transcript

Speaker 1:
[00:00] You're like ignoring all the benefits, right? This is the thing that's like, the alternative is stagnation, or I want to know what your alternative is. Europe is stagnant. They don't have innovation. So the Europeans have this problem. We don't. And there's some negatives, which you point out, but there are huge positives that everybody ignores.

Speaker 2:
[00:25] I'm Bethany McLean.

Speaker 1:
[00:26] Did you ever have a moment of doubt about capitalism and whether greed is a good idea?

Speaker 3:
[00:32] And I'm Luigi Zingales.

Speaker 4:
[00:33] We have socialism for the very rich, rugged individualism for the poor.

Speaker 2:
[00:38] And this is Capitalisnt, a podcast about what is working in capitalism.

Speaker 5:
[00:42] First of all, tell me, is there some society you know that doesn't run on greed?

Speaker 3:
[00:47] And most importantly, what isn't?

Speaker 4:
[00:49] We ought to do better by the people that get left behind. I don't think we should have killed the capital system in the process.

Speaker 2:
[00:56] If you look at the macroeconomic data right now, the US economy looks incredible. GDP is up, unemployment is historically low. But yet, if you ask the average American, they'll tell you a completely different story.

Speaker 3:
[01:07] Which begs the question, are they right? Every week of this show, we look at the specific pain points where capitalists stop working. But are we facing something much more existential? Is American capitalism systematically failing to deliver for the majority of people?

Speaker 2:
[01:21] The answer to that question is going to define the next decade of politics in our lives and it feels so urgent right now that it's actually the driving force behind an important event in economics this month.

Speaker 3:
[01:32] The Academic Center I oversee, the Stigler Center, which sponsored this podcast, is hosting our flagship annual conference. The theme is this year, is literally Can Capitalism Be Popular? We're bringing together the world's leading experts, economists, law professors, labor organizers and think tanks to debate this question.

Speaker 2:
[01:52] When the stakes are this high and the public mood is this pessimistic, the worst thing you can do is sit in an echo chamber. You have to test your assumptions against someone who completely disagrees with the prevailing narrative.

Speaker 3:
[02:02] Which brings us to today's guest. To kick off the conference and this episode, we wanted an expert who has spent his career making the case that American Capitalism, whatever its successes, is often more meritocratic, more performance-driven, and better government than its critics admit. There is no better one to do this than Steve Kaplan.

Speaker 2:
[02:22] Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at Chicago Booth. He has literally testified before Congress to defend the free market, arguing for the efficiency of leveraged buyouts before the Senate in 1989 and making the case to the House in 2007 that CEOs were actually not overpaid.

Speaker 3:
[02:40] But Steve is not just sort of an ivory tower academics and has also had a major impact in the real world because he created and runs the new venture challenge at the University of Chicago, which is a startup accelerator that has graduated over 370 active companies, including GrabHub, BrainTree and Simple Meals, facilitating more than 1.5 billion in funding.

Speaker 2:
[03:06] Steve has graciously agreed to join us today to make an unapologetic case that Capitalism is actually delivering the goods, even if our collective vibes say otherwise. Welcome, Steve.

Speaker 3:
[03:19] Just notice one difference. The background of Steve, all the books are in order. My background, all the books are a mess.

Speaker 2:
[03:30] My background, I have a giant poster hiding an enormous mess. So anyway, at least yours reflects both of you. Very funny. Okay, so maybe we should make a comment about that. But anyway, so let's set the terms of this conversation. Steve, when you consider an economic system, whether it's American Capitalism or Soviet Socialism, or Swedish Social Democracy, how do you assess the success or failure of it?

Speaker 1:
[03:58] There are probably five or six things I would look at. The first thing is GDP per capita, or the growth in GDP per capita, because that tells you how much production is available for people. And life satisfaction and all the life satisfaction work tends to be correlated with that. So that'd be number one. Number two, you want a strong safety net that doesn't undermine incentives. Three, you want innovation and dynamism. So Milton Friedman is famous for saying, the enemy is stagnation, and I think that is the enemy. Related to all that, you want a vibrant labor market so people can work. That means relatively low unemployment. Finally, a functional government that enforces the rule of law and is not corrupt.

Speaker 3:
[04:50] I think you pointed out, of course, the GDP per capita, which is very important. That's an aggregate measure. Do you think there is any discussion or room or importance of how this is distributed? And it says there was a very famous Italian poet that said the statistic is such that if you have a chicken and I have none, each one of us has half a chicken. And I think that you didn't understand standard deviation, but you get the point.

Speaker 1:
[05:16] I said a strong safety net that doesn't undermine incentives. And so, you know, you don't want people starving. You want people to have a decent standard of living. And I would say, you know, there's a trade-off. I would probably accept somewhat more inequality with higher consumption for all. You know, the question is, would you rather have like zero inequality and a very low standard of living? You know, my view is I want high GDP per capita. I want the people at the bottom quartile to be, you know, pretty, do pretty well. And I think I want everyone to do well, but I don't want them to do equally well. The US has been, you know, remarkably successful in that over the last 50 years. If you look at after-tax income or after-tax consumption, every quintile has gone up markedly since 1980. So everybody has actually, you know, benefited or all of those groups have benefited. So I think it can happen if you have a system that works.

Speaker 3:
[06:23] But it's interesting because you point out to after-tax income, which is, of course, important because it's what we consume, but that's a policy outcome. Let's look at the more market-based economy. And the market-based economy in the United States has been quite unequal in this distribution of the proceeds in the last, you could want to peak 50, 25. Let me start with the 25. We can go to 50. In the last 25 years, the bottom 50 percent of the population saw a per capita growth between 0 and 10 percent. Well, the 0.01 percent got an increase between 100 and 200 percent. So, how do you feel about this? Do you think that this is a good outcome, a bad outcome? Yeah.

Speaker 1:
[07:10] Again, you can't divorce what happens politically versus what happens in the market, because they're interrelated. That's why I look at real after-tax income, and particularly after transfers, you've had pre-tax income inequality has gone up, as you've said. After-tax inequality has gone up by much less, and then consumption inequality by even less. You look now at Bruce Meyers' work, you have Auden and Splinter. And so, the system has worked in a way that is, I think, a natural evolution that when you do see a lot of people having income, you know, there's some demand for more transfers, and that's actually happened.

Speaker 2:
[08:00] Before we continue on some of the bigger picture issues, I didn't want to lose the chance to define what you mean by a safety net that does enough without doing too much. How would you define it, particularly heading into the age of AI, where arguably more people might need a safety net than ever before?

Speaker 1:
[08:18] You know, the safety net is you want people, let's say in the bottom quintile, not to be in poverty, not to be below the poverty line as a start. And that's something where the work of Bruce Meyer, who's at the Harris School, has found that 68 percent of the public thinks that poverty has increased over the last 25 years, when in fact absolute poverty has declined substantially. And so if you look at the measure of being poor in 1980, poverty, the poverty rate fell from 13 percent to under 3 percent in 2018. So the people in, call it dire poverty, has gone down substantially over this time, and that's what you want. I should also add globally, the people who are living in extreme poverty has also declined substantially. And I know you don't want me to talk about global, you want to focus on the US. But clearly people in the US care about that because of all the outrage over the USAID cuts. And that's also a huge success story of the market system and I think the US system. So going back to Bethany's question, you don't want people living in poverty or subsistence, you want them to have a decent standard of living. And that's actually the 50-10 measure, which is the median versus the 10 percent. That measure actually, inequality has gotten less over time and that's consumption. The 90-50 has gotten higher, so that's where Luigi is right. So, and I'm, you know, that I think has been a very successful outcome of the US.

Speaker 3:
[10:04] But part of the reason why the 50-10 has gone down is because the 50 has gone down. Now, you're focusing on the bottom 10 percent, which is very important.

Speaker 1:
[10:13] It's not gone down after tax, Luigi. That's not true.

Speaker 3:
[10:16] Actually, they don't receive a lot of transfer, the 50 percent. The 50 percent pre-tax has grown basically nothing in a generation. And I think that if you want a democratic capitalist, a capitalist supported by a majority of the people, it must be delivering to the majority of the people. And if it doesn't deliver for the majority of the people, then you have two choices. Either you give up with capitalist or you go out with democracy. Which one do you choose?

Speaker 1:
[10:43] So let me respond two ways. So first of all, we disagree on what's happened in the middle after tax. I think it's gone. I think everybody has gone up. I think the Scott Winship stuff, which just came out, I think Alton Splinter finds that. So I think it's actually gone up over time. Now, let's come back to, okay, it's democracy. What are we gonna do? And I agree, you want everybody to succeed, because if you get this big difference of outcomes after tax, you're gonna have some disaffection, and it's a political issue. I would then just ask the question, what's the alternative? Compared to the other developed countries, which would be Western Europe, UK, Japan, they all have the same issues politically that we have here, where there's political disaffection, and their GDP growth per capita has been much lower, and their employment of young people is lower. They have all these issues that sort of a more socialistic system doesn't seem to help. And so I'd much rather have the US system, where I think most people have done pretty well over these 50 years. You've had a lot of innovation. Corporate sector has been spectacular in the US versus those other countries. And you know, the disaffection is sort of similar.

Speaker 2:
[12:14] Can we pause on a grungy detail again that I, both of you are probably going to have to answer for me, just because I as a non-economist, I don't understand. It seems that this issue about the 50 percent is really, really important. And how can there be disagreement? It's a number. So why can Luigi say it's one thing and Steve, you say it's something else.

Speaker 1:
[12:34] So I don't know where Luigi is getting this from. I went to Oughton and Splinter, which was a paper was in the JPE 2024. And I wrote down what they found and they looked from 1980 to 2022, real after-tax per capita income for the bottom 50 percent was up by two thirds from 1980 to 2022. And all quintiles were up significantly. And there's some disagreement. I think, you know, Piketty, Saz, Zuckman make some different assumptions. But they're a little bit of the outlier relative to Eric Zwick, who's one of our colleagues. David Weissbach is going to be more along, I think, the lines that Oughton and Splinter are. So those are my data. I don't know what Luigi's are.

Speaker 3:
[13:24] I think that I'm looking at pre-tax income. You're looking at after-tax. I think that that's a big distribution.

Speaker 1:
[13:30] Correct. And I acknowledge that.

Speaker 3:
[13:32] If you have a system in which half the population is on the paydoll, I don't find it very attractive, honestly. You seem to suggest that as long as they have enough to eat, but even if they don't make that money, but they get transfer, is a good system. I disagree on that.

Speaker 1:
[13:55] Luigi, it's not just that. The middle, they're not getting transfers. The middle, they're paying lower taxes. The taxes are higher despite what people say. We have a progressive system. The upper-income people do pay higher taxes, and so that's part of it, and the transfers help the bottom. But the middle is largely, I think largely transfer-free or there's not a ton.

Speaker 2:
[14:23] Before we move on from this, let me ask you both another question then. What does matter, pre-tax income or after-tax income? And would this, Steve, to you, imply that the tax system is working as designed? We had Ray Madoff as a guest on Capitalisnt, and she's written a book pointing out that the issue is taxes on wealth, not necessarily taxes on income. And one of the most compelling stats she gave is that, despite Warren Buffett's much acclaimed piece in The New York Times pointing out that his secretary paid more in taxes than he did under the solution he proposed, he would still not pay much more in taxes because it's a wealth issue, not an income issue. But anyway, so before I get too far afield on that, which measure do each of you think is more important? And Steve, then what does that, I assume you're going to say after tax income, does that imply then that the income tax system is working as it should?

Speaker 1:
[15:12] I would say after tax income and in particular consumption, because consumption is at the end of the day, what people actually get and live in their lives. And I think the US tax system has done a reasonably good job over time, but the caveat, so I'm going to agree with Ray. To some extent, I think there are loopholes that people use that you should probably close. It's very easy. There's now different products that allow you more easily to move capital gains income from this year to future years. So it's postponed gains and there's a little bit, it's legal, but it's sort of a little bit of a loophole that ought to be closed. I think the estate tax can probably be improved upon. I think the tax system can be better. My guess is, I don't know about enforcement and whether more enforcement delivers. And I know, I think cutting the IRS agents, which is happening now, may be a negative present value decision as well. So I think you want a tax system that operates correctly or what's the word, efficiently. And for example, the wealth taxes, I think, are ill-advised, that the California Wealth Tax and then the proposal to have, it's the Connors Sanders proposal to have a 5% wealth tax every year. I think even Luigi would not like that, no?

Speaker 2:
[16:44] But wait, before we go to Luigi, one word answer, carried interest, carried interest, capital gains tax or regular tax. Come on, you left it out.

Speaker 1:
[16:54] That's complicated. I leave it alone, leave it alone.

Speaker 2:
[17:00] Okay, Luigi, Luigi.

Speaker 3:
[17:03] So I think they measure substantially different things. I am with Steve that if you want to see the overall welfare of somebody, I think probably the consumption is the most important thing. So the after-taxing can be closer to that. However, I am concerned about a world in which people cannot earn a decent living and they live off the door of the rich people because this is not politically sustainable and whatever is not politically sustainable will not be sustained. So I think that there is a very big risk in having a market that delivers outcomes that are too extreme. So that's the reason why I'm worried about this. And to some extent, it's not an inevitable consequence because you are pooh-pooh in Europe, but except my Italy, that is a basket case and a disaster. Other countries have done well. In the last 25 years, Sweden has done better than the United States, Germany a little bit less, but not that much. And then if you look at the statistic of distribution, they've done remarkably better. So I think it is possible to have a more balanced growth. It's just in the United States, which shows not to. And we are depending massively on a system of redistribution that is under political strain. And I suspect and I don't want to make false accusation, but I suspect you are one of the first to say we need to cut down on that. So I think that the fear is that the system of the redistribution will not continue very long if you have such a different income pre-taxes.

Speaker 1:
[18:53] We agree on that. I think you don't want that. We want the middle to do better. And I think that over time, you can't redistribute all the way. Now, let's again go to the US-Europe comparison. I think post-GFC, the US has also a great financial crisis, excuse me. The US has outperformed all the European countries, the big ones. I don't know about Sweden, but certainly Germany, Netherlands, France. And I went and looked at this, so I'm pretty sure of this, that per capita income continues to go up in the US more than in Europe. I think Europe also, the redistribution that they have is much less sustainable than ours. The people don't work after 62, the retirement system, all those systems are problematic and they seem very hard to change. They also have a bigger problem with young people working, and I'm pretty sure their unemployment rates are higher than in the US. So if you're worried about young people and the middle not being on the dole, Europe's got a big problem relative to the US. And one last thing, the inequality is a bit understated in Europe for the following reason, that people can put income in other countries. In the US, you're taxed on your worldwide income, and in Europe, many of the countries, you're not, and therefore they understate the inequality. I think Zuckman figured that out recently, that his numbers were understated for the amount of inequality in France in particular.

Speaker 3:
[20:33] No, this you're absolutely right. It's not only they understate the income, they move out. If you're from the United States, you cannot move out because you're still taxed. If you are a rich Italian, you can move to Monaco and not pay any tax. In fact, everybody say, oh, do you like Sina, the tennis player, the entire tennis players? First of all, this guy's first language is German, and he lives in Monaco. He doesn't pay any tax in Italy. In what extent this guy is Italian? With the first name like Yannick and paying taxes in Monaco, to what extent is Italian?

Speaker 1:
[21:09] Luigi, that brings up a question. Why have you become a US citizen rather than stay in Italy if Europe is so much better?

Speaker 2:
[21:19] Luigi, would you like to answer that?

Speaker 5:
[21:22] I'm sorry, that was not fair.

Speaker 1:
[21:25] We're having too much fun today.

Speaker 3:
[21:28] But so, shifting here a little bit, you mentioned about the survey of happiness. Let's look at more hard data, which is life expectancy. What is shocking of the United States is not only they have a much lower life expectancy than any other developed country, in spite of spending between three and four times as much as most of them, and also their life expectancy, conditional life expectancy, their healthy life expectancy is even lower. Healthy life expectancy in the United States is only 63 years. So we're both past their healthy life expectancy.

Speaker 2:
[22:06] Oh dear God. This is really appalling, you guys.

Speaker 3:
[22:12] Then the shocking part is that if you compare to a country like the UK, and as I said, the life expectancy at any level of income in the United States is lower than the UK, and only the richest American are slowly approaching the richest UK people, but everybody else is strictly below. How do you see this major failure of the US health system?

Speaker 1:
[22:39] Yeah, I don't. That is, that's the one thing. Now, it's not, it's not so dire. And as you say, let me give another, another take on it. US life expectancy is up by about five years since 1980. So it started a little bit lower than Western Europe. Western Europe's up by seven or eight. So that's a, that's a two or three year difference. And that is, that is true. And I don't have a, I don't have a good explanation for why there is a difference before and why that difference has gotten bigger. The one caveat to that, I would say, is whether, again, going back to expenditures, whether Europe can sustain that as they get more and more older people and fewer and fewer younger people, they're gonna have a big, big problem or trouble sustaining their healthcare system. And the US has that same, a little bit of that problem, but much less.

Speaker 2:
[23:41] So that's a disturbing statistic. But I think the other one that Luigi sent that is, I don't know if it's more disturbing to me, but I think it's really hard for all of us to believe in a system where the American dream just doesn't work anymore. And so this social mobility data is really quite stunning that in Denmark and Norway, it takes two generations for a low income family to reach median income. In Germany, it takes four generations. And in the United States, it takes five generations. Isn't that antithetical to the concept of America and the American dream if we're not the country with the most social mobility?

Speaker 1:
[24:19] I'm not sure that the data say that. My reading of Raj Chetty's work, who looked at mobility, I thought said that mobility hadn't really changed over time in the US. So again, this is like a comparison, up or down versus time series. The mobility in the US, at least on the Raj Chetty data, seemed similar. And maybe it's been lower than it has been in Europe, although that's a weird result to me because, until the Trump administration has made immigration of all kinds more difficult, the US is the place people came and have been massively successful, including Luigi, and Elon Musk would be another. And so that's what sort of is the disconnect between that. Now, what may be a cause, and we didn't talk about this, this is the other failure of the US economy. That's a big one. And I'm curious to hear how that is in Europe. It's not necessarily the capitalism, it's the government, it's education. And the US education system, the public education system, I think has performed very poorly. Ted scores are in decline, the teachers union, they think capitalism is bad. You know, the national, you know, the NEA, which is the biggest teachers union, says that has a critique of capitalism, they're anti-capitalist. And so you've got the teachers unions have become very powerful. They're very active in the blue states, and the performance has declined. And that, I think, is also potentially a cause of less mobility, if the less mobility is true. And that's also something, if you ask me how we could improve the US, make the teachers unions less powerful, you know, don't let them bargain collectively. I think that's been a big, big cost to the US. Relative, and Europe, I don't know if it's better. You tell me if it's better there.

Speaker 3:
[26:29] I actually want to go back to something you said about health, because you said that I'm not so sure that Europe can afford the health care. I would say the other way around, because the health care in Europe costs a fraction of what it costs in the United States. So, and deliver so much more. You know that in the United States, there are 358 preventable death per 100,000 versus the 100 and something that you have in Japan, or Israel, or even Korea. So I think that the health care is not doing prevention, like they are doing in other country. And there is a massive amount of pollution. You know that, for example, Parkinson's disease is a complete, people thought it was a genetic thing, it's mostly an environmental stuff. And it's much more present in the United States. Why? Because the FDA has been slow at prohibiting Paracuara, which is a pesticide that is directly related to the incidence of Parkinson's diseases. And then, you know, one of the reasons why life expectancy is so low in the United States is that four out of 100 kids that are made to five, don't make it to 40, which is like a pretty dramatic number. And what is the primary reason? Is opioids. And what is the primary reason of opioids? Is the marketing that was allowed. And I'm sorry to say, the Capitalist incentives of McKinsey helping Purdue to sell that stuff to every little hospital and kid. I think that that is a really failure that Europe has avoided and actually saves a lot of money in it.

Speaker 1:
[28:16] Yeah, no, it's fair. I mean, the US can do better on health care. I think we agree with that. Whether that's a Capitalist failing or a government failing is a different question. And then again, we have a different population to start with. So it's a very complicated question. And our health economists struggle with this as well, as you know.

Speaker 2:
[28:40] I want to come back to that too, but I had a bigger picture question to ask you that has puzzled me for a long time. So I hear this argument from you and from other people about how well the economy is doing and how well America has done. It does seem to me, some people have blamed it on vibes, like a vibe session. It does seem to me that the performance of the economy should be kind of like pornography. You know it when you see it. If it's good, it should feel good. If it's not, maybe I'm mixing too many metaphors here, if it's not good, but it really kind of bugs me on some level that everybody says it's good and you people who don't think it's good and don't feel that it's good for you and for your children and for your loved ones, you're just wrong. So I guess the question boils down to, why do so many people not feel good about the economy and why are so many younger people in particular losing their faith in capitalism if everything is so great?

Speaker 1:
[29:35] I mean, it's a super good question. I mean, I went and looked at some of the happiness or life satisfaction answers people had both in the General Social Survey and then the Gallup World stuff. And what's super interesting is if you look from 1980 to 2018, US life satisfaction was pretty constant. It was down a teeny bit, but it was pretty constant about pretty happy, somewhat happy, and not too happy. And I think that's also true in Europe. The big drop actually in life satisfaction was 2018 to 2024. And there was a big drop in the US. There's a drop in Western Europe too, not quite as high as the US, but a drop. And so could be the pandemic, could be social media, which we're finding out has negative effects, particularly on kids. And that by the way is being reversed as there is on the opioids. So there are these self-correcting mechanisms, or part markets, part government that are pushing. So I don't know. It's a real puzzle that 2018 to 24 dropped.

Speaker 3:
[30:50] But Steve, you cannot sort of not take responsibility for capitalists when you see sort of the influence that, for example, the big chemical companies have on allowing pesticides to be distributed or purge you, basically getting its way in having recognized the opioids as a safe medicine and sold everywhere. And McKinsey supporting that and pushing that even farther. This is part of some of the aspects of capitalists. And why is this, you're saying is a responsibility of the government to undo it. But if the capitalists are buying off the government, what can they do?

Speaker 1:
[31:35] Well, Luigi, I think you're ignoring, first of all, I think you have this view that all companies are evil. And I have a very different view.

Speaker 3:
[31:43] That's not true.

Speaker 1:
[31:44] But companies want to do the right thing and some don't. And often that comes back to bite them, which has happened in the opioid case, not always. But you're like ignoring all the benefits, right? This is the thing that's like the alternative is stagnation. You want to know what your alternative is. Europe is stagnant. They don't have innovation. And part of the reason is their labor markets are very inflexible. It's hard to hire and fire people. It's overly regulated. And so the Europeans have this problem. We don't. And there are some negatives, which you point out. But there are huge positives that everybody ignores. I would take the flexibility and a bit more of the volatility, so you get innovation rather than stagnation. And that's why, again, you do need a safety net. You need to have that. And that's why I focus on that. And we do.

Speaker 3:
[32:46] You treat Europe like as a whole, but Sweden is performing very well. It's not a stagnant place. There is innovation. And there is longer life expectancy. People are happier. It's a much better place. Italy, I grant you, is a disaster. It's stagnant. People... The only thing that they do is they live a little bit longer because the food is better, but that's another story.

Speaker 1:
[33:10] And it's healthier for them.

Speaker 3:
[33:12] Yeah. But then, also in the United States, most of the action is in California. If you were to take out California from the United States, the United States would be abysmally bad. And California is everything you hate, regulation, so it's not obvious that the success, successes are due to the American capitalist model you like. They are in fact due to the opposite.

Speaker 1:
[33:40] No, no, come on. The businesses in California can hire and fire, so you have the flexibility. You have startups failing all the time, which is very different, again, from Western Europe. Sweden, I think, is a little better on that score, which is another reason they've been successful. But Sweden is a small country. Sweden has, I'm going to get this wrong, but 10 million-ish people. The economies that have scaled, that are large, the US is unique and uniquely successful over a long period of time. And those other countries that are larger in Europe are just not nearly as successful. And then California, you know, we'll see what happens. But it is, the fact that tech goes there and everybody agglomerates, I think, is powerful. As long as they could mess it up, we'll see.

Speaker 3:
[34:34] But you're saying that it's a great thing that the labor market is so flexible and at the end of the day, people find a job and employment is low. First of all, we know, and one of our colleagues did some of this work, is that a lot of mails are exiting the workforce. Prime age mails that in the old days were working are exiting the workforce. It's not true that they reallocate. Two, we know from the work of David Arthur that the China shock was pretty devastating to the Midwest. Let me ask you a question that I actually asked Glenn Hubbard when he was on the podcast. Imagine you knew then what you know now, which is what happened with the China shock. Imagine you are like Glenn Hubbard, the Chief Economic Advisor of Bush at the beginning in 2001. What policy would you tell to do differently to avoid this? Oh, you're saying this is just unavoidable stuff and we have to go through. What is your take on this?

Speaker 1:
[35:39] I'm trying to think. I mean, you look at what did Europe do in this event from the China shock? Because they got shocked too. I'm not sure Europe did anything differently from what we did. Did they have more protection?

Speaker 3:
[35:57] I think that in Europe is more difficult to fire. So I think one of the reasons why Italian productivity is not going up so much is precisely because there is a slow adjustment process. However, we didn't have the wave of suicides and drug epidemics and alcoholism that the Midwest had. So I think there are some important trade-offs there.

Speaker 1:
[36:24] Yeah, I think what I would say is, policy-wise, I think the world, you want the world to respond to technological change and to be more productive, that at the end of the day, that's a better thing. I think in this case, you probably would have wanted to provide more support to the people who were affected by this, who I don't think got a lot of support. Then the opioid crisis was the interaction between the loss of jobs and the marketing of the drugs. So you should have had a better regulatory regime on that. I think I would just say, would have had more of a safety net or more, try to re-educate the people who lost their jobs. I think that's the nature of the beast.

Speaker 2:
[37:23] I'm going to ask a slightly unfair question, maybe what you guys might perceive as an unfair question, I'm going to answer it before I have you guys answer it. So we've had a lot of talk about the safety net, and now with the AI transformation of our economy probably coming, you hear a lot of people in Silicon Valley talk about UBI as a solution and about the safety net as a solution for more and more people. And I often think when I hear this, that it's a little bit, let them eat UBI and that nobody wants that for themselves and nobody wants that for their kids. So for each of you and for me too, if your kids, if the economy was structured in such a way that your kids had to depend on the safety net, for sustenance, is that the economy you would want? And I'll answer it clearly for my kids, no. I want them to be able to go out there and work and function and have a sense of meaning and purpose. And I don't want them to have to depend on a safety net. And so I'd like both of you guys to answer that too, how you'd feel about your kids subsisting on the safety net.

Speaker 1:
[38:20] So the UBI, I think that at least the preliminary data on UBI is it's not a great thing, right? I think is I'm in agreement with you. So you don't want your kids to starve, right? That would be awful, but you want to have them, you want them to have an incentive to work rather than be taken care of. And historically, at least, we'll see if AI is different. Every time there's been a huge technological shock, there's been disruption, but other jobs have showed up. And as long as the system remains flexible, you end up having a good outcome or what I believe is a good outcome in the US. So that's where I would be.

Speaker 3:
[39:04] But Steve, yes, eventually you have a good outcome. In the middle, you wipe out a generation. So if you value zero, the pain and suffering of a generation, it's a great outcome. But why would you value zero?

Speaker 1:
[39:18] Luigi, where are you wiping out a generation? When did this ever happen?

Speaker 3:
[39:23] Well, think about with the introduction of the spinning journey in the Industrial Revolution. There was a generation of lumers that was wiped out.

Speaker 1:
[39:31] Let's go since 1900 or the 1880s. People were the farmers, they came to the cities and found jobs. There have been all these, electricity, it took time. People adjusted the PC. People adjusted secretaries. The word processor was not good for secretaries, people adjusted. The internet was not good for retailers, people adjusted. In the last 125 years, the beginning of the industrial revolution, I'm not sure is the analog here. I think the right analog is the technological changes in the last 125 years. There have been people who have adjusted. Again, you're not growing people away, you have a safety net. I should also ask, what's your alternative? What would you say? Bethany, I kind of agree. What are you saying?

Speaker 3:
[40:28] First of all, I want to say, you're forgetting the China shock. In the China shock, there is a generation that's been wiped out. If I am a 45 years old working in a factory, and my next job is to be the cashier, or trying to become a nurse or a web designer, it's not easy, and most of the time doesn't work. And that generation is wiped out. It's not in the Industrial Revolution, it's 10 or 20 years ago.

Speaker 1:
[40:59] Of course, there are winners and losers all the time, and I feel, and it's terrible that there are, but it's again, that happened. So what is your solution though? You haven't said your solution.

Speaker 3:
[41:10] I think that we want to adopt technology, but it's not obvious that the maximum speed is the optimal speed. And so maybe we want to slow down in order to make it easier for one generation to move out.

Speaker 1:
[41:26] That, I think that's so dangerous because information wants to be free, right? And if we slow down, then someone else, China or India or whatever is going to do it. And then you're behind Europe in a way that makes it very, very difficult. So I think that's very dangerous. That's why I like our system because, again, there are positives and negatives, and the negatives are awful, but relative to any alternative, it's hugely better.

Speaker 2:
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Speaker 3:
[42:38] Okay, so you can see this, this is from Orton and Splinter, the paper that Kaplan cites, okay? So, sorry Bethany, I jumped straight on this, but I think it's important. So you see the picture on the right, the figure B, represents the bottom 50% average real income since 1960, okay?

Speaker 2:
[43:00] Yep.

Speaker 3:
[43:00] Now, if you look at the fiscal income, just for your information, this is what you report in your sort of a tax return since we pay recently, you might be familiar with that. That is basically flat since 1970, okay? You see the picture is basically flat. And by the way, this is maybe geeking you out, but they use the personal consumer expenditure deflator rather than the more common CPI, consumer price index, because the numbers look better with the consumption expenditure, inflation is being higher if you look at measuring the consumer price index.

Speaker 2:
[43:40] But let's keep it that way. So let's pause on that. So what you're saying is that that number would look even worse if it were calculated. It's flat, but it's flat using the best possible way of looking at it. And if you calculated it more honestly, it would look worse. Okay, let's keep going. Got it.

Speaker 3:
[43:54] So now look at the jump, the big jump. There are two jumps. The big jump is from fiscal income to pre-tax income.

Speaker 2:
[44:03] Yeah, and what's the difference?

Speaker 3:
[44:06] That's what I discovered myself, I have to say, because it's not that easy. First of all, this is super interesting. Only 60% of our income is report in income taxes.

Speaker 2:
[44:21] But that's not true. I have report on my income.

Speaker 3:
[44:24] No, no, no, no, no, no, no. That's not true. That's not true.

Speaker 2:
[44:28] It isn't? You're calling me a tax chief?

Speaker 3:
[44:31] No, no, no. The law allows you not to report certain things. So number one, you don't report your health insurance if you're employed. Then you don't report the employer payroll taxes. Then there is the retirement income accrual. So if you have a 401k and the 401k goes up, that income is not reported in your...

Speaker 2:
[45:01] Okay.

Speaker 3:
[45:02] Another important part is the corporate retain earnings. You take a company like Apple, they distribute some dividends, that dividends become income for some people. But in the personal income tax, the retain earnings of Apple don't show up anywhere. The bottom line is there is a lot of arbitrariness in that allocation. Still, if you look from 2000 onward, that number is pretty much flat. Got it. Then there is another big jump, that is the pre-tax versus after-tax particular transfer. So look at the after-tax income versus pre-tax plus transfer, not much. I think that that other part is big. Why is big? That's mostly Medicare and Medicaid.

Speaker 2:
[45:58] Yeah, which then is, then that's really a screwed up calculation because it's very misleading to say that those benefits apply to that 50% of the population. That's taking a huge benefit for a very small number of that 50% and applying it over the whole 50%. So it's very meaningfully, so to the over 65, and Medicaid is very meaningful to maybe the bottom 10% who qualify for Medicaid, but for a whole bunch of people in there who are the numbers are making it look like they're getting that benefit, it's nothing. Do you see what I mean? I'm not saying very well, but that's... Yeah.

Speaker 3:
[46:36] You're saying perfectly. And also I think explains one important element of the difference between reality and perception, because a lot of that stuff is stuff you don't see in your pay stub, and you don't perceive as well as the normal income. So much of that improvement is the fact that your employer pays for your health care, and their care is super expensive, becomes super expensive. But you kind of perceive you still have the same health insurance. In fact, if anything, if you look at the little fine print, that health insurance has become worse because it starts to cover less and less things over time. So your perception is, I get worse and worse over time, but the statistics say, no, no, they pay in dollars more and more over time. If there is one big conclusion of the discussion with Steve, is that health care is the center of the universe to some extent.

Speaker 2:
[47:39] I was actually thinking that too, because do any of these frictions matter other than health care? Because if that keeps people in jobs that they don't want to be in, just that level of anxiety that you know, if you lose your job, you lose your health care too. It's just, it adds a truly astonishing and awful dynamic to this, because that is what makes people feel so trapped, right? And as somebody who pays for her health care, because I'm an independent contractor, I mean, it is insane. My premiums went up 40% this year. I don't know what is happening in the market, but it happened across the board to people. And so I'm paying 40% more for, once again, worse health care. I'm not getting anything more out of it. It's just, it's really a broken system.

Speaker 3:
[48:26] It is the big, beautiful bill. You have to thank the big, beautiful bill. I think in 2021, the Democrats introduced a subsidy to basically exchanges that provide health care. And that subsidy has been terminated by the big, beautiful bill, so-called. The price dynamics, the market dynamics of that stuff is explosive, has been hidden from the face of most people who subsidies, rather than trying to fix the system on the line that is broken. I think that that is, to me, the clear message.

Speaker 2:
[48:59] Yeah, I think so too. And it's hidden, but it nonetheless causes people extraordinary anxiety, especially if they need their health insurance for a medication, they need to stay alive. They know they can't afford to lose their job. And so then in a world where jobs are ever more precarious, it just, it's hidden, the financial benefit you get from it may be sort of hidden, but the corresponding agony, I was going to say, I was thinking anxiety, but agony is probably a better word. The corresponding agony you get from the fear of losing it is not hidden at all. That's a very real factor in a lot of people's lives.

Speaker 3:
[49:33] Yeah, I think as a European, I find it crazy that the moment you're fired, you actually have to think about paying for your health insurance, which is the last thing you want to do in the moment you're fired. So adding insult to injury, I think is crazy. And I think I regret that we didn't push Steve more because he came out as this socialist in favor of a welfare system, but he wasn't very specific, and on particularly, we should have asked whether he believed in Medicare for All or some form of Medicare for All because that's what a safety net is.

Speaker 2:
[50:10] I mean, I've become more and more offended by the casual way in which privileged people talk about a safety net or talk about UBI as the solution to America's woes, but they don't want their children to live that way. It really is, let them meet UBI or let them meet the safety net. It's like for other people and other people's children, there should be a safety net to take care of them, but they want their children to still have opportunity. It really bothers me that that becomes the default way to address the lack of opportunity for everybody, that while there's a safety net for you, for you people.

Speaker 3:
[50:49] But I think that I don't want to put words in Steve's mouth, but my impression is that his definition of a good economy is an economy in which nobody starves because there is a safety net. But past that, I don't care. Versus a system where everybody has opportunities and everybody also benefits somewhat by a growing pie.

Speaker 2:
[51:15] Well, in fairness to him, he didn't say that. He didn't define what he means by a safety net. He wouldn't define it. So I'm not sure he would say that, that it's just the minimal level to avoid starvation. And I think if we had him here, he would also say that he wants everybody to have opportunity. But then the devil is in the details, right? What do you do to make sure that everybody has opportunity? And what do you do to make that real? So I think it's very easy and lovely to say there's a safety net and we won't define what that is or who it takes care of or what it provides. And we want everybody to have opportunity, but we're not going to do anything to make sure that that's the case.

Speaker 3:
[51:56] Yeah, I think that there are two or three simple things to do. The first one is some form of universal healthcare for everybody. I think it saves a lot of life and increase life expectancy because that's prevention. We had actually a professor at the University of Chicago in the medical department who worked both in Europe and in the United States describing the value step. She works in lung cancer, so a terrible sector, and she was describing one of the difference is in Europe, the patients arrive much earlier. Why? Because as a general practitioner, and as a general practitioner is referred and brought there much earlier, in the United States, they arrive from the emergency room much later. Then once they arrive in the United States, they are much faster doing all the diagnosis than Europe, and so that's an advantage. But then that's a part I didn't know, is if you are in a rural hospital in the United States and you arrive there with lung cancer, they try to keep you there because you are part of a business. In Europe, because they have no profit motive, they transfer you to the best place where your cancer can be cured. So I think that's a gigantic difference between a business and a patient.

Speaker 2:
[53:21] Yeah, I realized that firsthand, it was years ago, but a friend of mine was in Chicago and passed out at a restaurant having heart palpitations and the ambulance had to come and get her, and I went with her obviously, so we went to an emergency room in Chicago, and they tried to convince her that she needed to have open heart surgery because she was having a heart attack. And my then brother-in-law was a doctor in Chicago, and I called him and he said, Oh my God, get her out of there. This is nothing. She's having a vasovagal spasm, which manifests as heart attack symptoms, and they know that, but they're gonna get paid. She has insurance, and she's one of the few people who ever ends up at this hospital with insurance, and they're gonna do the surgery on her in order to get her insurance to pay, but this is nothing. She doesn't need heart surgery. She's gonna be fine. She's just having a vasovagal spasm, and get her out of there. And so I got her out of there, and we got to Northwestern, and indeed it was just a vasovagal spasm, but my friend Stacey literally almost had her surgery that she didn't need as a result of being an insured patient in a hospital that needed the money.

Speaker 3:
[54:30] The irony is that she had the heart surgery, this would have been counted as an income in the statistics.

Speaker 2:
[54:40] Oh God, that's so awful. This is particularly wonky dark humor, Luigi. Only on Capitalism can we be making a joke out of this. Oh, goodness gracious.

Speaker 3:
[54:55] I think that that's number one. So and to his credit, I think even Steve recognizes that our sort of healthcare system has stood up.

Speaker 2:
[55:04] Yeah, I think he does too.

Speaker 3:
[55:05] That's important. Maybe we should launch a campaign, Steve for Medicare for All. But the second part, I think is education. To me, the first problem with education is the fragmentation of education due to the way we finance education at the city level rather than a more general level, which creates a lot of segregation and so creates pockets that are very, very good and vast area of a population that is terrible. If I were a king for a day, I will really force a redistribution of resources and enforce some minimum standards to have a good outcome or a decent outcome for everybody.

Speaker 2:
[55:53] I think that enforcement of standards, again, is one of those things that sounds really good. In reality, it becomes very, very difficult. Let me think about No Child Left Behind and the amazing controversy around that. I also, I've been reading it, paying a lot of attention to because my parents live there and it's where a lot of my relatives are from. The so-called Mississippi miracle about what Mississippi has been able to do in terms of improving scores for its students and it's real. Mississippi was able to do that because Mississippi was able to go its own way on this. That setting of top-down national standards is also tricky because it prohibits the very kind of experimentation that Mississippi was able to do. But I know you're talking about resources rather than necessarily a strict set of standards. They are two different things.

Speaker 3:
[56:47] Sorry, Bethany, you can do national but not federal. I think that I will start with national because the problem is the segregation at a suburban level so that you have the inner city with terrible schools and the suburbs with phenomenal schools.

Speaker 2:
[57:04] It's never going to be... I absolutely agree with you. And I agree that this and health care are the two huge issues in America because they both make a mockery of the idea of equal opportunity. And so I absolutely agree with you. I'm not disagreeing. I'm just pointing out that the mechanisms to enforce that, to fix that are really, really difficult. And also that it would probably never happen because you are never gonna have parents say, oh, I'll take less from my children so that other children can have more. They're just, it's where people's ultimate sort of, I'm not even gonna call it selfishness because it's what we all want, what's best for our kids. And so doing that in any meaningful way means taking away from the privileged and taking away from privileged kids. And nobody's ever gonna do that. It just, they won't. I mean, so it's not fixable in that way.

Speaker 3:
[58:01] I disagree. I think it is fixed by increasing dramatically the quality standards of public education. The reason why you feel the need to go in the suburbs where the schools are better is because the schools nearby are not good. The moment that your schools are good, you don't have to take away from the other guys. You basically impose more taxes to everybody to finance a better education for everybody. Then eventually, people will opt out and go to the public schools.

Speaker 2:
[58:32] I think that sounds really good in theory. I think in reality, it gets incredibly complicated. I mean, even just look at Chicago, the idea of neighborhood schools versus schools that you test into, and how incredibly controversial that has become under Mayor Brandon Johnson. I have heard people argue, get rid of all the schools that people can test into, so that they're only neighborhood schools. Therefore, everybody has to send their children to the neighborhood schools, and everybody gets the same education. Nobody wants that. It sounds really nice in paper until it's your kid, who then isn't getting the education. Because maybe it ends up in 30 years, it ends up being better for everybody, but there will be a lost generation there of kids who, that's putting it too strongly, but there will be kids who are not getting as good of an education as they could during that period of transition, in order to bring everybody up to the same levels. I just think it's really difficult. One more thing on this, which is answering Steve's big point that what else do you want? I think it's a bit of a straw man. I agree with him. What else do you want? It's really useful to look at other places and say, would we want to trade? Would we want more stagnation? Would we want to give up American innovation? But even if you accept that as true, that the American system is what enables this phenomenal innovation, I think it's still a bit of a straw man to say that we can't do better. We've had so many people on this podcast who have talked about how capitalism is constructed by the state. To say that, to look at another country and say, yeah, but you wouldn't want that, is to just give up.

Speaker 3:
[60:18] The other point, which should not be forgotten, is a lot of the innovation was based and is still based out of government resources. I think we have the internet, thanks to DARPA. We had a lot of the innovation we have today, thanks to the Apollo project and so on and so forth. So I think that saying that you cannot have that innovativeness unless you are in a cutthroat system, I think that's false.

Speaker 2:
[60:45] I agree with that. I think the foundational issue that we have talked about and that we talked about at the conference is this idea that people don't feel that they have opportunity and that their children have opportunity. There are too many examples of that and the system can't work. If you have a system that is cutthroat, and people feel like by their own hard work, they can make it work and they can create a better life for their children, then that's one thing. Then we can say, okay, but if maybe. But if people don't feel that that's the case and that no amount of hard work is going to get them where they want to be or get their children to a better life, then you've got a problem. And I think too many people do feel that way and for good reason. I remember being really struck by when I was working on my last book, this GAO study that pointed out that it looked at big employers in a whole bunch of states and a good chunk of the people who work for big companies are still on welfare food stamps because they don't make enough even working full time in order to not need government help. And there is something wrong with a labor market where people work full time and work hard and don't make enough money in order to not need help from the government. Then that's something going wrong in the labor market. But I do think Steve is raising exactly the right question because I think it is too easy for all of us to attack Capitalism and be negative without saying, well, then what do you want instead? I still do trust Capitalism. I think it's that Winston Churchill quote, it's the worst possible system with possible exception of everything else that's ever been proposed. But that doesn't mean we can't do better because even Capitalism in its rawest form is constructed by the state. And so to abdicate the role of the state in setting better terms for the competition that is Capitalism is to totally abdicate. And I don't think that's the right answer either. I think the very wealthy in our society don't understand how much they owe to the state. I think there's very much this, it's this meritocracy gone wrong idea that, I did it on my own, all of this money is mine. I don't owe any of it back to the state because it's mine. And I think that is fundamentally wrong when you understand the history of Capitalism and understand that it is the state that has enabled the accumulation of these great fortunes. Yes, it's people, but it's people working within the rules set by the state. And so I wish we, I've been thinking that maybe we just, people need to have more of a sense of civic responsibility. And that's something that has changed in America for the worse over the past 50 years, where people used to have, people who did very well used to feel a responsibility back to the state that had enabled them to do very well. And maybe it was just in the years after World War II that felt more real. The fact that the state had enabled the existence of America felt more real to people, and they felt like they owed something back. And that being so far away from wars that touch most, especially the wealthy, plus this notion of meritocracy has allowed people to feel they don't owe anything back, that it's theirs. And I just, I think that's something I would like to see changed as well.

Speaker 3:
[63:56] And Bethany, to close on where we started in the conference yesterday, there was an interesting discussion about the allocation precisely of those benefits. Because if you allocate, for example, the Medicare to mostly the poor, where do you allocate the Tesla subsidies and the corporate welfare? And if you end up allocating that to the top, then you again see an enormous unequal distribution.

Speaker 6:
[64:28] Capitalisnt is a podcast from the Stiegler Center and the University of Chicago Podcast Network in collaboration with the Chicago Booth Review. If you haven't yet, you can now find our podcast as a video on YouTube. Don't forget to subscribe and leave a review wherever you get your podcasts. The show is produced by me, Matt Hodep, and Brittany Broders, with production assistance from Andy Nazzaro, Matt Lucky, Sebastian Burka, Julie Prepst, and Andy Shee. The podcast is partially supported by a generous contribution from Luis Muniz and Cristani Medellus Muniz. We are grateful for their commitment to advancing the thoughtful dialogue and scholarly engagement on our show. If you'd like to take the conversation further, also check out promarket.org, a publication of the Stiegler Center, and subscribe to our newsletter. Sign up at chicagobooth.edu/stiegler.