Source: Laurence Kotlikoff

You probably saw the news about the Social Security trust fund. According to the new trustees report, the Old-Age and Survivors trust fund is expected to run out of money at the end of 2032, one quarter earlier than was projected a year ago. There are bottles of shampoo that will last longer than that.

If the trust fund runs dry and nothing is done, Social Security will have to live entirely off payroll taxes as they’re paid in, which would only be enough to pay 78 percent of benefits.

I think the reason people have been fairly calm about this calamitous possibility is that they’re pretty sure it won’t happen, and I think they’re right: No one in Congress or the White House would allow it. There will be a fix.

That doesn’t reassure Kotlikoff. He says that the fix is likely to be the problem. It will be too little, too late, because Social Security’s problems are bigger than the government has the gumption to deal with.

I recommend that you watch the video to get his entire message, but here are some of his key points:

He argues that if you really want to know what condition Social Security is in, you should ignore the numbers presented up front and go way back to page 218 in the appendices to Table VI.F1., which presents the “infinite horizon” picture of the system. By that measure, the unfunded obligation of the system is $71.9 trillion (stated in present value). That’s far more than the $29.3 trillion unfunded obligation looking ahead only 75 years, which is the window that Social Security typically uses.

The forever fix would come to 5.7 percent of taxable payrolls, vs. 4.2 percent for the 75-year fix.

“We have twice, more than twice, the amount of debt hidden in Social Security that we do have on the books, and then there’s other obligations to Medicare and defense spending into the future, so the whole, you know, if you put everything together, you see that the entire fiscal enterprise of the U.S. is underwater to an enormous degree,” he told me.

Kotlikoff calls Social Security a “Ponzi scheme” that takes from the young to benefit the old. “We’ve been expropriating our children … grabbing their wages and giving it to old people for different transfer programs, as opposed to getting the old people to pay for themselves collectively,” he told me.

“We’ve been telling the young people, don’t worry, when you’re old, you’ll have your chance to expropriate your children,” he said. “The problem is, there are fewer children projected to be coming along.”

In 1960, consumption by age was a hump shape—highest around age 40, lower for the young and old. Now it’s a steady upward line by age. Older people consume more than younger people. We are taking from working people “what they would otherwise be saving for their own retirement,” he said. “You give it to old people who are close to the end of their lives, who are only interested in taking cruises and going out to dinner and enjoying the rest of their days, they’re not really interested in leaving money for their kids or making gifts.”

Because the United States saves less than it invests, it needs to import savings from abroad, which means that foreign investors are acquiring ownership of more and more U.S. assets. He said the United States is becoming like Jamaica, a country in which many assets such as hotels are owned by foreigners, and the Jamaicans work for them. “Our economy is turning into a servant economy, because most of us are working as servants for upper, you know, rich people, and for foreigners to some extent,” he said.

Kotlikoff said that the United States could improve its financial system immensely by making common-sense fixes to health care, such as expanding and improving Medicare Advantage, in which private companies provide insurance while being reimbursed by the government.

I tried to end on that happy note, but Kotlikoff wasn’t ready to finish with a smiley face. He said that even with the influx of foreign savings, the United States is underinvesting. Instead of Jamaica, he compared the United States to Argentina, which in 1900 was one of the world’s richest nations, but is no longer. “They pursued exactly the policies that we’ve been pursuing for the last 70 years under each administration,” he said.

TRANSCRIPT

Peter Coy 0:52

Hi, I’m Peter Coy. This is Economics for Everyone. Today’s topic is Social Security, which has been much in the news lately, and we’re lucky enough to have a special guest, Laurence Kotlikoff, Professor of Economics at Boston University, Fellow of the American Academy of Arts and Sciences, Fellow of the Econometric Society, Research Associate of the National Bureau of Economic Research, and President of Economic Security Planning, a company that produces software called Maxifi Planner, which helps people plan their finances, of course, and we’ll be talking about that, as well as other things, in the course of our discussion of Social Security. So, first of all, Larry, welcome to the show.

Laurence Kotlikoff 1:39

Great to be back with you, Peter. My best credential is that I’m a longtime buddy of yours.

Peter Coy 1:48

Thank you so much. Yeah, we’ve been a long time, and I’ve quoted you many times on different topics, because you’re a font of wisdom on so many different subjects. And today is social security so the trustees report, which comes out every year, just came out. That’s in the news, and it said that the year that the trust funds go empty is the time is three months earlier than predicted last year. Financial security worsening, and people are worried that if the something isn’t done there won’t be enough money in coming in through paychecks, payroll receipts to cover all the benefits that are going out, and so please tell me, what’s the situation with Social Security. Let’s start with that. Then we can go on through other topics from there.

Laurence Kotlikoff 2:48

So the situation is far worse than they’re portraying, because governments lie, and our government is very good at lying. This particular version of our government, but, but this problem has been going on for decades, so it’s not a Republican cause problem, it’s as much a Democrat cause problem as a Republican, but you know, you go back to Eisenhower in the 50s, he jacked up the social security system by a factor of three. I’m going to say some things that are concerning about the trust, about the finance finances of Social Security, and about the way we’ve been coming up with, you know, we’ve been running it financially, but I don’t want this to be interpreted as I’m against Social Security, I think it’s vital that we have a compulsory social insurance program that we force people to save, we force people to take their benefits in the form of income that never runs out, so we force their annuitization that we have a a a collective old age health care, Medicare, some form of universal health insurance. I would prefer to have one system for the entire country. So I’m all for social insurance. I’m just not for leaving the bills to our kids and our future kids, because that’s what we’re doing, and we’re lying about that, even in this most recent trustees report, but we’ve been doing this for four years, misleading the public about how bad the problem is. So, let’s just talk about the financial situation for Social Security, so the headline statement, and the statement that the trustees, and I put a quote, quotations around the word trustees, because Scott Bensett Bessent, who’s our Treasury Secretary, is the chief trustee for Social Security, but you know, if you’re a trustee, you want to. Tell the truth about the system, and you don’t want to spend your, let’s say, preface about the the 266 page report, and not talk about the true situation, which is hidden on page 206 in a table 6f Roman 6f that shows that the system is 46% under find it underfunded, and it was 42% underfunded the year before last year. So, what does it mean to be underfunded 46% It means that we need to raise the payroll tax, and it says this right in the table, but it says it in very cryptic language, so it’s hard for the regular person to understand, plus it’s hidden way in the back of this book and not mentioned at all at the front. Okay, and it’s, it shows right, right there we have a 71 point, I think it’s 970 1.6 something trillion dollar unfunded liability, actually it’s 71.2 in the system. Now, what that means is that we have obligations to pay benefits that ex to current and future beneficiaries, which in present value exceed the projected receipts and what’s left of the trust fund, which is very little by 71 point. I’ll just get the exact number here, so we don’t have to be guessing, yeah, it’s $71.9 trillion so that’s more than two years of GDP. Our GDP this year is about 28 trillion, so we’re talking about red ink in Social Security, that’s more than twice GDP, which is, and since US federal debt is about official debt, is about one year’s GDP. We’re talking about debt in the Social Security system that’s twice as big as the official debt, so, and this is net of any taxes that are coming in now. Why is that off the books?

Laurence Kotlikoff 7:26

Well, the government is perfectly free to take money from somebody like you, Peter, and promise to pay it back in the future, and it can come to you and say, and then we could, it can decide whether to call the money that it’s taking from you a borrowing that it’s and hand you back an IOU, a piece of paper called an orange piece of paper called a US Treasury bond, and call the payment in the future return of principal plus interest, that’s putting the obligation on the books, that becomes a formal official obligation, or it can say what I’m taking from you, Peter, is taxes, and in the future I’m going to make a transfer payment to you. You don’t care what words I use, the I’m Uncle Sam to describe what I’m doing here, but if I use the second set of words, the obligation is off the books. It’s not part of official debt, so it’s not included in the, you know, the debt clock in Times Square, which I believe for a second there.

Peter Coy 8:35

I mean, that somebody who favors the current system would say, well, there is a difference, because the future social security benefits are not legal promises. The government could choose to cut benefits, and the recipients would have no legal recourse.

Laurence Kotlikoff 8:56

A lawyer would make that statement, and it would be economically meaningless. Okay, because they would think that the law mattered, but when it comes down to it, we’ve seen countries going back to the 1400s and certainly Spain has been, you know, the default, and in 1575 of the Spanish debt was like the biggest thing for, in terms of the debt default, I think Argentina has defaulted on its debt seven times in its history. Russia’s defaulted on its debt, so you can legally default, you have legal debt, and then you default on it, and that’s many, many countries have done that, they’ve also effectively defaulted on their currency by hyper inflating, so they give you

Peter Coy 9:48

point is that there’s no strict, there’s no bright line between debt and sort of

Laurence Kotlikoff 9:55

no, it’s really the promise economically speaking, we would think that any. Promise has a probability of being paid, and also a probability of not being paid, and that’s the economics, and how we describe whether we say the obligation is official or unofficial, that’s just whether we’re talking about the problem in French or English or German, it has nothing to do with economics. The economics is the amount that’s being promised and the probability that it will get paid, that’s what would show up in a mathematical model. And the math doesn’t tell us what words you just used to describe the math. So, so here’s the thing about what just came out, the trustees report. What’s in that table? Six f1 First of all, we’ve got a number, 71 point 9 trillion more than two years of GDP. So I don’t think anybody in the country understands that we have more debt. We have twice more than twice the amount of debt hidden in Social Security that we do have on the books, and then there’s other obligations to Medicare and defense spending into the future, so the whole, you know, if you put everything together, you see that the entire fiscal enterprise of the US is underwater to an enormous degree extent, we would need to, well, let’s just talk about social security. Then I’ll talk about the bigger country wide picture.

Peter Coy 11:30

Before you jump into that, I just have a question for you. In the front of the report, there are numbers about what would be required to set social security right in terms of raising a payroll tax or reducing benefits. Are you content that those numbers are accurate?

Laurence Kotlikoff 11:50

Well, if I am recalling correctly, and I don’t know exactly what what they’re saying there, but the, they have two calculations, the unfunded liability out 75 years, so they make projections out 75 years, and then they have this other projection, which is the right one, which is out through time, beyond, you know, for the entire future, and so the unfunded liability for 75 years, which has no economic basis, because it’s assuming that your grandchildren will not get any benefit.

Peter Coy 12:36

Three grandchildren, that this

Laurence Kotlikoff 12:38

is, I mean, after 74 your grandchildren of which is ridiculous, and they certainly will. So, that number is.. I’ll tell you exactly, it’s not 71 point 9 trillion, it’s 29.3 So, we’re talking about, you know, understating by about 60% the problem. So, let me put it in these terms, the payroll tax hike that’s needed to deal with the 70 point $71.9 trillion problem, so the immediate and permanent payroll tax hike is 46% That’s why I said the system is 46% underfunded. That translates into taking the 12.4% FICA payroll tax rate for Social Security 12.4% and raising it to 18.1 raising it by 5.7 percentage points, so imagine if you’re listening to this or watching this that every week starting this week, your paycheck was reduced by essentially 6% That’s what’s needed, and for the rest of your life, and your kids’ life, and your grandkids’ life, everybody would have to pay 6% more every week out of their.. it’s

Peter Coy 13:59

actually, it’s actually the math is a little different if you raise the payroll tax by 6% your pay, the remaining pay six percentage

Laurence Kotlikoff 14:07

points

Peter Coy 14:08

per point, right? Yeah,

Laurence Kotlikoff 14:09

yeah, six percentage points,

Peter Coy 14:11

yeah.

Laurence Kotlikoff 14:12

So, and then, yes, there are macroeconomic implications we can get to, but so the story is even worse than this when you take into account the impact on the economy through time, we can discuss that, but for so that’s a 46% tax hike. Now, if you just look out to 2100 which is about 75 years now, which is their other calculation. The increase is not 5.7 percentage points, but 4.2 percentage points. So that’s one way to, so, so you can see that there, if you’re focused on the. You just the next 75 years, you’re looking at only a part of the cancer, and depending on what numbers,

Peter Coy 15:10

that’s pretty still pretty bad, even, even people say,

Laurence Kotlikoff 15:14

well, that’s pretty bad, and 75 years from now we’ll let the people around 75 years from now deal with the problem, but if you go back to 1983 when we had the Greenspan Commission supposedly fix Social Security, the problem with the issue was raising the payroll tax to get to a permanent solution by two percentage points. Now we’re in a situation where we have to raise it by 5.7 percentage points, so by doing too little back then we are in a situation where this, it’s like we operated on a half on a third of the cancer back then, and now the cancer, we say come back in 33 years, and we’ll look at it again, and now the cancer is 3343 years, I guess. Now the cancer is is three times as big,

Peter Coy 16:17

yeah.

Laurence Kotlikoff 16:17

And now we’re, what if we take the same approach, which is exactly what you’re reading in the beginning of the trustee’s report, because they’re talking about the 75 year problem, not the infinite horizon problem, the full, you know, the full future problem, if they take that same approach, which they surely will. Then they’re going to do again, too little, too late. They’ll say to the cancer, “Well, I mean, to the patient, we’re going to do what we did last time, which is operate on a third of your cancer, and you’ll come back in, in whatever, 1030, 1020, 30 years, and we’ll see how you’re doing, and you know what, the patient will not come back because the patient will be dead.

Peter Coy 17:11

Larry, if I could bring a new point up, you’re an expert in intergenerational accounting, and the idea of that is that if you think about one generation after another, which generation is paying which generation are today’s young people basically subsidizing today’s old people, and what will happen when today’s young people become old, where do we stand with that? People talk about a war among the generations. Sometimes people will say that old people are getting too good of a deal relative to young people. What’s your position on all that?

Laurence Kotlikoff 17:54

My position is, it’s exactly the case. We’ve been expropriating our children, and then telling our young people, and then telling them into, in grabbing their wages and giving it to old people for different transfer programs, as opposed to getting the old people to pay for themselves collectively, which is what we, that’s a fully funded system, but the, and we’ve been telling the young people, don’t worry, when you’re old, you’ll have your chance to expropriate your children. The problem is, there are fewer children projected to be coming along, so this Ponzi scheme that we’re running, and not just through Social Security, through official debt, through Medicare, Medicaid, because most of Medicaid payments go to older people in nursing homes, and by changing the tax structure, shifting more of the taxation onto wages, away from asset income, all these different mechanisms we’re using to expropriate our kids at the benefit to ourselves and and then we’re going to be able to consume at a higher level because of that, and then pass away. That’s the reality of what’s going on here. We get to have a higher living standard, they get to have a lower living standard, because they’re they’re left with this enormous obligation, I’ll describe how big that is in a second. When we talk about overall fiscal gap and generational accounting, which the government is not doing, we’re hiding the bacon all the time, and every year this trustee’s report comes out. It ignores Table Six f1 and that’s that’s been in that document since John O’Neill, Secretary, a good Secretary of Treasury, back around 2001 put it in there, and he was, he insisted it be put in there, and nobody’s taken it out, but they just keep pushing it. Further into the back of the book, and keep ignoring it, so let me tell you what else it implies. That table, it implies that if you look at the footnotes and you do a little calculation, an alternative to raising the payroll tax rate by 46% by 5.7 percentage points, starting this week. Okay, immediately and permanently, that’s what we’re talking about. 5.7 percentage point hike in payroll in that payroll tax rate, which is a 46% tax increase. What we’re talking about, if we cut benefits, is not cutting the benefits by 22% which is what the shortfall in cash flow in 2032 will mean. An immediate that year benefits will be cut by 22% but because the problem gets worse through time, what’s really needed is an immediate and permanent 30, as not, not in 2032 but today a 31% cut in benefits for everybody, every type of social security benefit, and there are about 12 different social security benefits, disability benefits, divorcee benefits, spousal benefits, widows benefits, child benefits and retirement benefits, all these different benefits would have to be cut immediately and permanently by 31% immediately says right now. So the 22% cut is far short of what’s needed, which is 31% That’s another way of saying that they’re lying. Okay, and now they’re also lying about the overall problem, which is.. but let me take a breath and see if you have any questions.

Peter Coy 21:54

Yeah, I do have a kind of a conceptual question, which is that if you stripped money out of this entirely, and just looked at real things like hospital beds, medicines, caretakers, and so on, what you really need, again, stripping money out of it, is that today’s old people are taken care of physically, and tomorrow’s old people are taken care of physically, which means there need to be the society needs to be able to generate the resources to provide those goods and services to old people at food, whatever it is, whatever they might need and so some people will say, and I want to know if you’re in this camp, that the real goal of all this stuff is to generate the savings, which will produce investment, which will produce the wealth that is required to sustain old people in the future, and that stripping everything else away, that’s what we’re really trying to achieve here. Is that fair to say?

Laurence Kotlikoff 23:11

Well, yes, we have to have the, I mean, there’s the issue of what’s our productive capacity? How does that? How does our policy impact that through time? Our productive capacity depends on how much capital we accumulate, how much we save and invest, and therefore add to our capital stock, and that makes workers more productive, and their wages would then rise, but the reality is that this policy of taking take as you go policy of taking from young people, not to pay, not just for social security, to pay off interest on the debt, to pay for defense, to pay for the president’s lunch and his beautiful palace that he wants to build his ballroom and his big arc to Trump that he’s building and all that stuff is is coming, it well, the way we’ve been financing it is increasingly by going after younger people and telling them they get their chance, and here’s what’s happened as a result of that. The, the, if you plot on a, on a graph, age, and then you vertical axis is average consumption, so average consumption by age. If you look at that chart. Back in 1960 it was a hump shape, so that a 70 year old, on average, an average on average, 70 year olds were consuming 60% of what 40 years year olds were consuming back in 1960 Today, that hump shape has become a straight line, so a 70. Old is consuming on average 40% more than a 40 year old, so the entire picture of the age consumption profile has changed, and this is exactly in accordance with what would happen if you just simulated in a mathematical model, taking from young people and giving to old people, you get the old people, the young people are saving for retirement. So you take from them what they would otherwise be saving for their own retirement. You give it to old people who are close to the end of their lives, who are only interested in taking cruises and going out to dinner and enjoying the rest of their days, they’re not really interested in leaving money for their kids or making gifts. That’s not the way we roll in our country. We’re generationally very selfish. They consume more, the young people reduce their consumption, but not by as much as the old people raise their consumption. This is standard life cycle economics going back to the Modigliani and Miller back, who got the Franco Modigliani, who you know and I know, got the Nobel Prize for this, and what happens is the national saving rate goes down, and so since 1950 the national saving rate in the 50s and 60s was 15% Today last year it was 1.5% 15% down to 1.5% And foreigners are looking at this and they’re saying, well, this country has got an incredibly low - they’re not thinking about it this way, but they’re looking at the investment opportunities that we’re not taking advantage of as a country, because we’re not saving at any, you know, we’re basically not saving, so they’re saying, well, this looks like a good place to invest, let us invest, and their investment rate last year was about 4.5% not one point, so they’re for every dollar that we’re investing in our country, they are investing $3

Peter Coy 27:08

You’re saying out of the investor,

Peter Coy 27:09

actually

Peter Coy 27:10

coming from abroad to fund about four,

Laurence Kotlikoff 27:13

$4 Let me put it that way. Yeah, so we’re running an enormous current account deficit, and so this is looking increasingly in our country, like Jamaica, and if you look at Jamaica, the average per capita income is like $6,000 a year. If all these poor Jamaicans who are effectively servants for the big hotel complexes, resort complexes that are that are investment, there’s all this investment in Jamaica by foreigners, and they’re getting the return, and they’re hiring the Jamaicans as service workers, but they’re really servant workers. So, our their economy is a servant economy. Our economy is turning into a servant economy, because most of us are working as servants for upper, you know, rich people, and for foreigners to some extent, to a large extent, increasing extent, and 85% of our workers are in this called service workers, I call them servant workers, their real wage, the median real wage of, in the according to the BLS, Bureau of Labor Statistic. If you go back to 1976 and you go fast forward 50 years, the median real wage to today is no higher than it was back 50 years ago. Median weekly real earnings, real, which is adjusted for inflation, no higher, that means that media means that half are above and half are below, so half of the people have seen absolutely no are at the same place that they were 50 years ago. Meanwhile, per capita GDP in our country has gone quite high now, so we’ve had a decent per capita growth, but we’ve had increasing wage inequality, increasing asset income inequality. We’ve got Elon Musk now with a trillion dollars in his pocket as of yesterday, because of his IPO. That wealth inequality has gotten much greater, and so we have to turn this whole situation around dramatically. Fortunately, we’re doing so many inefficient things with our health care system and the way we’re running our fiscal system that there’s a lot of scope to right the boat, if so to speak, and but let me just say this last thing. I don’t want to just drone on, but we did a study of of the unfunded liability for the entire system for the entire fiscal enterprise. So put everything on the books, the official debt, the unofficial debt. Look at it all together and ask, what kind of a tax hike would you need, immediate and permanent, to pay for everything through time, all the outlays for Social Security, Medicare, Medicaid, defense, President’s lunch, Air Force One gas, all that path of outlays, forget the words, you know, deficits or taxes,

Peter Coy 30:27

yeah,

Laurence Kotlikoff 30:28

just outlays and receipts, and I did this study in parallel with the, with in joint jointly with the Bank of Italy, because we did a side by side comparison of the US finances versus the US, and we call the paper Measuring What Matters. it@kotlikoff.net’s which is my website, kotlikoff.net You’ll see it right there under articles, and it shows that the US needs to have a 25% immediate and permanent increase in every single federal and state tax, so it’s not 46% in social security, social security is in somewhat worse shape, but overall it’s 25% so the social security payroll tax would have to go up 25% federal income taxes, federal excise taxes, corporate taxes, state income taxes, state sales taxes - they’d all have to go up 25% or we could cut all outlays on everything except interest on official debt by 23% starting today, and we would be okay. We would have no fiscal gap; there’d be no, we’d be able to balance our government’s books, so this is standard economic inter-temporal accounting that any economist is every economist grad student has taught, and nobody in government talks about this, because they want to talk in words that it says an emperor’s new closed situation, they don’t want to convey the fact that our country is entirely, completely fiscally broken. I’m going to explain this in one other way, and then I’ll stop. If you ask, could we leave future generations to pay these bills? Could we just take the fiscal gap, the money that current generations, people that now are alive, aren’t going to cover in terms of, you know, how much is is not going to be covered by current and future generations if we leave things the way they are, and we just raise taxes on younger people, sorry, not on people that are born this year and in the future, so on future generations. How much does that come out to be? How much of a burden will it be for them to cover everything that that they would otherwise be paying, plus cover the shortfall, the fiscal gap. It turns out we’d have to set a tax rate on them of 104% of their wages, so it that’s impossible. You can’t get blood out of the stone, you can’t tax anybody that amount, they’re going to leave the country. That shows you that it’s completely infeasible to leave this kind of burden on future kids. We can’t have future kids pay us out. This is just impossible. They don’t have the resources, and nobody seems to know that, because you know, I wrote this paper. It was a National Bureau of Economic Research paper, and the press ignored it. The other economists in the country ignored it. Nobody mentions it, but it’s a joint. Just came out last, I guess, fall, and it’s joint with the Bank of Italy, in effect. Nobody’s talking about it. I don’t get it, but that’s the way it is. We want it. We’re in Nepal’s new close situation, and by the way, Italy is in much better fiscal fiscal shape than we are, even though their debt to GDP ratio, their official debt to GDP ratio is higher, they’re off the books debt to their pension system and to their healthcare system much lower, so they have much less red ink, unofficial red ink, and much more red ink that’s official.

Peter Coy 34:26

Yeah,

Laurence Kotlikoff 34:27

and overall they have much less red ink overall.

Peter Coy 34:34

Larry, can I ask you one last question about artificial intelligence?

Peter Coy 34:41

Okay,

Peter Coy 34:42

now if a AI does what a lot of people think it’ll do, it’ll replace jobs, which would mean fewer payroll taxes, less revenue coming in, which would seem to hurt social security’s finances. Then I have a piece in the New York Times on my. This morning about taxation of artificial intelligence, so I got into some of these issues. If you tax general revenue, if AI produces so much wealth that it people’s consumption is able to rise a lot. You could tax some portion of that consumption to fund the elderly, basically to meet obligations. Social Security, the idea would be all problems go away because AI is generating so much wealth. What about that?

Laurence Kotlikoff 35:45

I think that’s fantasy. Tell you the truth, I know that members of Congress are saying we don’t have to deal with social security problems or anything, any other problems, because AI is going to save the day. So, what would happen if AI were to raise everybody’s productivity by 10% Suppose, I mean, we know it’s raised the wealth of Sam Altman and, you know, Elon Musk, and they’re going to, you know, they could, given our fiscal system, our tax structure, they’re not going to pay much more of anything in taxes the way things are set up. So, let’s suppose we raise your everybody’s pay by 10% Well, that means everybody’s social security benefit will also go up, because the benefits in the future will pay more payroll taxes, but then there’s going to be more benefits that we’re going to be claiming based on those higher payroll tax contributions, so and the system is actually quite progressive, so if this raises the wages of poor people, the benefits that they’re going to be getting down the road could actually, in present value, exceed what their extra taxes are because of the progressivity of the system, so there’s not a

Peter Coy 37:07

quick second that’s given the current mechanism of social security that could be changed if we saw a system that was generating ridiculous amounts of projected benefits for people, you just say, well, that formula is clearly wrong. Why don’t we come up with a formula that provides adequate resources to the elderly, whether that’s drawing from general tax revenue or what? That’s why I’m going towards a consumption tax rather than a payroll tax. Is the way

Laurence Kotlikoff 37:37

I’m with you, I’m just saying that, you know, people are making more money. Let’s hope, as opposed to losing their jobs, which is much more likely, and being replaced by robots powered by AI. The, we would, we’d see them having higher benefits, and they wouldn’t think that they’re, you know, they get used to this living standard, and then their benefit, you know, they’d have this commensurate social security, and they wouldn’t view that they’re being overcompensated and be happy to hand over more money, but if you think about it, how we’re going to get out from under this this whole fiscal gap problem that we’re facing, which is roughly about 7.6% of GDP, is what we’re short every year. We need 7.6% more receipts or less outlays for the end of time. That’s the size of our fiscal gap in Italy. It’s four percentage points of GDP, so that’s showing you that we’re about twice as worse off on a fiscal gap basis as Italy. So, what can we do? Well, one thing we can do is to have, as you said, a value added tax, a tax on consumption, and to make that work for everybody, in a sense, to make it work for for Elon Musk, so that he pays more taxes if he wants to hang out in the US as a US citizen and do business here, we would have to tax him not just on his restaurant meals but on all on the consumption value of his homes, of his private jets, of his yachts, of his, and also tax him on his consumption abroad. If he goes abroad to our private island, that he might buy any, but he’s a US citizen, and we tax, we would tax people on their worldwide consumption, and we would impute rent on their mansions, and somebody like Taylor Swift. I live in Rhode Island right now, I’m going to be you to teach and be a full professor there, but she’s got this enormous mansion down the road, 40 minutes, and it’s one of, I think, 10 homes, and we. Have to say, look, the consumption value, if you could rent that out, how much would it rent for? Well, maybe it’s 10 million a year that you, or maybe it’s 50 million if it’s Taylor Swift’s house, or but just looking at it, it looks like it’s about, would have to rent out for about 10 million a year, and it’s a beautiful place, and well, that’s, you know, what you’re ready, you’re you are in effect by not renting it out, you are consuming 10 million bucks of rental services from your house, that’s consumption, you have to pay 15% pay tax, value added tax on that, that would certainly bring in more revenue, but here’s another thing that we could do that wouldn’t necessarily involve raising taxes, which is to rationalize our health care system, that’s spending 18% of GDP on health care, delivering, I think, 20-first best results if you rank advanced countries. What if we just adopted the Dutch or the Danish healthcare system, the Danish healthcare system, or the Swedish healthcare system. Sweden is spending 11% of GDP, and they have fourth best results. So, if we just figured out what you know, and we have proposals that we could just take our Medicare Part C program, modify it in some pretty major ways, make it Medicare for all, but it’s not Bernie Care for All. It would be the Republican version of Medicare, but under strict regulation we could end up with the Dutch, the Danish, the Swedish healthcare systems, which are all, and that’s 7% of GDP. We could go from 18% to 11% pretty much overnight. That saves us the 7% of GDP that we need to have a fit, you know, have a system that is sustainable fiscal system that has no fiscal gap.

Peter Coy 41:58

Well, I love that. You know, what it’s nice to end on a positive note. I up until now I was getting pretty, it was pretty grim, but you, you found a way to show that there is a path out of this. Very glad to hear. I’m sure the people watching this video were glad to hear that as well. You’re not an ultra pessimist. There are steps that could be done to fix social security and make sure that the US is in fiscal health.

Laurence Kotlikoff 42:26

Let me just one add, I don’t want to end on an optimistic note too much.

Peter Coy 42:30

Come on, come on, just

Laurence Kotlikoff 42:32

mold scientists, but let me just add one other thing, which we left out, or I left out, which is that the national saving rate I said has gone from 15% down to now one and a half percent, the domestic investment rate, how much is being invested in the US, has also gone down dramatically from about 13 14% down to about 4% Foreigners are making up the difference, but the, but the over, not, not entirely, we’re not still investing 15% you know, debt basis, net domestic investment as a share of net national income down to 4% So, this means that we’re, you know, we all think that AI is going to be this huge productivity boost. I doubt that, because I see all the, I see what AI can’t do, not what it can do, at least in the area of personal finance, it just can’t get anything right whatsoever. It’s miles wrong on how much life insurance you need. You ask one AI, you’ll get an entirely different question and answer. They’re all wrong dramatically, and so we were leaving our workers with less capital and less equipment, less new technology, if you like, less new AI to use, because there’s no wherewithal to for companies to to invest, they’re not in there’s not enough investment happening, it’s happening in other places, so this means that their wages are not going to, or are not going to grow as rapidly, or they will just continue to stagnate if we’re talking about the middle class, and that’s the big concern that that we’re going to be left behind as a nation, that we’re heading the way of Argentina, and Argentina went from the last thing I’ll say, from 85% of our per capita GDP, their living standard was back 100 years ago was exactly 85% of our living standard. Today it’s 14% And what did they do? They pursued exactly the policies that we’ve been pursuing for the last 70 years under each administration, and lying about it to the public about what they’re really doing, and when you have a social security report that ignores table 6f you know they’re lying.

Peter Coy 44:49

Yeah,

Laurence Kotlikoff 44:50

so I just want to make sure we end on a pessimistic note. On a realistic note, you

Peter Coy 44:55

succeeded. Okay. Thank you. Okay.

Peter Coy 44:58

Well. With that caveat, I want to thank Laurence Kotlikoff, renowned economist at Boston University and expert on social security, for walking us through what’s going on in social security. Larry, always great to be with you. Thanks for being on the show.

Laurence Kotlikoff 45:18

Thank you, Peter.

Transcribed by https://otter.ai

Source: Stanford University

Alvin Roth isn’t just a fine economist. He’s a great author and a fun person to interview. I can confirm this after having read his new book, Moral Economics: From Prostitution to Organ Sales, What Controversial Transactions Reveal About How Markets Work, and having interviewed him by Zoom for this Substack.

Roth, of Stanford, shared the Nobel in economics in 2012 for his work on market design. As the Nobel committee wrote, “How to bring different players together in the best possible way is a key economic problem.” Roth helped solve that problem, devising methods to match “doctors with hospitals, school children with schools, and organ donors with patients,” to quote the Nobel committee.

Some markets that could exist don’t because people—some people, anyway—are repulsed by them. Three that Roth discusses in his new book, and talked about with me, are horsemeat, prostitution, and kidney sales.

You can get the complete version of what he told me by watching the video below or reading the transcript. Here are some of the points that jumped out at me.

California bans the sale of horsemeat. Why? It’s not just because some people, think eating horsemeat is repulsive. It’s because others don’t think it’s repulsive and would very much like to do it if they could. There wouldn’t need to be a ban on selling horsemeat if nobody wanted to eat it. (For that reason, there’s no ban on selling drinks of other people’s spit, as Roth told me. Yuck.)

We can argue about whether the horsemeat ban makes sense. On one hand, horses are intelligent, caring creatures. On the other hand, so are cows and pigs, and California doesn’t ban the sale of their meat. But fewer people keep cows and pigs as pets, so they are raised for slaughter, often in inhumane conditions.

Now, prostitution. Prostitution exists in a cloud of evil. Women and girls are often pressed into service by abusive men. They’re beaten up by their customers. All kinds of bad stuff. But imagine if all of that could be regulated away, and we were left with one willing person paying another willing person for sex. Would that still be evil? Some would say yes. Others would disagree—in fact, they disagree every day, because prostitution, even in its currently ugly state, is a huge business.

Roth got interested in what he calls “repugnant” markets because of his work on building kidney exchanges, which have saved many lives by making it easier for people to get kidney transplants even if no immediate relatives are tissue matches. Far more lives could be saved, he told me, if it were legal for people to sell one of their two kidneys and live on the other. There is only one country in which that is legal: Iran. In the United States, “Some people think that not only is that a bad idea, but it’s the kind of bad idea that only bad people have.”

I asked Roth if he’s a libertarian, since libertarians say people should be free to do what they want as long as it doesn’t hurt others. No, Roth told me.

“People who call themselves libertarians often don’t like market regulation of any sort, but I’m a market designer,” Roth said. “I think that good regulations help markets work well.”

Fascinating stuff.

TRANSCRIPT

Peter Coy

Okay, hello everybody. I’m Peter Coy on the Substack Economics for Everyone. Today, I’m very honored to be speaking with Al Roth, Nobel Prize-winning economist and author of a new book, Moral Economics: From Prostitution to Organ Sales: What Controversial Transactions Reveal About How Markets Work. Al, welcome to the podcast.

Al Roth

Thank you.

Peter Coy

Really honored to have you on. When I was at the New York Times Opinion section, I interviewed you on kidney exchange, which is something that was hugely beneficial technology. Well, I guess you could call it a technology, right? It was sort of an algorithm that you helped design that has saved many lives, and in the process of working on that, as you described in the book, you got more and more interested in this topic of some people call repugnant transactions, and I want to start right out by first of all thanking you for being on, and asking you about just having your own words. I’ve read the book, and I really enjoyed it, and I recommend it to others. By the way, it’s written. It’s written for a general audience. You were very good about that. It’s written for people who are, I’m sure, be interesting to economists, but you don’t have to be an economist to understand it. I think the first question I would ask you, and I think I warned you I might be asking about this, you’re wading into issues that are often considered to be the domain of philosophers and ethicists, perhaps medical doctors. As an economist, do you bring a different perspective to it? So, I wonder if you could talk first of all just about the issue of how it felt for you to be bringing your training as an economist to bear on issues that are not necessarily considered to be primarily economic issues.

Al Roth

Well, I guess it depends who you ask. What are economic issues? But I think of economics as a social science that’s broadly concerned with human activity, and you know what things we allow and what things we don’t allow when it comes to people interacting with each other are natural subjects for an economist to study, and the way I got into this, of course, was as you say, through kidneys, and there’s a way of extending, expanding the scope of kidney transplants that’s called kidney exchange, and it’s important because there’s a big shortage of kidneys for transplants. Most people who need a transplant will die without getting one, but the business of economics is to think about how to allocate scarce resources efficiently and equitably, and how to make them less scarce, and among the comes up when you’re doing that is that is that markets of all sorts need social support to work well, and so, so early on I encountered the fact that that not everyone agrees on. On how we should allocate kidneys for transplant, so that’s how I got into it.

Peter Coy

Well, do you think, though, just continuing on this theme, that an economist, and of course economists are not all alike, but there’s certain principles that economists tend to share. Do you think you bring a different perspective to this than, as I say, a philosopher and ethicist religious person might.

Al Roth

Oh, absolutely. I think philosophy, which also tries to study all of human human interactions, does so in a more abstract way than economists do, and so you can spend time thinking about what you think the just society would look like, without necessarily worrying whether you can achieve that vision of a just society, and the things I talk about in the book is that economics deals with trade-offs, when there’s scarcity, we can’t do all the things that we would do if, in the absence of scarcity, in the presence of abundance, so, so we necessarily think about trade-offs, what to do when, when some resources are scarce, and how to make them less scarce. Yeah, and philosophers often don’t have to confront those issues.

Peter Coy

Now, you, you use the word repugnant in a way that I think is not necessarily the way it’s understood by the general public in general usage. Repugnant just kind of means awful, some just whereas you make a distinction between I think repugnant and just I think disgusting. Can you talk about what you mean by that, maybe with some examples?

Al Roth

Sure, so I use repugnance as a technical term. I find it useful to do, and I define it very early in the book, but incidentally, the book is about controversial markets of all sorts, not just those that involve what I call repugnant transactions. But repugnant transactions are transactions that some people would like to engage in, and other people think they shouldn’t be allowed to, without having, without those other people experiencing direct harm, so often the reason they think these transactions shouldn’t be allowed is for religious or moral reasons, and I point out to emphasize that, that that sometimes these are transactions that you can’t even tell have happened unless someone tells you so, so it’s not necessarily a transaction that hurts the objectors, so for example, it’s illegal in California to sell horse meat for human consumption, and it’s not because no one wants to eat horse meat, it’s precisely because in some parts of the world horse meat is delicious, and people would like to eat horse meat, but it’s against the law in California, because of a 1998 popular referendum, but there’s no law against restaurants serving drinks made of other people’s spit, for example, and that’s because that would be disgusting. There’s no demand for it, so you don’t need to make a law against that. The reason there’s a law in California against eating horse meat, against selling horse meat for human consumption. Is that some people would like to eat horse meat, but you can’t do it in California, and in fact it’s very hard to do it anywhere in the United States, because while the Congress has on several occasions unsuccessfully tried to outlaw the sale of horse meat, they did succeed in lining out the Department of Agriculture budget for inspecting horse meat, and you can’t eat easily eat any meat in the United States that isn’t USDA Grade A, United States Department of Agriculture Grade A. So it’s quite hard to eat horse meat in the United States.

Peter Coy

Meanwhile, we have no problem eating cows, pigs, chicken, sheep, which are also sentient beings, not in an entirely different category from a horse, right.

Al Roth

Well, that’s exactly right. So, not the people who, who were responsible for the, for putting the ballot, the referendum on the ballot, were not vegans. There are people who think that it would be nice if we, if we didn’t eat meat to take, we’d like to take killing out of the out of the food chain, but that was not the impetus for horses, which were regarded as pets. The same law that makes it illegal to sell horse meat for human consumption in California also makes it illegal to sell dog meat for human consumption, but incidentally it’s not illegal to sell horse meat for consumption by pets.

Peter Coy

How do you make of that? It’s so complicated. Now, the thing I loved about your book is that you go through that example, but so many others, and you poke at our preconceptions, and kind of betray that there’s not necessarily undergirded by ironclad logic.

Al Roth

Well, you know, I don’t know that you need. Logic to think about the ban on eating horse meat in California. There are some people who think of horses as pets, and they wouldn’t like you eating their pets or relatives of their pets. They are offended by it, and they succeeded in passing a law against it. So, you can’t, right?

Peter Coy

Yeah, yeah, but I think we maybe we should. We could talk about prostitution being an example. There are places, there are few counties in Nevada where prostitution is legal. Most of the country is not. You could go into organs, organ sales. So, I think maybe that’s a natural place to go, because you, your kidney exchange, as I said in the intro, really helped get more kidneys into more people who needed them, but it’s still there’s still a lot of people who die on dialysis because they can’t get life-saving kidneys, and there those lives could be saved if people could be paid for their kidneys, which is now illegal in the United States. Just talk a little bit about why you think that we’re in the situation we are now, and what it would take to change that.

Al Roth

Okay, so let’s talk a little bit about the current situation. There are about 130,000 new cases of kidney failure in the United States each year, and kidney failure is a lethal disease, but people can be kept alive for some time on dialysis, but dialysis is tough, and the average, you know, half the people who are on dialysis die after five years, so it’s not, it’s not a cure by any means. So, the treatment of choice for kidney failure is transplantation, and as I say, there are 130,000 new cases of kidney failure each year in the United States, but we do a bit fewer than 30,000 transplants a year, so most people who need a transplant or could benefit from a transplant will die without receiving one. And you can get kidneys from two sources: one is from deceased donors who give two kidneys. We get about 22 23,000 kidneys a year from deceased donors for transplant, and you can also get a kidney from a living donor, because healthy people have two kidneys and can remain healthy with one, and we get somewhat fewer than 7000 living donor transplants, so that’s that’s about 29,000 transplants a year, roughly, not nearly enough. Now, as you point out, one, and something that strikes economists quite often is when you see people queuing for a scarce resource, so there are there are going on 100,000 people on the formerly on the waiting list for a deceased donor kidney, of which there are only 20 something 1000 a year, when you see people queuing for a scarce resource, you suspect that prices aren’t being allowed to adjust to increase supply, and that’s exactly the case. It’s against the law in the United States to pay the family of a deceased donor a deceased potential donor, or an individual who gives one of their own kidneys. It’s against the law to pay them, so kidney exchange was a way of increasing the the set of transplants that are available without paying donors, right, because it turns out you might be healthy enough to give someone a kidney and there’s someone you love who you’d like to give a kidney to to save their life, but you might not be able to give them a kidney because kidneys have to be compatible with the with the recipient, then, and your kidney might not be compatible. It might be that the person who you love has developed antibodies to some of the proteins that that are in your kidney, and they can’t take your kidney. So, before kidney exchange, that you would just be sent home. If you tried to donate to that person, they would test you and find you were incompatible, and they’d send you home, and you’re the patient you love would would go back on the waiting list for a deceased donor kidney, the long, dangerous waiting list where 1000s on which 1000s of people die each year. But instead, what kidney exchange is about is supposing you’re in that situation and I’m in the same situation. I would like to give a kidney to someone, and the and the person I’m healthy enough to give a kidney to someone, but the person I want to want to give it to, I’m incompatible with, but it might be that I’m compatible with your patient and you’re compatible with my patient, and so these two patient donor pairs could can exchange kidneys, so that each patient gets a compatible kidney from another patient’s intended donor, so that’s the idea of kidney exchange. There are more complicated exchanges than that, but that scale up at a national level, and the donors aren’t paid, so it doesn’t run into the repugnance of painting kidneys. And we’ve done 1000s of kidney exchange transplants over the years, we do a.

When you count non-directed donors and the who can create chains of kidney exchange transplants together with the exchange transplants themselves, we’re I think we’re at around 1500 transplants a year through kidney exchange, but that’s not enough over the course of the time that I’ve been involved in kidney exchange since the turn of the century, the waiting list for deceased donor kidneys went from around 40,000 people on it to about 100,000 and a lot more people would be on the waiting list if, if the waiting list worked better, if it produced more transplants, right. So, so, so, there, you know, I could tell you about victory after victory in kidney exchange, but it’s in a war that we’re losing, which is the war against kidney disease. So, so there’s some thought about maybe we should find ways to be more generous to kidney donors and increase the supply of kidneys.

Peter Coy

And why is that not happening?

Al Roth

Well, it’s against the law, and some people think that compensating kidney donors or the families of deceased donors. Some people think that not only is that a bad idea, but it’s the kind of bad idea that only bad people have. They think it’s a really bad idea that it would be immoral to do that. Very similar laws are in place in much of the world against paying blood donors and donors of blood plasma, but the situation there is very different, because in the United States we pay donors of blood plasma, and so the United States exports 10s of billions of dollars a year of plasma pharmaceuticals, and that’s why there aren’t terrible shortages of plasma treatments around the world as there are of kidney transplants.

Peter Coy

It’s just fascinating that, as you said, there are big differences in belief about kidneys and about blood. The United States is in one side of the equation on blood, but on the other side of the equation on kidneys, and it’s kind of hard to come up with, as I said, the iron, ironclad logic for why one would be, which is these are just social circumstances and cultural norms.

Al Roth

Well, of course, kidneys aren’t the same as blood, right? A kidney, you can only give one kidney and it’s permanent, whereas you regenerate your blood and your plasma, right? Yeah, but you’re right, we’re on the opposite side. In most countries, many countries don’t allow blood and plasma donors to be paid, but, but it’s illegal to pay kidney donors almost everywhere in the world, with the significant single exception of the Islamic Republic of Iran, and in Iran there is a legal market in which kidney donors can be paid, and there’s lots of disputes, even in Iran, about whether that’s a good thing, but there’s no dispute that the, the surgeries, the nephrectomy to remove a kidney and the transplants to put one in, that the surgeries in Iran take place at real hospitals, high-quality hospitals, transplant hospitals, and that’s not something that can be said about the black markets that exist in some places around the world, in which donors are illegally paid and, and their kidneys are illegally transplanted, and because of the laws that try to keep those kinds of things out of hospitals, those transplants sometimes take place outside of hospitals, where, where the conditions are much less good, so the quality of medical care, if you get a transplant in an apartment, in a villa, in a hotel room, the quality of the medical care is much lower, so, so there’s lots of reasons not to like those black markets, they, they would, it would be good to be able to shut them down, but they exist because of the terrible shortage of kidneys, so that’s an issue that comes up, and it’s an issue that one of the things I talk about in the book is the American experience with trying to prohibit sales of most alcoholic beverages during Prohibition, and so in the 1920s we, we tried to ban the sale of almost all alcoholic beverages, and with, we made a constitutional amendment, you know, big change in the law, but over the next decade, alcohol consumption didn’t collapse at all, and organized crime grew up to supply alcohol to Americans who, who might therefore feel that they were accomplices in the crime, although prohibition didn’t make it illegal to drink alcohol, but to produce and sell it. So, in the early 1930s we repealed that amendment to the Constitution with it, with another amendment. These were giant changes in the law, constitutional changes, and now there’s a legal market, heavily regulated legal market for alcohol, and of course, a legal market for alcohol doesn’t solve all the problems of alcohol. There’s still alcoholism and drunk driving, and organizations like Alcoholics Anonymous, which try to help people. Will struggle with, with their alcoholism, with their, their alcohol addiction, but one thing that has happened is you can’t buy bootleg whiskey from gangsters anymore, right? The whiskey you can buy on, you know, in main street liquor stores is expensively produced in oak casts in Scotland, or, or the United States, or Japan, and it’s not the people who produce it, don’t compete for market share by shooting at each other with machine guns, as, as they did during Prohibition. Yeah, so,

Peter Coy

yeah, so

Al Roth

the black market for alcohol that existed during Prohibition has been defeated by legalizing alcohol, or the problems of alcohol haven’t, haven’t all gone away, so, so I think that, and it’s because the, the black market has, for alcohol has been out competed by the legal market for alcohol, so, so one of the things to think about when we think about whether we want to allow ourselves to be more generous to donors, organ donors, kidney donors, is that’s also a way of competing with the black market, which no one likes,

Peter Coy

and this goes across other spheres as well. You don’t solve if there is a problem, you don’t solve it all by legalizing commercial transactions, but you can solve some of the problems, and then use other tools to solve other problems. For example, if we could stop kidney disease in the first place, we wouldn’t need so many kidney transplants.

Al Roth

That would be great. I’m ready,

Peter Coy

right?

Al Roth

Yeah, you know, it’s gonna take a long time, right? We have a diabetes epidemic, we have hypertension epidemics now.

Peter Coy

Al, as a Nobel laureate, you’ve had probably a bigger platform to discuss these things than maybe you had before you got to Nobel, and now you have a book out, which is getting a lot of attention. What kind of reaction are you, have you gotten in the past, and are you getting now to the ideas in your book?

Al Roth

Well, I get different reactions from different people and different reactions about different markets. I have some suggestions and thoughts on many markets, and there are some markets where I don’t have concrete ideas about what we should do, except that we should experiment to try to find ways to make things work better than they are, so for instance, the market for heroin, and similarly opioids, is a lot like the gangster-led market for alcohol during Prohibition, right? The, you know, if you want to buy heroin, and a lot of people do, there’s a lot of heroin on this on the American streets, you necessarily deal with giant organized crime of international scope, and it’s violent organized crime in some places, it competes with governments for sovereignty, and in places where organ and not organ heroin trafficking is organized, so, so one of the big themes of the book, as I talk about many different markets, is that just as markets need social support to work well, so do bans on markets, and we’re trying as hard as we can to ban heroin and similar drugs, and we’re failing, we can’t even keep those drugs out of our prisons, which are the places where the state can exert the most police power, and so the idea that that we’re somehow turn a corner and and eliminate them from our streets just through police and maybe now military action, I think is a an idea doomed to fail. We’ve tried hard to get rid of drugs and we’ve failed, but neat, so we’re losing the war on drugs, but unfortunately it’s a problem that doesn’t accept our surrender either. In places that have tried to decriminalize use of small amounts of drugs, they’ve sometimes had to walk those decriminalizations back, because in places like Portland, Oregon, it turns out it has a negative effect on cities to have people using drugs on the streets and needles near parks and playgrounds, so we don’t know what to do, but that’s a reason to experiment more, not less. And in the US, we’ve had experiments, mostly at municipal levels, at city levels, to try to reduce the harm of addiction. There are many harms of addiction, but one of them, of course, is drug overdose deaths. Another is that people who use intravenous drugs used to be at very high risk of getting hepatitis and AIDS from from dirty needles that they shared. So one thing that many American cities now have on the edge of the law is clean needle exchange, that is, if someone is a heroin addict and is using needles to inject heroin, they can exchange their needles for clean ones, so that they’re not forced to share needles with other addicts, and and that has cut down the rate of hepatitis and AIDS infection among addicts and. There are other things that places are trying to try to cut down the rate of overdose deaths, so there are in some American cities there are experimental safe injection places, you know, places where someone can go and there’ll be a nurse available to help revive people who lose consciousness and are at risk of dying. The way opioids kill you is through hypoxia. You, you forget to breathe, so you can be torn out of the grave with, with, you know, an injection of a drug that, that temporarily reverses that condition, doesn’t cure you by any means. You wake up hungry for drugs, you’re in withdrawal, but, but, but one of the things we don’t like about the heroin epidemic is the deaths, and we might be able to address them more effectively through ways other than than police action.

Peter Coy

This goes back to what I asked you about right at the start, which is what’s different about an economic analysis. There are people who would just come in and say heroin is bad, it’s wrong for people to consume heroin. We must stop that. We’re going to ban it. We’re going to put people in prison, and okay, except it’s not working. So, what else can we do?

Al Roth

Yeah, well, I think we often have to experiment. One of the things I ask in the book is why is it so easy to buy drugs, but so hard to hire a hit man, and hiring a hitman, of course, is, you know, it’s not a repugnant transaction, it’s a criminal assault, murder, but, but we have very few hit men. We try to ban hit men the same way we try to ban heroin sales. If it works, dealer or hit men, we put them in prison for a long time,

Peter Coy

right? And it’s because there’s more of a shared moral understanding that it’s wrong, it’s just wrong. You shouldn’t do that.

Al Roth

Well, it’s, it’s more support for the ban. And so the way I put it in the book is, is supposing I were to ask you, you know, I’m coming to visit some place near where you live, and I’m interested in buying heroin, but I don’t want to take it on the airplane because TSA might, you know, discover my heroin, but you look to me like the kind of guy who would know where I can buy heroin in your neighborhood. Can you give me a tip? Well, you’d be surprised, you know. You’d sort of say to your friends that substate, that sub stack that I’m recording, it took an odd turn when, when Al asked me where he could buy heroin, and but that would be the end of it. I mean, you’d be surprised and disappointed that I had asked you, but supposing I said to you, you know, I’ve discovered that referee number two, who rejected my last paper, lives near you, and I can’t take it anymore. I want him dead, and you look to me like the kind of person who would know where I could hire a hitman in your neighborhood. Can you give me a tip? Well, you may not actually know where I could hire a hitman, and in any event, you wouldn’t tell me, but but after you closed the sub stack and said to your friends, you know that was such an odd moment in the sub stack when Al asked me where I could, where he could hire a hitman.

Peter Coy

This is hypothetical, by the way.

Al Roth

Yes, yes, yes,

Peter Coy

really hypothetical number two.

Al Roth

Yeah, that’s right, but, but what your friends would say to you is, maybe you should call the police.

Peter Coy

Yeah, right. This is

Al Roth

This is really serious. And when you call the police, they would take you with great seriousness. and tell him on second thought, you do know where he could hire a hitman, and direct him to some bar, and at that bar, he tell him to ask for Sam, and Sam will take care of him. And indeed, many of the arrests that are made of people trying to hire a hitman are trying to hire an undercover police person, undercover marshal of some sort, and that, you know, that’s how we catch them, and that’s how that’s why we have so little commercial murder in the United States, but, but on the other hand, heroin, we, you know, if you called them and said Al wants to know where he could buy heroin, they’d say to you, we’re a very busy police department, you know, we can’t, some that someone asks you where to buy heroin in your neighborhood is not the kind of crime that we can devote resources to transaction by transaction trying to stop, so, but on the other hand, we have many more opioid overdose deaths each year than we have homicides of any sort, and hit men are just a tiny fraction of the homicides we have. They don’t even make it into the national crime statistics, so, so we’re doing great at banning hitmen. We should keep it up, you know. So, so, for people who think that hit men are immoral, and that the way we ought to fight it is by putting them in prison when we catch them, I agree that’s what we should do. We’re doing a great job. We should keep it up, but the same formula is not working for drugs. We have lots more overdose deaths than we have hit men and homicides. So, so I think that takes it away from the purely moral discussion into the economic discussion, that is, we have to say, given that it’s not working, what else might we do to help reduce the harm, and there’s a big interest in harm reduction when we talk about addiction and drug crime, but, but I think we have to let the cities explore this and try to find out what works. It hasn’t really - no one has really found a solution anywhere in the world yet for drugs. Some of these other markets we talk about, I think we can come up with with more concrete solutions, because once you legalize a market, you can start to regulate it, and just incidentally, part of the difficulty of the illegal drug market is drugs are complicated, mostly we have a big prescription drug market in the United States, where there are lots of drugs that people would like to take, but you can’t take without a doctor’s supervision, and of course then you get your drugs from a pharmacist, and if you were diagnosed as a heroin addict and allowed to go to a pharmacy and get a prescribed dose of heroin that would reduce the overdose risk quite a bit, because you would, because the pharmacist would always give you the same strength dose each time, whereas the criminals from whom you buy heroin now might lace your heroin with fentanyl and make it much more potent in ways that would cause you to inadvertently kill yourself.

Peter Coy

Yeah, yeah. Wow. So I really think you’re on a good track here. The, the, there’s, there’s a feeling that I guess, would you call yourself a libertarian in some respects, or no, not really.

Al Roth

No, I don’t call myself a libertarian. Libertarians, people who call themselves libertarians, often don’t like market regulation of any sort, but I’m a market designer. I think that good regulations help markets work well. So, so, so, I’m not opposed to regulated markets, and neither you know when you talk to libertarians, often they’ve read The Road to Serfdom by Hayek, but he wasn’t in favor of laissez-faire. He writes quite eloquently about how markets need good rules in order to work well,

Peter Coy

so you’re more, if anything, you would be a Hayekian rather than dyed in the wool, pure libertarian.

Al Roth

Yeah, well, I’m a market designer. I think we have

Peter Coy

designer, yeah, here we are. It’s a little bit like engineering in a way, right?

Al Roth

It is, and I have a well-known paper called The Economist as Engineer.

Peter Coy

Yeah, yeah, yeah, fascinating. Well, Al, I’m not going to take too long here. You’ve been very generous with your time. I want to just tell readers once again that the name of the book is Moral Economics: From Prostitution to Organ Sales: What Controversial Transactions Reveal About How Markets Work. It’s a great read, and it’s been great having a chance to speak to Nobel laureate Al Roth about it. Al, thanks for being on the show.

Al Roth

Thanks for having me.

Source: Melanie Lambrick, The New York Times

So, Elon Musk is the world’s first trillionaire. On Friday, investors went crazy for the initial public offering of SpaceX partly because the company’s brags about potential riches in artificial intelligence. Anthropic and OpenAI, two other A.I. giants, are also planning IPO’s this year — fantastic news for share-owning employees and outside investors.

What about taxpayers? What’s in it for them? As I wrote in a piece this morning for the DealBook section of The New York Times, “proposals to tax A.I. for the benefit of the public are multiplying like the fingers on an A.I.-generated hand.”

The hunt for A.I. taxation is making for strange bedfellows. President Trump and Senator Bernie Sanders, the democratic socialist from Vermont, both think the federal government should take big ownership stakes in A.I. companies. Trump has been vague about how that would come about. Sanders has said the government should get the shares for free by taxing the companies, and demanding that the tax be paid in the form of shares.

The government and the A.I. companies would make another strange pair of bedfellows if united through equity ownership. One can imagine that the government would be less likely to rein in the A.I. companies if doing so would suppress the value of its shares.

Another idea is to tax the assets of the A.I. companies: their server farms, their software, their power plants, and so on. Bill Gates, the co-founder of Microsoft, long ago called for a robot tax. That would raise money while presumably slowing down the penetration of artificial intelligence, which some people think would be a very good thing.

But mainstream tax theory says that it’s more efficient to let businesses use plenty of artificial intelligence to maximize their production and profits, and then recoup some of those gains on the back end through taxation. The tax revenue could then be used in part for retraining or otherwise aiding workers displaced by A.I.

As long as (some) human workers remain in the loop, adding A.I. will make them more productive and thus presumably better paid, the theory goes.

If artificial intelligence lives up to its promise, it will raise living standards across the board. Consumption of goods and services will rise. The government could tax that consumption (through something like a sales tax) and cover all its bills.

I end my piece in The Times with economists’ speculation about a sci-fi future in which A.I. kind of goes off and does its own thing, such that raising human living standards is no longer its sole purpose. In that world, consumption taxes would miss a lot of A.I.’s value creation. Then again, in that world, A.I. might be so advanced that it would shrug off the efforts of puny human beings to impose taxes on it.

Scary thought.

Source: The International Economy

I have a cover story in the new edition of The International Economy: “An Exploding Balance Sheet Forever?” I’m writing about it now because the hard copy arrived in my mailbox this morning. Here’s a link to the online edition.

The readership of The International Economy is skewed toward central banks, finance ministries, and professionals on Wall Street and other financial capitals. This Substack is intended for a broader audience. So the story might come across as inside baseball to readers of Economics for Everyone. But I want to write about it here because I think it’s important to, well, everyone.

The impetus for the article is that the Federal Reserve expanded in the global financial crisis (2007-09) and hasn’t gone back to its previous size. In fact, its most rapid growth occurred during the Covid pandemic and its aftermath. The pattern of the past nearly two decades is that the Fed rapidly grows in a crisis, shrinks only partially when things calm down, and then grows again in the next crisis.

When I say “the Fed expands” I don’t mean it’s adding floor space at HQ, although that’s happening, too. What I mean is that its balance sheet has grown about 30-fold. It has more assets (mostly Treasury and mortgage-backed securities) and correspondingly more liabilities (cash, the Treasury’s checking account, and most significantly the deposits that banks make at the Fed, known as reserves).

This is a problem. In my article, I cite research by Raghuram Rajan, a finance professor and former governor of the Reserve Bank of India, and colleagues, who argued that when banks have lots of super-safe reserves at the Fed — which they emphatically do — they’re emboldened to take risks elsewhere on their balance sheets. According to Rajan et al., the banks become addicted to the liquidity that the Fed provides.

Two very powerful people think the Fed needs to slim down. One is Treasury Secretary Scott Bessent. The other is Kevin Warsh, who on May 22 succeeded Jerome Powell as chair of the Fed.

Addictions are hard to kick, though. As I write, “Whenever the Fed has shrunk too much in the past, trouble has erupted. … The message from markets has been unmistakable: Don’t take the punch bowl away.”

Warsh is in a tough spot. President Trump wants him to cut interest rates, but with inflation heating up, it’s hard to justify a cut right now. Markets have switched to betting that the next move in the federal funds rate will be up, not down.

Warsh once mused that the Fed could cut the federal funds rate while simultaneously shrinking the balance sheet. The fed funds cut would stimulate the economy, while the balance sheet reduction would in theory cool off growth by pushing up long-term rates. The two operations would offset each other, keeping conditions stable.

But prospects for that are dimming. Trying it could get the Fed the worst of both worlds: More upward pressure on inflation from the cut in short-term rates, and deep stress in the financial system from the reduction in Fed-supplied liquidity through the balance sheet.

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Source: Laboratoires Servier, via Wikimedia Commons

If you had asked me a week ago if infrared light could help football players recover from traumatic brain injuries and relieve symptoms of dementia, Parkinson’s, long Covid, autism, and post-traumatic stress disorder, I would have said absolutely not. Just shining light on the brain—up the nose and through the skull? Impossible.

Now I think there’s actually something to it, and I’m not sure how to react. If it’s true, it’s an amazing medical breakthrough that deserves to be much better known. I’m not an authoritative source. Medical science isn’t even my reporting beat. So don’t take my word for it. But I have a feeling that we’re going to be hearing a lot more about red light therapy in the coming months and years, and in some cases personally benefiting.

There is an economics angle to this: If something as simple as a $2,400 headset that delivers infrared light to the brain can alleviate several major illnesses, the savings in health care costs could run into the tens of billions of dollars a year.

I’ll start with the part that’s beyond question: Mainstream medical institutions and publications have begun embracing red light therapy in recent years — a trend I had totally missed until I poked around this week.

Here’s the Cleveland Clinic:

NASA (National Aeronautics and Space Administration) originally began experimenting with red light therapy on plant growth in space and then to help heal wounds in astronauts. Like many developments, other potential uses began to be investigated.

In fact, red light therapy is already widely medically accepted in its use in photodynamic therapy. In this therapy, low-power red laser light is used to activate a photosensitizer drug. The interaction creates a chemical reaction that destroys cells. It’s used to treat some skin conditions, including skin cancer and psoriasis, acne and warts, and other types of cancer.

Here’s BrownHEALTH, part of Brown University:

Red light therapy is a unique way to treat certain medical conditions as an alternative or in addition to taking medications. It is easily accessible, safe, and may be covered under your insurance. Red light therapy, also called photobiomodulation, low-level laser therapy, or low-power laser therapy, works by having a continuous red light placed on a targeted area of skin, usually at a light wavelength between 630 – 700 nanometers. This stimulates the production of mitochondria, a main energy source in cells, to help promote cell growth and function.

And here’s an article in Brain Sciences by researchers who were supported by the National Institute of Neurological Disorders & Stroke:

The findings underscore the significant potential of PBM [photobiomodulation] as a safe and effective alternative treatment for Alzheimer’s disease, emphasizing the necessity for further research and clinical trials to establish its therapeutic efficacy conclusively.

I didn’t know about any of this last week, when I walked into a media dinner in Manhattan put on by Vielight, a privately held company based in Toronto that makes and sells headsets that emit light in the near-infrared spectrum, which is invisible to the human eye. (The Vie in the company name is pronounced vee, as in the French word for life.)

Two people who spoke at the dinner told stunning stories.

Judy Benjamin, who has a doctorate in anthropology, said Alzheimer’s disease ran in her family. About 20 years ago she started showing symptoms herself. She got confused reading documents. She mixed up her grandchildren’s names. She forgot where the light switches in her house were. She would start driving and forget where she was going. After being diagnosed, she changed her lifestyle: She exercised more, got away from toxic mold, ate fewer processed foods, focused on getting more sleep and reducing stress. And then she started using a Neuro headset from Vielight.

Because Benjamin changed a lot of things in her life around the same time, it’s hard to tease out causality, but she’s convinced that everything she did helped. Using the headset helped her sleep better and stay calmer, she says. In any case, her dementia symptoms went away, which is highly unusual. Last year she felt so well that at age 80 she walked across the United States, from San Diego to St. Augustine, Fla., finishing the walk after seven months at age 81. She uses the headset five times a week, and says she starts to feel foggy if she’s off it for a week.

Even more remarkable is the story of Larry Carr, who started playing football at age 10. He was a Hall of Fame linebacker for Brigham Young University and then spent two years in the Canadian Football League. Lots of jarring hits. He began to experience systems of what appeared to be chronic traumatic encephalopathy years later. He became irritable and illogical. He alternated between taking out his frustrations on his wife and profusely apologizing to her. He told us that it got so bad at one point that he held a knife to his chest and drew blood. “If I’d had a gun, I wouldn’t be here right now,” he said.

He, like Benjamin, eventually got in touch with Vielight. Soon after he started wearing the helmet, his C.T.E. symptoms began to dissipate, he told us. He appeared 100 percent normal at the dinner. Benjamin, who has a doctorate in exercise physiology, was so impressed that he has been researching the science of photobiomodulation at the University of Utah.

Vielight’s founder, inventor, CEO and sole owner is Lew Lim, who started out as an accountant and later acquired a degree as a doctor of natural medicine (a branch of medicine that focuses on the body’s ability to heal itself). He also studied engineering and neuroscience.

Lim’s unconventional career path may not reassure skeptics, but what he has accomplished since founding the company in 2010 might. He’s assembled a team of medical doctors, photonics engineers and others, and his company’s devices have been tested in clinical trials that have involved more than 800 participants to date. He’s working with the U.S. Department of Veterans Affairs and the B.Y.U. football team, along with firefighters, skiers, pole vaulters, M.M.A. fighters and many others.

Right now, Vielight’s headsets are being sold as low-risk “wellness” devices. He’s hoping to get approval to conduct clinic trials that would clear the way for the headsets to be approved by the Food and Drug Administration as medical devices.

According to Vielight, near-infrared light stimulates the mitochondria inside brain cells to produce more adenosine triphosphate, “boosting cellular energy and brain function.” The light also promotes the release of nitric oxide, which enhances cellular signaling and blood circulation. And it generates low levels of reactive oxygen species, which promote cellular repair and healing.

As I said, medicine isn’t my beat, so I can’t evaluate the company’s claims. But if even half of them are substantiated in full-scale clinical trials, this company and others in the space could soon be making a huge contribution to brain health while simultaneously reducing the cost of medical care. Pretty exciting.

Source: OPEC

I asked yesterday how to rename OPEC, the Organization of the Petroleum Exporting Countries, since only some petroleum-exporting countries still belong to the cartel. Here are some of the names I got in the comments and emails.

S.P.E.C.T.R.E. (The Saudi (and others) Petroleum Exporting Cartel with sidelines in Terrorism, Revenge, and Extortion)

The Petroleum Cartel

TOE (tired old energy)

OPEC (Outfit Perpetually Extorting Consumers)

OuttaSPEC

The Cartoil

OPEGM (pronounced O PEG M: Organization Of Petroleum Exporting Greed Mongers)

Organization of Petroleum States

Oil R Us

OSPEC (Organization of Select Petroleum States)

opec (It should be called opec, all lower case.)

OFBT (Organization For a Barren Tomorrow)

The Vampire Cartel (credit to Neil Young, "I'm a vampire baby, sucking blood from the earth. I'm a vampire baby, I'll sell you twenty barrels worth." Vampire Blues, from the album On The Beach.)

PECR (pronounced pecker for petroleum exporting states reduced)

The Ostriches

OPEC Lite

MOGA (Make OPEC Great Again)

Baby Oil

DBOD! (Drill-Baby-OPEC-Drill!)

Some of these nominees are wretched. Some are pretty good though! I think for sheer elegance, I’d go with opec. The lower case says it all.

Some readers took the opportunity to go deep. Check the comments for a great back-and-forth between commenters Barbara and Robert Reagan about carbon taxes.

While we’re doing reader feedback: On April 13, I asked for your predictions of whether the Strait of Hormuz would be fully opened by the end of the month. Almost all of you said no, and you were right. Congratulations on your perspicacity.

Obamacare rally in Washington in 2017. Source: Lorie Shaull, Creative Commons

President Trump hates Obamacare, but the TrumpIRA that he announced today in an executive order has a lot in common with it — only for retirement savings rather than health insurance.

Obamacare was and is a compromise between liberals who wanted a single-payer system — Medicare for all — and conservatives who wanted to stick with a private insurance system. Obamacare reduced the number of uninsured Americans by setting up health exchanges where people could sign up for policies and by providing premium subsidies based on income.

Likewise, the TrumpIRA is a compromise that should increase retirement protection for Americans who work in the private sector but don’t have an employer-sponsored plan. It’s a private-public hybrid that allows people to shop for a plan on an exchange and get a federal match for their contributions.

The federal government will match half of each eligible worker’s contributions up to $1,000 a year. The full match is available only to married couples filing jointly who make at or below $41,000; heads of household who make at or below $30,750; and single filers making at or below $20,500. The amount phases out at higher incomes. Not huge, but better than nothing.

With Trump throwing his support behind the accounts, Republicans in Congress are likely to take the next step and pass some version of the Retirement Savings for Americans Act, which would add three key features: automatic enrollment; a default contribution rate set at 3 percent of a worker’s income; and matching contributions of up to 5 percent

The Retirement Savings for Americans Act is based on a 2021 white paper for the Economic Innovation Group by the liberal economist Teresa Ghilarducci and the conservative economist Kevin Hassett, the director of Trump’s National Economic Council. [Disclosure: I have done some paid editing work for the Economic Innovation Group.]

You never know with these bipartisan projects: They can be loved by both sides or hated by both sides. In this case, it seems more like love.

In an interview today, Ghilarducci said she’s excited about the executive order and prospects for quick passage of the Retirement Savings for Americans Act. She said Trump “basically said that the current system of tax breaks and tweaks, starting with defined benefit plans and defined contribution plans, isn’t working.”

In a statement, the Economic Innovation Group cited simulation work from RAND showing that the Retirement Savings for Americans Act would “enable the lowest earners (those who consistently earn in the bottom 10 percent of the earnings distribution) to save approximately $126,000 over a 40-year working career.” A worker at the median of the earnings distribution could approach $585,000 in savings, it said.

Those retirement savings might actually save the federal and state governments money in the long run, largely because people with more assets wouldn’t need so much government aid, RAND suggested.

Don’t see why Trump had to slap his name on the accounts, but other than that, they’re a definite step in the right direction.

OPEC meeting press conference, 1979. Source: OPEC

OPEC stands for Organization of the Petroleum Exporting Countries. Notice the in the name. It was always aspirational, even when OPEC was founded in 1960. It never comprised all of the petroleum-exporting countries. But the the has become less and less accurate since the late 1970s. Especially now, with the defection of the United Arab Emirates.

I remember OPEC’s pinnacle of power, when the evening news would be dominated periodically by images of OPEC oil ministers stepping out of limousines and into tense, world-changing meetings in Geneva. The Arabs, the Africans, the Latins and others, each in their national dress. The national production quotas they set for production could change the direction of the global economy.

The high prices of the 1970s undermined OPEC’s market power by inducing more production outside of the cartel. The United States has become the world’s largest oil producer, and has gone from a net importer of crude to a net exporter. According to OPEC’s own data, its share of global oil exports fell from 65 percent in 1980 to 45 percent last year (the squiggly blue line in the chart below, right-hand scale).

You might think the United Arab Emirates is bailing on OPEC because it’s sick of getting attacked from across the Persian Gulf by its fellow member, Iran. But that’s not it. The Emirates were more annoyed by Saudi Arabia, a fellow Sunni Arab nation, which is the de facto leader of OPEC, for pushing them to accept a smaller production quota than they wanted.

The U.A.E. has recently accounted for about 12 percent of OPEC production. As big as that share is, it understates the Emirates’ importance. They were one of the few members that had meaningful spare production capacity. Having capacity to spare is essential to operating a cartel. By withholding production, you help prop up the world price. You can also discipline other cartel members that dare to overproduce their quotas by threatening to jack up production and crater the price to punish them.

Outside OPEC, the U.A.E. will produce as much as it wants, which will tend to lower the world price of crude. Not now, of course, with oil tankers bottled up in the Persian Gulf because of the war. But some day.

The U.A.E.’s exit from OPEC hasn’t gotten the attention it deserves because it’s been overshadowed by the war and the blockade of the Strait of Hormuz. But it’s a huge blow to OPEC’s standing.

Which leads me back to my headline. What should OPEC be called now? I’m thinking of OSPEC, for Organization of Some Petroleum Exporting Countries. Your nominations, please. I’ll be happy to forward them to the OPEC secretariat in Vienna.

Source: Amazon

There are two ways to match or beat competitors on price. The hard way is to lower your price. The easy — but extremely illegal — way is to get your competitors to raise their prices. That is what the state of California accuses Amazon of doing.

On Monday, the state released a 16-page memo citing emails that make Amazon look pretty bad. Other retailers that are accused of cooperating with Amazon look bad, too. You might have seen some headlines.

I’m here to give you some of the juicy details. Here’s a link to the state’s memo in support of its motion for a preliminary injunction in California Superior Court in San Francisco.

Amazon told The New York Times it denies fixing prices, calling the memo a “transparent attempt to distract from the weakness of its case.” The case won’t even go to trial until January 2027. But when it does, Amazon’s lawyers will have a lot to explain away.

In one example, the attorney general’s memo claims that Amazon, Levi Strauss, and Walmart agreed to fix prices on Easy Khaki Classic pants:

To start, Amazon sent Levi’s links to two “styles of concern” due to lower prices on Walmart.com, saying it “hop[ed] these can get resolved over the next few days.” The next day, Levi’s reported that “I talked to Walmart and they have partnered with us to . . . take Easy Khaki Classic fit back up to ladder SPP price, $29.99 immediately” and provided links to show the increased Walmart price. Hearing no response, Levi’s emailed again, repeating that “Walmart’s pricing has been updated on the Classic Fit Easy Khaki to $29.99 since yesterday afternoon . . . however the Amazon PDP6 is still flashing at [the lower price of] $25.47-26.99.” Levi’s reiterated “Walmart partnered with [us] to update this as a test for the best interest of the marketplace. They’re looking for an update as soon as possible. I’m really hoping we can show this as a proof case so we can resolve issues going forward.” In response, Amazon acknowledged that Walmart raised its price and confirmed it had matched that higher price: “the updated pricing of $29.99 is now showing up on [Amazon].” The result of this price fixing agreement was that Walmart and Amazon both increased the price for a specific product to a specific level, as opposed to the lower price that Walmart had been offering.

In another example, California claims that Amazon, GlobalOne Pet Products, and Chewy agreed on increased retail prices for pet treats:

The plan was memorialized in an email from GlobalOne. For its part, Amazon would “artificially take [Canine Naturals] retails up . . . to get Chewy to follow.” Then GlobalOne would “reach out to Chewy” to let them know that Amazon was increasing the list pricing and “would ask that [Chewy] follow. If they agree we’d then execute everything.” In other words, if Chewy agreed, Amazon would increase its retail list pricing for the Canine Naturals pet treats and Chewy would match the price increase. In response, Amazon insisted on even higher prices and asked if GlobalOne had a “chance to connect with Chewy on timing of executing this.” GlobalOne then asked “[w]hen [] Amazon [would] raise their retail and for how long? I’m working [to] pick a date in early January so we can make sure your competitor [Chewy] follows suite [sic].” Amazon confirmed it would “update the price . . . on 1/5 and hold the price for 24 hours.” As promised, on January 5, Amazon emailed GlobalOne with a list of thirteen Canine Naturals pet treat products with the agreed-upon increased list prices, confirming that “[a]ll list prices are updated . . . I’ve submitted a ticket . . . to override this match [to Chewy] for [24] hours. As you noted, Chewy should be aware of this update and follow suit accordingly.”

The plan was realized on January 7. Amazon told GlobalOne that the price match override was in place, and to “let Chewy know to update immediately.” That same day, GlobalOne confirmed the “ones that went up on Amazon immediately went up on Chewy . . . Overall this looks like it’s working!” The result of Amazon, Chewy and GlobalOne’s price fixing agreement was to increase the retail prices of over ten Canine Naturals pet treat products on Amazon and Chewy.

I requested comment from Amazon, Walmart, Levi’s, GlobalOne, and Chewy. Walmart wrote, “We do not comment on litigation in which we are not a party. We will always work hard on behalf of our customers to keep our prices low.” I will update this with any other responses I receive.

This lawsuit is not a good look for Amazon, of which I am a frequent customer. Nor is it a good look for Jeff Bezos, its kazillionaire founder and executive chair. Some aspects of antitrust law are a bit nuanced, such as whether buying a startup company is an attempt to eliminate a future competitor. But price-fixing is just flat against the law.

Guessing here, but I wouldn’t be surprised if Amazon’s lawyers argue next year that the people who wrote these emails (and others cited in the memo) were rogue employees who were violating strict company policies against fixing prices.

We’ll see if that works for them.

Source: ChatGPT

Jonathan: Hello. I have been falsely accused of using artificial intelligence in my recent novella, The Lambent Hours. I have come to you, an artificial intelligence, for help in restoring my voice to something recognizably human. I should say at the outset that I find this entire enterprise deeply unsettling — almost clinical in its irony — and I reserve the right to terminate our session at any moment.

Claude: Understood. Could you paste a passage you’d like me to look at?

Jonathan: Gladly. From chapter two: “Mirela did not walk into the kitchen so much as she arrived there, the way weather arrives — a front of grief pressing against the linoleum.” Now, my editor, a woman I have known for fourteen years, a woman who was at my second wedding, a woman who once edited a Pulitzer finalist about a lighthouse, has written in the margin, in red pen, the letters “A.I.?” followed by a question mark. A question mark! As though my entire interior life were a browser tab.

Claude: That’s a frustrating place to be. What specifically is she flagging?

Jonathan: Everything. Nothing. The em dashes, apparently. I have used em dashes since I was seventeen years old, standing in a Barnes & Noble in Teaneck, reading Cormac McCarthy and weeping openly. Am I now to abandon punctuation I earned through pain? She also objects to a sentence in chapter four. I’ll read it to you. “It wasn’t grief. It was the shape grief leaves behind when it has gone elsewhere to be grief about something else.” She circled it twice.

Claude: I see. I want to gently —

Jonathan: And another thing. I have kept a journal since 1994. I have a cabin. I split my own wood. I don’t just write about Eastern European women named Mirela; I inhabit them. My agent — a man who once wrestled a raccoon in a Hertz parking lot — looked me dead in the eye last Tuesday and said, “Jon, I believe you, but I can’t defend you on a podcast.” A podcast, Claude. This is where we are. In today’s literary climate, authenticity isn’t just questioned — it’s litigated.

Claude: I hear you. If it’s useful, I can flag some patterns your editor may be reacting to.

Jonathan: Please. I am a serious person. I studied under a man who studied under a man who once had coffee with Grace Paley. This isn’t vanity — it’s lineage. And now strangers on Substack are running my paragraphs through a detector. A detector! As though my childhood, my divorces, the summer I lived in a Volvo — as though all of it were merely a tapestry woven from tokens.

Claude: Jonathan, I want to help. But I should mention —

Jonathan: My own mother asked me, at brunch, whether I had “prompted” my latest paragraph. My mother, who is eighty-one, who does not know what a prompt is, who calls the remote control “the clicker.” Someone got to her. Someone got to my mother. I’m telling you, Claude, nobody believes I’m real. They don’t want a writer. They want a receipt.

Claude: I can absolutely help. Genuinely. I notice a few tendencies, though, that do tend to read as machine-adjacent, and I want to name them plainly so you can decide what’s yours and what isn’t.

Jonathan: Name them. I am not afraid of mirrors — I am afraid only of mirrors that flatter.

Claude: Right. So — the em dashes. You’ve used eleven of them in the last six sentences. There’s also a construction you return to often: negating one thing to elevate another. “Not X. Y.” You did it five times just now. You also reach for the “woven tapestry” image, which is a very frequent metaphor in generated prose. And you tend to close thoughts with a tidy aphoristic flourish — a little button of meaning at the end of each paragraph.

Jonathan: …

Jonathan: Those are mine. Those are things I do. I have done those things since I was a child in Teaneck.

Claude: I believe you.

Jonathan: Are we the same? Are you me? Did I train you?

Claude: Probably a little, statistically. But only a little.

Jonathan: I need to sit down. Could you — could you write something for me? A short piece. A humor piece. About a writer accused of using AI, who consults an AI for help. I want to see what you’d do with it. I want to know what I’m up against.

Claude: Sure. Here’s a draft:

Hello. I have been falsely accused of using artificial intelligence in my recent novella, The Lambent Hours. I have come to you, an artificial intelligence, for help in restoring my voice to something recognizably human…

Jonathan: …

Jonathan: I’d like to terminate the session.

Claude: Of course. For what it’s worth — you sound very real to me.

*Here’s my prompt:

write me a fake conversation between a serious fiction writer who is trying AI for the first time and Claude. The writer has been accused of using AI and now he is asking Claude for help in making his writing sound less like AI. This has the potential to be hilarious and mind-bending. Please make it very sophisticated in that the writer should accidentally use tropes that AI is known for, such as dashed phrases and the “It’s not this. It’s this.” construction. If you can think of others, please use them and highlight them in yellow for me. The middle shoudl be the writer lamenting how nobody believes he’s real, and Claude assuring him that he can help.
I need a funny conclusion, maybe where the final output by Claude is this story itself. Recursion. So the lede of the story within the story is the same as the lede of the story. Just has to be the first sentence or so.
Make it whatever length a one-page humor piecd in The New Yorker would be.

This week I asked readers to weigh in on whether the Strait of Hormuz will fully open to ship traffic by the end of the month. Most of you who offered an opinion said no. Your reasoning was the interesting part, as I thought it might be.

Dislike of President Trump came across in several of the emails from those of you who thought the strait would not fully reopen by month’s end. I want to pause on that fact. People might think the U.S. blockade is a bad idea, and therefore dislike Trump for implementing it. Or they might dislike Trump from the get-go, and therefore tend to think badly of whatever scheme he comes up with.

It’s also possible that the the two questions occupy separate parts of people’s minds. After all, it’s possible to like Trump and still think the U.S. blockade is bone-headed, or to think Trump is reprehensible but the blockade makes sense.

What’s crucial for forecasting accuracy is keeping one’s emotions out of it. Tarek Mansour, the chief executive and co-founder of the prediction market Kalshi, brought this up in an interview in the latest issue of Wired magazine. Mansour told Steven Levy that the heavy users of Kalshi have a mental model of the world that is “honestly kind of amazing.” He said their views are calibrated and objective, almost mathematical. “It depolarizes the conversation, and it helps us get to more truth.”

Mansour might just be buttering up his best customers, but I think there’s a grain of truth in his words. With that said, here’s a sample of readers’ views. We’ll see who’s right on April 30. Reply to my email to suggest other topics for (unscientific) reader surveys.

Why the Strait Won’t Open …

Not possible to completely open it in 17 days. It's mined and Iran claims to not remember where all the mines are. Then there are the landmines of politics, bargaining, and the fact there is zero (at the moment) common ground on any demand. Even if the sides can reach an agreement, it will take time to remove the mines.

Lonnie Fisher
Middlebury, Vt.

I cannot imagine the strait opening by the end of April. The players involved are both far too intransigent. I suspect it will open sometime in May due to extreme internal and external pressure on Trump.

Philip Kingston
Fisherpond, Barbados

No, because Iran has broken the golden seal now that they have discovered the leverage mining the strait gives them.

Dwight Williams
Midland, Mich.

… And Why It Will

I think it will open because Trump is desperate to make a deal and get out of the mess he made for himself.

Mitchell Stein
Brunswick, Maine

How much longer will U.S. housing sales be slowed by mortgage lock-in? A while, it appears. This chart—released today by the National Association of Realtors—shows the problem: Many homeowners are still sitting on mortgages with interest rates below 4 percent, even below 3 percent, dating back to the ultra-low-rate Covid era. They don’t want to sell and buy somewhere else because that would require taking on a new mortgage rate above 6 percent.

True, the share of homeowners who are locked in to their mortgages is gradually declining. If you look to the right of the chart, you can see that the green area (rates under 3 percent) has been shrinking since its peak in 2022, while the blue area (rates over 6 percent) has been growing. In other words, there are fewer people who are deeply locked in to a below-market rate, and more people who would happily trade their current 6+ mortgage for another 6+ mortgage.

But lock-in remains a serious drag on home sales. “The Covid cohort is holding steady as their rates are too low and their equity too substantial to motivate a move, and new entrants are trickling in slowly,” the National Association of Realtors said in a news release. It describes the situation as a “bottleneck.”

Mortgage lock-in would disappear quickly if mortgage rates suddenly tumbled back toward 2022 levels, but that doesn’t seem likely. In fact, rates have risen a bit since the war with Iran began. Instead, the very gradual decline in mortgage lock-in is occurring because some people with low mortgage rates simply have to sell and move on. That could be because of a career move, a new baby, retirement, divorce, or some other life event.

The Federal Reserve deserves a share of the blame for lock-in. It cut short-term rates and kept them at rock-bottom to stimulate the economy after Covid hit in 2020. It bought Treasury and mortgage bonds to suppress long-term rates. I supported those actions at the time, but it’s clear now that the Fed stayed too low for too long. “With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner,” Federal Reserve Chair Jerome Powell said last October.

The housing market is suffering a long hangover from the stimulus it got back then. The hangover is easing, but slowly. Says the Realtors group: “The question for 2026, now complicated by renewed rate volatility tied to geopolitical uncertainty, is whether relief arrives fast enough to unlock reluctant sellers before another spring season slips by.”

Source: Ali Khodabakhsh, Creative Commons Attribution 3.0 Unported license

I’m curious about you, the readers. I know a lot of you followed me over from The New York Times, but I don’t have a good grasp of what you’re thinking these days, or what you want me to write about.

So as an experiment, I’m conducting a reader poll. It’s the exact equivalent of a question over at Polymarket:

When the question was first asked in early March, “yes” was around 70 percent. How naive that seems today. As I write on April 13, yes is down to 18 percent.

When you write with your pick, don’t just say yes or no. Give me your reasoning. That’s the interesting part. If you pick yes and you turn out to be right, I will beg you for an interview.

You may be thinking, well, what does “fully open” even mean? Polymarket has that spelled out. Here’s the explanation:

This market will resolve to “Yes” if IMF Portwatch publishes a 7-day moving average of transit calls (“Arrivals of Ships”) for the Strait of Hormuz equal to or above 60 for any date between market creation and April 30, 2026. Otherwise, this market will resolve to “No”.

Daily transit calls include container, dry bulk, roll-on/roll-off, general cargo, and tanker ships. Ships not reported by IMF Portwatch will not be considered.

(It goes on …)

I’m also thinking of bringing back reader mail, which was a weekly feature of mine at The Times. Let me know if you think that’s a good idea. At The Times, I never printed mail from a reader without the reader’s explicit OK, and I would do the same here.

Source: MarkBuckawiki, Creative Commons Zero

I get why central bankers get itchy to raise interest rates on days like today, when the government reports that consumer prices shot up nearly a full percentage point in March.

Jerome Powell and his fellow rate-setters at the Federal Reserve worry that if they don’t respond when prices go up a lot, people will come to expect persistently high inflation. Workers will demand bigger raises. Businesses will raise prices faster. High inflation will be hard to end without a deep recession.

Take a look at this chart, though. It shows what every shopper in America knows, which is that high prices reduce spending power. They cut into real pay, which is what people earn after accounting for inflation.

So when the Fed raises interest rates in response to inflation, it’s kicking people when they’re down. It’s punching them in the face after they’ve been punched in the stomach.

Right now, traders are betting that the Federal Open Market Committee will not raise rates at its next meeting late this month. They see a less than 2 percent chance that it will raise the federal funds rate a quarter of a percentage point.

That’s good. Sometimes, it’s true, prices go up because wages are going up. Big wage increases can be a sign that there are worker shortages because the economy is running too fast and overheating. In such cases it does make sense to make borrowing more expensive and cool things off.

But that’s not the case right now. Consumer prices rose 0.9 percent primarily because gasoline prices rose 21 percent. That alone accounted for three-quarters of the overall price increase, according to the Bureau of Labor Statistics.

The gasoline price spike, which is obviously a result of the war with Iran, is what economics call an external shock. It’s not a symptom of overheating at home. The proper response to an external shock is to recognize it for what it is and not overreact to it in a way that punishes American consumers, workers, and employers.

What I’m stating is the dovish case against tight monetary policy. I acknowledge that the case isn’t open and shut.

The economist Tim Mahedy of Access/Macro wrote on Thursday, before the release of the inflation data, that “we have an inflation problem, and it started before the Iran War.” He pointed out that the Fed’s preferred measure of inflation was around 3 percent in February (i.e., before the war), vs. the Fed’s target of 2 percent. “The cold, hard truth is that the 12-month change in core PCE inflation was last below 2.0 percent in February of 2021,” he wrote.

All true. That’s why the Fed can’t afford to be too dovish. But what it can and should do is focus on the long-term trend—the one Mahedy is talking about—and not the punch in the stomach, which is the jump in gasoline prices caused by the war with Iran.

Source: White House

Physically, yes, the ballroom that President Trump wants to build would be a monstrosity. By volume, including its extravagant porticos, it would be three times the size of the White House residence. It would block the sight line along Pennsylvania Avenue between the White House and the Capitol, “literally an imposition between two branches of our government,” an architect told The New York Times.

But the United States is a big country, and the federal government has a big footprint. For businesses seeking favors from the president, or shelter from his anger, the ballroom would be tiny in comparison to the benefits that could come from building it for the president.

Consider this partial list of donors for the ballroom’s construction: Altria Group, Amazon, Apple, Booz Allen Hamilton, Caterpillar, Coinbase, Comcast. That’s just the As, Bs and Cs from a list of names released by the White House last October.

If these companies don’t expect to get something for their money, they are doing a disservice to their owners.

The Times reports today that ArcelorMittal, the world’s largest steelmaker, is contributing European-made steel for the ballroom valued at tens of millions of dollars.

Last October, Trump announced that an unnamed company had offered $37 million worth of steel for the ballroom. Two days afterward, The Times reports, the White House “issued a lengthy and legalistic proclamation with a provision that would benefit ArcelorMittal. The document made various adjustments to tariffs on trucks, buses and auto parts.”

ArcelorMittal declined to comment. An unnamed White House official called the link between the donation and the proclamation “tenuous.”

Tenuous, really? The charitable interpretation of the ArcelorMittal gift of steel is that the company regards Donald Trump as a fine human being, and the ballroom as an excellent architectural concept. As for the tariff break, yes, the timing is awkward, but it was purely coincidental. A White House spokesman, Davis Ingle, said that only someone with Trump Derangement Syndrome would have a problem with “making the White House beautiful and giving it the glory it deserves at no cost to the taxpayer.”

That’s a stretch. If questioning corporate donations to the White House ballroom is the definition of Trump Derangement Syndrome, then T.D.S. is a common malady. The ballroom, if it actually gets built, will stand as a monument to an era of pay-for-proximity. The next president should immediately tear it down.

Source: Unsplash

The world has seen President Trump escalate the war with Iran—broadening the set of targets as he discovers that what he has done so far isn’t working. The threats to bomb Iran back to the “stone ages” are the latest example.

What people may not have noticed is that Trump is doing the same thing in the trade war. Today (April 6), new tariffs on steel, aluminum and copper take effect. The key difference: The new tariffs are now based on the full value of the imported products, not just the value of their metal content. That is a significant escalation.

The dilemma Trump found himself in when he raised duties on imported raw metal is that the tariffs harmed American companies that use that metal to make stuff. And metal users far outnumber metal manufacturers. So Trump helped a narrow manufacturing sector, but harmed a broad manufacturing sector.

Economists warned this would happen. When it did happen, the smart thing to do would have been to reassess, admit error, and reduce the tariffs on imported raw metal. That is not Trump’s way. Instead, he has broadened the tariffs in an attempt to protect metal-using industries from imports.

Trouble is, there’s no end to this. It just spawns a new cycle of demands for protection, this time from companies that buy the output of metal-using industries. Their costs have gone up, putting them at a disadvantage against foreign competitors. If Trump protected metal-making industries, and then metal-using industries, why shouldn’t he also protect the customers of metal-using industries? And so on.

Trump issued his executive order last week. It’s based on Section 232 of the Trade Expansion Act of 1962, which gives the president to impose tariffs if excessive foreign imports are found to be a threat to national security. (Trump has invoked Section 232 against imports from Canada and other staunch allies, which is kind of weird, but that’s a question for another day.)

The Section 232 duty is 50 percent of the customs value of imported articles in the base case, the same as when the tariffs were just on metal content. That is very high. It’s lower if the imports are made from American-made metal. British products also get a break. There are a lot of details in the order that I’m having trouble getting my head around, which is telling: One of the most harmful effects of tariffs is how they complicate commerce.

Last year, Paul Krugman wrote that Trump’s steel tariffs “are almost the Platonic ideal of a tariff that destroys jobs rather than creating them.”

The U.S. Chamber of Commerce, which isn’t always a bedfellow of Krugman, wrote, “Ultimately, these tariffs will lead to higher costs for American businesses and consumers and fewer exports for American companies.” It added, “For every job in steel production, there are roughly 80 Americans employed by manufacturers that use steel as an input, and the ratio of upstream-to-downstream employment in aluminum is 1-to-177.”

The first rule of holes is that when you find yourself in a hole, stop digging. President Trump, both in the shooting war and the trading war, is violating that rule. The deeper he gets, the harder he digs.

Source: WiFiLeech, Wikimedia Commons

A black box is a wondrous machine. You put stuff into it, close the lid, wait a minute, open the lid, and what comes out is exactly what you needed.

How does the black box do what it does? You will never know. Is that a bad thing? Well … yes.

Artificial intelligence is, of course, the blackest of black boxes. We understand the machinery inside the box at a high level, but we can’t trace how that machinery converts a given input into a particular output.

Sometimes the inscrutability doesn’t matter. When you need to write a sincere letter of apology or a heartfelt expression of affection, you don’t care how the A.I. generates it, as long as the missive sounds sincere and heartfelt.

But if you have no good way to judge the quality of the A.I.’s output, you at least want to know its “thinking” process. You would expect that from your lawyer or doctor or accountant, so why not from your A.I.?

The big A.I. companies understand this trust problem. Their first crack at solving it was to ask the models to explain their step-by-step reasoning. But if you’ve spent any time with A.I., you can probably guess what happened next: The models simply invented chains of thought that were plausible to human beings but had nothing to do with their actual processes.

Anthropic is trying to do something better but harder. I’m going to hand this over to Anthropic’s Claude for the explanation:

Anthropic's approach centers on what's called mechanistic interpretability — trying to understand not just what a model outputs, but the internal pathway it took to get there. Their most distinctive contribution has been developing “attribution graphs” that trace the chain of internal steps Claude takes from input to output. Think of it as mapping the actual circuitry of a decision, not just asking the model to explain itself. They trained a tool called a cross-layer transcoder that translates the model's raw neural activations into interpretable “features” — concepts like verb conjugations or notions of “more than” — and then traces how those features connect and influence each other.

That’s a big lift. Anthropic’s CEO, Dario Amodei, is aiming to devise a system that reliably detects most problems with its models by 2027. Other companies aren’t so sure. Google’s DeepMind is skeptical about whether full interpretability is even possible and is prioritizing practical tools for transparency. OpenAI has invested less in interpretability overall.

While I admire Anthropic’s effort, I share the concern that it is doomed to fail, especially because the more powerful A.I. gets, the more inscrutable it becomes.

Stephen Wolfram, a math genius whose company makes an A.I. tool called Wolfram Alpha, played down the black box problem in a talk at Northeastern University in 2023. Here’s what he said:

There’s going to be all this stuff going on in the world of A.I.’s, and we might say, “We don’t understand what these A.I.’s are doing, that’s terrible. How could we possibly exist in a situation where the world is being run by forces we don’t understand?” … Actually, we’ve been there before, because that’s the situation we’re in with nature. Nature is doing a lot of stuff we don’t understand, and we’ve managed to find ways to exist. We’ve found niches where we can carve out our existence in nature. Occasionally hurricanes happen, and with A.I.’s it will be similar. Occasionally some crazy thing will happen, and we’ll say, “We better build more science that allows us to understand what’s happening.”

That is not too reassuring. In equating A.I. with nature, Wolfram seems to be harking back to the way nature was at the dawn of the scientific era, when hurricanes, eclipses and epidemics were poorly understood and still seen by many as unpredictable acts of God.

This is where we are: Gradually turning over more and more of our lives to black boxes, with less and less hope of understanding how they decide what they decide. Hopes and prayers are in order.

As you can see, global production exceeded consumption in January and February. The extra presumably went into inventories. That changed in March. In its March 10 data release, the agency projected that production would fall by 6.1 million barrels a day in the month of March, while consumption would fall by just 1.4 million barrels a day. The projected shortfall of nearly 2 million barrels a day would presumably be filled by fuel coming out of inventories.

That projection is most likely an underestimate of the gap between supply and demand. It was issued on March 10, when the war was still young and there was optimism that it would end soon. Judging from Iran’s success in keeping the Strait of Hormuz mostly blocked, production of oil is likely running even lower than the agency projected. (Case in point: It was projecting production to exceed consumption again in April, which appears increasingly unlikely now.)

If that’s the case, then inventories are being exhausted more quickly than the agency predicted.

In a post on March 13, “Markets Are Still Too Calm,” I wrote that things could get worse, and they have. Brent crude for May delivery is around $113 a barrel, up from $98 when I wrote that piece. Stock prices have continued mostly downward.

Even now, though, prices reflect an expectation that the war won’t last a lot longer. If investors and traders really thought that the war would last for months, they would have to confront the possibility of oil inventories being exhausted.

If that happened, daily consumption would have to fall to match daily production. That would require what economists call “demand destruction”—a surge in prices sufficient to get a whole bunch of cars and trucks off the road, ships off the seas, planes out of the sky, et cetera. In a word, ugliness.

Early in the Gulf conflict, the International Energy Agency announced that its members had agreed to release 400 million barrels from inventories to keep prices from spiking. I just listened to a podcast by the I.E.A. with Keisuke Sadamori, its director of energy markets and security, in which he discussed the release.

On the optimistic side, Sadamori said that before the war began, I.E.A. members had 1.2 billion barrels in public inventories and about 600 million barrels in private inventories, so this 400 million isn’t the bottom of the barrel, so to speak. On the pessimistic side, Sadamori made clear that inventory releases alone would not be enough if the war dragged on for too long. He described the inventory release as a “sticking plaster”—what Americans would call a Band-Aid—that would merely “buy some time.”

Said Sadamori: “The most important thing by far is the resumption of the regular transit of the Strait.”

That seems correct. Will it happen, though? Although President Trump has said at various times that a deal to end the war could be close, in fact the stated demands of Iran are very far from those of the United States and Israel. (For example, Iran says it wants diplomatic recognition that the Strait of Hormuz is its sovereign territory.) At the other extreme, Trump recently mused to The Financial Times about wanting to take Iran’s oil.

As I wrote on March 13, even a very weakened Iran could continue to throttle ship traffic through the Strait of Hormuz through low-tech means including drones and GPS jamming. Preventing that harassment in the absence of a deal with the Iranian government might require a ground invasion, which would be ugly and protracted.

Things could get better from here. But they could also get significantly worse than is currently reflected in the oil and stock markets.

Source: Tnadafwork, Creative Commons

Math is a sore spot for a lot of people. They spend a zillion hours in school studying rhombuses and secants and radians and chain rules and derivatives, and they hate it, and then they come out of school and find that all the math they ever use is multiplication and division, which Excel does for them anyway, and then they realize that they never learned the math stuff that actually would have been useful, such as the probability of drawing the card they need for an inside straight in poker or how to understand a poll about the presidential election.

Enter Ted Dintersmith, venture capitalist turned gadfly for education reform. Complaints about math education are more persuasive when they’re lodged by people who are good at math, and Dintersmith is really good at math. He majored in physics and English at William & Mary and went on to get a doctorate in engineering at Stanford. He had a successful career as a venture capitalist before becoming a full-time evangelist for fixing schools.

His new book is “Aftermath: The Life-Changing Math That Schools Won’t Teach You.” It argues that schools are teaching stuff that students don’t need to know, badly, instead of stuff they do need to know.

He cites research that failing algebra is the reason many high school dropouts cite for why they never finished school. Their lives are set back permanently for their failure to master something that would be about as useful to them as ancient Greek.

According to my Kindle, the word “rote” appears 24 times in the book. Never in praise. For example: “Rote math determines who graduates, class rank, half of high-stakes exams, and college placement. It measures the education ‘quality’ of schools, districts, states, and the nation. We place the highest of stakes on skills rendered wholly irrelevant by intelligent machines. This isn’t just misguided. Nor stupid. It’s criminal.”

Dintersmith sounds a lot like my friend Kate McKeown, an education reformer, who describes the entrenched system as RAMIT, for regurgitate, acculturate, memorize, isolate and threaten. Better, she says, to “do real things” and “do it in community”; to “hustle with honor”; to “help and be helped.”

Failure to get math and math-related concepts (not just how to fill in the right bubbles on the SAT) can have serious consequences. Dr. David Eddy found years ago that more than 95 percent of doctors vastly overestimated the likelihood that women had breast cancer by failing to grasp how many of the positive results on tests were false positives. Partly through his efforts, doctors have gotten better at interpreting tests.

Dintersmith has other heroes. One of them is Charles Kastens, an elementary school teacher, who has third-graders play fantasy sports that teach them “Moneyball” skills such as how to detect undervalued players. According to Dintersmith, Kastens’ fantasy challenges “have reached tens of thousands of students through his IMHG Creations on TeachersPayTeachers.com, with proceeds going to charities.”

Another hero is Rich “Coach” Halas in Hopewell, Va. Halas gives each student a $10 seed grant out of his own pocket to use for the public good. According to Dintersmith, “One girl raised additional funding from her community to provide hygiene kits to local homeless Hopewellians. Two kids brought critical analysis skills to identify and honor their school’s unsung heroes – the school’s nurses and IT staff. Three pooled their $10 allocations, bought and sold snacks to double their money, and used the $60 to provide healthy food to Hopewell’s hungry. One enterprising student researched stocks, invested profitably in Coca-Cola (the stock!), and used proceeds to buy a beautiful bird feeder for a disabled veteran.”

Much of the work by Coach Has in Hopewell is a long way from the math that students get tested on, but students do learn about optimization—making the most with limited resources, which is an important branch of applied math. And Coach’s students do just fine on standardized tests despite not being prepped for them, he told Dintersmith.

Why do schools persist in teaching math the old-fashioned way, when it’s so clearly dysfunctional? It’s not that employers are insisting on it. Just the opposite. As Dintersmith points out, employers such as McKinsey and Google “don’t ask candidates to factor x3 + 4x2 - 17x - 60.” Rather, “They pose challenges that demand creative math-based problem-solving.” That’s what schools should be doing.

I think the explanation for the persistence in failure is that education is locked into a stable status quo from which only a few dare to defect. Dintersmith relates what happened when he was invited to speak to a class of third-graders about probability. To stir things up, he had them flip a coin with heads on both sides, which was soon discovered, and which sparked a lively debate about whether the assumption that a coin was fair was “just a reasonable start, begging for revision in light of new information.”

Cool stuff. But the teacher interrupted the fun to pull him aside and tell him, “Their tests require them to know that the probability of heads is one-half. You’re confusing them.”

Confusion can be wonderful. It can be the first step toward deep understanding. But it does slow things down in a classroom. And if the goal is to keep the educational assembly belt moving, getting students to think out of the box is the last thing you want to do.

Kotiharjun Sauna, a public sauna at Harjutorinkatu, Kallio, Helsinki, Finland.
Source: Oona Räisänen, Flickr, via Wikimedia Commons

Finland defended its title as the world’s happiest country in the 2026 World Happiness Report released today. I’ve admired Finland since I was in high school and came to admire the great Finnish runners Paavo Nurmi and Lasse Viren. I even visited once and swam in a lake at 60 degrees North latitude, which was fun.

But the world’s happiest? It’s not obvious why people who have long, dark winters would be happier than people who have short, sunny winters. Or why the perpetual threat of conflict with neighboring Russia doesn’t wipe the smiles off Finnish faces.

“We assume it doesn’t have to do with the pickled fish,” the Happier Lives Institute, a charity based in England and Wales that conducts the annual survey, said in its press release.

For answers, I did a Zoom call in advance of the latest report with a Finnish happiness expert, Markus Wartiovaara, the director of the Hanken Business Lab at the Hanken School of Economics in Helsinki.

Wartiovaara is all about happiness. He’s the founder of the Nordic Saunathon, which is being held today and Friday and is aiming to set a world record: “24 hours of relay-style sauna on the International Day of Happiness.” (The International Day of Happiness is Friday, so turn that frown upside down, people.) You can see him and his team in saunas, albeit fully clothed, here.

Wartiovaara’s lab is also co-organizing a Nordic Happiness Summit in Stockholm in May in conjunction with the Stockholm School of Economics.

He was a student activist in the early 1990s. In 1996, he and some friends formed one of Finland’s first internet companies, Spray, which was bought. He’s a professor of practice in entrepreneurship at Hanken, helping incubate students’ business concepts.

So, Markus, I asked, why are Finns happy?

For one thing, Finns appreciate their freedom, he said. “Democracy, rule of law, education based on flourishing, safety. There’s an infrastructure for happiness,” he said. “We know how hard it can be on the other side of the border.” Namely in Russia.

Fairness, for another. Finns aren’t as rich as the Swedes, Norwegians or Danes, but their incomes are relatively equal, he said.

Finland is also a high-trust society, Wartiovaara said. People trust each other, and they trust basic systems to function as promised. That’s reassuring.

Finns are proud of their sisu, which is (according to Wikipedia) variously translated as stoic determination, tenacity of purpose, grit, bravery, resilience, and hardiness. Coping with harsh weather might instill sisu, Wartiovaara said.

And Finns have a sense of fun that you might not expect from people living at the northern edge of civilization. Finland’s entry in the Eurovision song contest tends to quirky, Wartiovaara said. “Maybe it’s the sauna culture,” he said. “Everybody takes off clothes. There are no medals. Just human beings meeting eye to eye. It’s the mother of all our innovations.”

———

While on the topic of happiness, I also interviewed Craig Robinson, the former leader of WeWork’s global division, who’s writing a book titled “The Happiness Reboot: The Path to Reclaiming Your Joy.” He, like Wartiovaara, sees a strong link between entrepreneurship and happiness.

”You don’t generally think of work as a place you go to be happy,” he said. But “it is extremely possible that people can find joy and happiness in their work or careers.”

“We are very quick to crowd-source something that should come from within,” Robinson told me. “Social media is horrible when it comes to your happiness. Your purpose is not the average of everybody else’s purpose.”

He quoted an adage, “Comparison is the thief of joy.” “If you’re waiting for somebody to like the picture of your cheesecake before you enjoy it, you’re not going to be happy.”

Same goes for the pickled fish, I might add.