The Year in Review
2021-12-27 · Guest: Richard Epstein (Hoover Institution and NYU Law) · 52:22
Review of 2021 Economic and Policy Events
Bob Zadek welcomes Professor Richard Epstein to review the major events of 2021, focusing on the lessons learned from a year of significant economic and social shifts. They discuss the importance of primary sources in media consumption and dive into the causes of rising inflation, critiquing the Biden administration’s fiscal policies and antitrust rhetoric.
Topics: Inflation, Fiscal Policy, Monetary Policy, Media Literacy, 2021 Year in Review, Antitrust Law Speakers: Bob Zadek (host), Richard Epstein (guest)
Reviewing 2021: Lessons and Methodology [00:00]
Bob Zadek: You’re listening to the Bob Zadek Show, a full hour of libertarian discussion for the smartest guests on radio. Live, spontaneous, and thoughtful. It’s the show of ideas, not attitude. Now, your host, Bob Zadek.
Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show in all of radio. Thank you so much for listening this Christmas weekend Sunday morning. Well, here it is, the end of the year, and it’s always a good idea, I think, and informative to look back over the year that is just about to end, and to see what lessons we can learn from the events of the year. It was a somewhat momentous year with lots of lessons to be learned.
And since there is a potpourri of subject matter when we look back over one whole year and look back over the operation of our planet for the year, we can discuss and should discuss inflation and spending and trade and foreign policy and environment and COVID, to name just a few of the major topics. Well, as a host of a radio show and a podcast, I would like to cover all of this. So I could have assembled somewhat of a dream team. I could have marshaled on one show—do the organization to bring in an expert on fiscal and monetary policy, an—an expert on trade, an expert on the environment, an expert on the science of COVID and epidemiology. I could have done all that, that massive organizational chore, or I could have invited Professor Richard Epstein back on my show to cover all of these topics and save a lot of organizational headaches with the same result.
So, Richard, welcome to the show this morning. I have asked you to join myself and my listeners to help us sort through the noise of the past year and to dig down and to see what are the lessons that you have learned or have been reinforced. And what are the lessons which the lay listener, the one who does not dwell on all of these weighty issues—what are the lessons the average listener can and should learn from the events of the past year? Because if you don’t learn from the mistakes of the past, you are doomed to repeat them. And we certainly don’t want to repeat. I am—I am sort of trying on a new—a new persona, see how it works. So Richard…
Richard Epstein: I mean, we’ll make you into a Spanish intellectual. Thank you.
Bob Zadek: So let me just finish, Richard. I just want the audience who haven’t heard you on your prior visits to my show—Richard is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution. He’s the Lawrence A. Tisch Professor of Law at NYU Law School, my alma mater, I dare say, and is also a senior lecturer at the University of Chicago. Richard has written a great number of books, most recently, The Classical Liberal Constitution: The Uncertain Quest for Limited Government. He wrote that a few years ago. It is still available in print. And Richard has always been, if I want to learn a lot in a short period of time, there’s only one resource, and that is Richard Epstein.
So Richard, you were entitled to that introduction, and I had to interrupt you to squeeze it in. Now, let’s start. We can start anywhere. Let’s start perhaps with fiscal and foreign policy, inflation, spending, and the like. What should the average voter, the citizen in our country, have learned from the events of 2021? What is the backup for those lessons and what does that portend for 2022? And along the way, you might want to highlight the mistakes, but this is not a scolding or scolding Biden administration. This is about what have we learned and what does the future hold?
Richard Epstein: Well, I’m going to start with a sort of a general point, and then we can move to the particular topics. One thing that I have learned more than anything else, I think, is that when you start hearing contentious positions about difficult kinds of issues, what you have to do is not read the newspaper accounts, but click through the links and then try to go through and get some of the primary sources that you can examine yourself.
This is very painful and it’s very arduous, and sometimes it’s best to get a review article. But a newspaper account, generally speaking, is just going to leave too much out, have too many untied-up ends, and you’re going to get the wrong impression. And that’s pretty much true with everything that’s happening here. In part, one might want to say, “Aha, this is because of the dominance of the liberal media,” and there’s no question that it does spin things relentlessly in one direction. But I think as a methodological caveat, you have to be aware even of the sources you’re more sympathetic to, the conservative sources. So I read a great many of them, and the thing that I like best about them is they actually give numerical data, and they also give you links to the original scientific positions. And even if you can’t read the whole article, you can certainly read the abstracts of it to get a sense of what’s going on. So I think that’s the first thing that one wants to do.
Inflation and the Velocity of Money [06:42]
Richard Epstein: And now, in terms of the particular topics that you’re talking about, it’s hard to know which of them you want to take first. They’re all to some extent interrelated, and what we see now is in effect a kind of a breakdown with respect to American institutions. So let me start on the domestic side, and we’re going to start to talk about the stuff associated with inflation. I think it’s a pretty good place to pass off.
The standard monetarist theories, the things that we associated with Milton Friedman and John Taylor, take the basic view, which I accept, is that when you’re trying to figure out how it is that you cope with inflation, what you want to do is to get rid of the uncertainty that’s associated with the actions of government. And so if a government has a large discretion to either cut down or to increase the money supply, to engage in quantitative easing, to sort of buy government securities so as to inject more cash into the economy, you have to look at that with deep suspicion. What these people are trying to do is to outsmart the rest of the world. What they in fact always do is they create a degree of uncertainty so that people trying to enter into particularly long-term investments and strategies don’t worry about whether the market’s going to go up or down, the inflation rate’s going to go up or down one way or the other.
And what happened is in the last year or two, we’ve lost all sense of fiscal discipline on this subject. In part it’s because we wanted to, quote, “stimulate the economy” by putting more cash into the particular system, and in part because we just opened up the federal purse to deal with the real and imagined ills associated with the COVID-type situation. But there is a tomorrow. And what happened was for a while none of the inflation really hit because inflation is a function of two variables. It’s a function of the amount of money that you have in the economy, and every bit as important, the velocity—that is, the speed at which that money changes hands.
And for a long time during 2020, the money was there, but it didn’t move very much. But 2021 gave you a kind of a relaxation, and all of a sudden the money starts to move and starts to move very rapidly. And so if you look at the month-to-month or year-to-year changes on the months, it turns out that we’re up to about 6%, maybe even 7% inflation, a record that hasn’t been matched for over 40 years, going back to the early Reagan days or even the late Carter days.
And so what’s the explanation for this? The simplest explanation is you’ve got too much dough out there moving too quickly, and that you have to be able to control it backwards. Otherwise, what’s going to happen is the uncertainty is going to increase, and people who have fixed investments, bonds or whatever it is, are going to find themselves systematically shorted. They then say, “Oh, we go into risky investments,” but then they have to enter the stock market, which has perils of its own. So you have to try to ramp all of this stuff back.
But you don’t see that happening today. One of the headlines that one saw this morning in the New York Times was a statement by Mr. Biden that what he wants to do as President of the United States is to reinvigorate the antitrust enforcement to see whether or not there’s gouging and monopoly profits that are what’s going to explain what’s going on in this particular case. And that’s exactly the wrong kind of response. In order to be able to have these monopoly profits, you have to have some kind of a monopoly. You have to explain why it is that this monopoly starts to exist this year and it didn’t exist last year. You have to explain why it is when prices go down, the monopolists are helpless to prevent that from happening, and when they go up, they turn out to have infinite power to bring these things.
Richard Epstein: And it’s really extremely dangerous to do this because when you start to try and find individuals whom you could name as culprits for this particular wrong, what happens is all sorts of American businesses are now going to be tarred with an illegitimate brush, and that’s going to reduce the level of confidence that people have in their private institutions. It turns out that most of these things will turn up to be absolutely empty. You can’t even figure out what a coherent theory is.
What you really need to do, if you’re trying to figure out what’s wrong with the economy, is not ask where the hidden antitrust violations come from, but look at the explicit regulations in many areas that, for example, prevent the efficient deployment and redeployment of labor in ordinary markets: minimum wage laws, anti-discrimination laws, family leave laws, and so forth. But there is no tendency today to think about structural weaknesses; rather, it’s just an effort to try to find the bad guy and to hoist them by some kind of ugly petard. And that, I think, is just a terrible mistake.
So what you do is you get the inflation thing wrong, then you get the antitrust and things start to go wrong, then what you start to do is say, “Ah, maybe it’s because we have the wrong kind of exchanges with foreign nations.” Now, one of the worst features of the Trump administration was the view that somehow or other, if Americans bought something from overseas or they took a division and transferred it overseas, that what happened is it was a kind of betrayal to American workers and to the American consumer. That is just a mistake.
The only way that you can, in effect, succeed in the export market is to succeed in the import market. So if you want to make good profits, and it turns out the only steel that you can use for a particular kind of widget is German steel, you buy the German steel, incorporate it into your products and sell it overseas, and you get win-win situations all around. But when you start to demonize companies who decide in fact that they’re going to have cheaper production facilities overseas, what you do is you then start to institute a regime of crazy subsidies for American exports, and worse, a system of very dangerous tariffs and other expenses that are going to be imposed on companies that come in.
So you can see how the cycle works. You misunderstand inflation, you don’t stop it at the source by trying to cut back on the spending, then you screw up the antitrust laws, then you screw up foreign trade. And the lesson that you have to learn is that there’s no free lunch, and the intellectual lesson that you have to learn is when you see something that’s going wrong, the first thing you want to do is to figure out what kind of restraint, what kind of barrier to trade and entry do you want to get rid of, rather than trying to figure out what kinds of subsidies do you want to add on and what kinds of restraints you want to put on.
Subsidies cost money; money comes out of taxes; taxes in fact impose deadweight losses. Barriers to entry prevent trade from taking place, making everybody smaller. So instead of ramping up on both those things, the first thing you always want to do is to think about what you can do by way of a sensible form of modest but persistent deregulation in the economy. And that’s the lesson you have to learn, and that’s the lesson which hasn’t been learned recently, and I think that much of the difficulty here is bipartisan. It’s not just simply the Democrats.
Regime Uncertainty and Energy Policy [14:15]
Bob Zadek: You mentioned uncertainty—how difficult it is for those in the private sector to run their business when they are trying to anticipate what government will do. It sounded like you were channeling the great Robert Higgs there, who wrote about, if I’m not mistaken, regime uncertainty, where the market—the private sector—cannot deal with uncertainty, particularly political uncertainty. Because how do you make long-range decisions if the decision is either right or wrong depending upon the outcome of an election? It’s impossible.
Well, when you have uncertainty, you have to hunker down and postpone a decision, which is in fact a decision, and say, “I’ve got to wait till things settle down.” You have a duty to maximize profits, and you can understand markets; you can’t underwrite the political process. So once you have—and one last comment, Richard, just for the audience. Uncertainty and risk is a cost. It’s a cost. That’s all it is, like rent and wages. Risk is a cost. And when you have great risk, the private sector has to make a profit. That’s their fiduciary duty. So they simply build in a non-profit-and-loss-statement cost called risk—adjusting for risk—which means they raise the cost. Which means because simply of the unpredictability of the political process, things cost more. It’s like political inflation, if you will. So I wanted the audience to appreciate the significance of your comment about the…
Richard Epstein: Right on. Let me sort of explain it with a kind of an example. The United States government for a very long time took a relatively hands-off position with respect to fracking. And the level of technological improvement that took place in that particular area was enormous so that the occasional kind of massive blow-up and screw-up that you had in 2010 was not taking place by 2020. All of those things had been ironed out of the overall situation.
It also turned out that if you looked at the relative efficiency of the project, all the inputs that were needed to get a barrel of oil went down. You needed less water, you had less waste, less runoff, less everything. And so what you were doing is you were then selling these things into the export market, which had an enormously positive political impact because what it did is to dull the influence of the Russians’ ability to sell natural gas to the Western Europeans and also soften the profits that would be made by a lot of the nations in the Middle East where political instability is a great problem.
You get somebody like Joe Biden who comes in and he says, “I’m not going to stop this stuff,” but what he does is he stops auctions and it makes it more difficult to get permits on public land. It turns out that there’s talk of shutting down the export market altogether, then you take that back, and then somebody says, “Well, it’s not completely done.” So what you do is you reduce the American production and that means you’re putting greater reliance of other nations on stuff from abroad. Oil and gas, of course, is a global market, which means that the price at the pump starts to go up again.
And what you’re doing, in effect, is you’re getting somebody who is so concerned with what he thinks to be the impact on global warming, that what he does is he makes massive dislocations. But does he understand global warming? And the answer with respect to the Biden administration is no.
The trick in this situation is to first figure out exactly how much greenhouse gases do by way of harm. That’s a very difficult calculation. If you try to run a simple relationship by seeing the increase in the level of greenhouse gases and translate it to an increase in temperature, it doesn’t quite work out because temperature tends to go up and down even over relatively short periods of time. So, for example, the world temperatures went down by about a degree Fahrenheit between 2016 and 2018 at the same time that carbon dioxide emissions started to go up. So you have to figure out what else is going on in these cases.
You also have to ask, “Well, is there any good that carbon dioxide provides?” And the answer is yes. What it does is it helps with photosynthesis. That increases the amount of greenery that takes place on the surface of the earth, which has gone up by about 13 or 14 percent—a huge number—over the last 30 or so years. What that does is, it turns out, it reduces the variance that you see in the temperatures. So you have a few very, very cold days and few very, very warm days. It turns out even within the day, since the greenery is starting to increase, the lows at night get higher and the highs in the day get lower, which means that the variance goes down.
So you’re trying to figure out what’s going on here. Why are you simply looking at the bad side of this instead of figuring out what the other side of this thing is? And you just don’t see that. What you do is you just see semi-hysterical statements about how the world is coming to an end, that everything turns out to be “code red.” So what’s the difference? You don’t try and solve this problem by solar and wind energy, creating huge subsidies, leading, for example, to the kind of instability that you had in winter in Texas back in February of this year with amazing losses. What you try to do is to sort of change things at the edges. And we’ve changed them.
Richard Epstein: The amount of coal production in the United States is down by close to 50% over the last 10 years; it’s a huge change. You increase the amount of natural gas, and then what you do is you get people in New York and in California who say, “We don’t like natural gas.” And so what they do is they shut off an efficient source of energy, and that means you’re back to wind and solar. But those have to be powered by all sorts of other things, including oil and gas and fossil fuels. And they also have to take into account the fact that the sun doesn’t always shine, right? And the wind doesn’t always blow. And then it’s very difficult to transmit this stuff from one place to another; the waste associated with their operations are very, very great.
And so what you do is you see this kind of idealized market taking place. And the secret of this is not to have, as you mentioned, these massive discontinuities based upon these crisis models, which aren’t borne out by any short-term evidence. And the dislocations you’re going to see in world markets are very, very great. And on this, there was a difference. Donald Trump often gave the wrong reasons for the right results. Every time he started to talk about the whole question of carbon dioxide, he thought it was a deal problem between the United States and the rest of the world. That’s not the major issue. The real issue is you have to figure out what the positives and negatives are together. And when you’re looking at complex global phenomena, you just can’t simply prejudge it.
And if you listen to everything that comes out of the standard world organizations and the national organizations, it’s just a question of when the finger of fate is going to wipe us all out. And on a beautiful sunny day, one has to ask the question: Is this the long-term prospect, or have we, in effect, got a very different problem? And the secret here is: if you get steady technological improvement and relatively little political interference, you will start to do better on these particular margins. And in fact, the world is a greener and a safer place today than it was 20 years ago by any single measure or metric that you want to have. And it’s not because of the political classes; it’s because of the low-level, inconspicuous technological improvement that first worked here and then there. And if you put them all together, ten very small changes are the equivalent of one major transformative event.
Inflation, Climate Change, and Intergenerational Morality [20:15]
Bob Zadek: Richard, I want to make an observation—just my own musings on the first two topics we talked about, which is inflation, and then we segued into climate change. I want to just offer an observation. Perhaps you have a thought on it, perhaps not, and then ask you a subject of the environment—get you out a little bit of your comfort zone—and I’m going to ask you a moral question regarding climate change, which I hate to use the expression because climate always changes. That’s not quite a headline, but so I’m going to first make an observation.
There’s an interesting parallel, in my opinion—just a musing—between climate change and the environment and inflation. Rather, when one reads about inflation in the press, it seems, or much of the press, it seems to me—probably to protect Biden, but it’s not about journalism this morning show—but what happens is they talk about inflation increasing as if it’s a natural external event which we have little or no control over. Much of the press writes that way because they’re uninformed. Inflation is man-made, unlike what climate change is not. So we have two concepts backwards. Much of the public seems to attribute inflation to some external event that we have little or no control over. Instead, it is totally man-made. And we treat climate change as something man-made when perhaps the effect of humans on it is either neutral or positive. I just had that parallel when you mentioned the two topics.
But now my moral question, Richard, and for me it’s a hard one. When we talk about big-picture climate change, when we talk about leaving the world to our grandchildren—that kind of somewhat, in my view, nonsensical discussion—we are talking about humans today making a sacrifice so as not to inconvenience humans living who we will never meet 500 years from now, as if to say those humans who are living in a somewhat perhaps changed environment will not have 500 years of information to deal with it. Just like we invented 100 years ago air conditioning, which didn’t exist 100 years before that. So I don’t understand on the moral basis: What is the moral reason for humans to minimize or reduce the standard of living today in the theoretical hope that a bunch of strangers living 500 years from now will not be inconvenienced? On the moral level, it makes no sense to me.
Justice Between Generations and Natural Variability [22:45]
Richard Epstein: Well, I mean, this is a standard problem associated with what they call justice between generations. And I think the way in which to sort of understand this is to recognize that you’ve put a false dichotomy through on the descriptive level. There is nothing that we can do today which will have that kind of one-to-one effect with respect to what happens 500 years from now. Every generation starts to think that it’s in charge of the world until 10 years pass and there’s another generation that’s in charge.
And so the way to think about the long-term situations, I think, is in much more concrete terms, saying, “Look, we have a situation now. What we try to do is to figure out how it is that if we stabilize the situation today, that 10 years from now, somebody else is going to start to take this thing over.” And we hope that we’ll give them a higher benchmark than they had the previous time. But the idea that somehow, if you do something today that’s a tweak to oil production, it’s going to influence the level of well-being with respect to lung disease of people in 2525—that’s dreaming. It’s never going to happen that way. You shouldn’t even think about it.
So the famous Rawlsian formulation is what you try to do at the end of a generation, whenever that time comes, is to leave the world at least as well off as it was before. And if you recall what I said, we’ve been able to do that, at least in the United States—maybe not in Soviet Russia. You start looking at longevity; things are getting better. You start looking at total pollution levels; it turns out they’re getting lower. You start looking at accident rates associated with pipeline shipments and medical situations or automobiles; these are all down from the last 30 years or so by factors of 80 or 90 percent. Just huge improvements that have started to take place.
So the reason there’s no dilemma about this is that if, in fact, what you can do is to create these things as part of the permanent intellectual and scientific infrastructure, that will last and the next generation will start to build upon it. And that’s what you want to do. So if you take care of business today, you have to recognize that somebody else is going to have to take care of business tomorrow. And your job—and I think it’s an extremely important one, since I’m a teacher—is I think of myself as trying to educate the next generation of political leaders who are going to have some kind of background in law and economics and the other things that I start to teach.
And so, I mean, if I have students now—and I think I do—who are in their early 20s, 30s, 40s, and 50s (I’ve been teaching for 54 years), I regard that as my contribution to the future. And I think everybody who’s an educator wants to think about that as well. So I think, in effect, the problem of the future will take care of itself if we do things right today. And we don’t have to worry about this trade-off. I can’t conceive of the situation that we have now where you make technological improvements which become part of the general knowledge base of the world, that’s going to lead to major reversals 500 years from now. It’s just inconceivable that it’s going to happen.
The other point that you mentioned, I think, however, is really worth talking about: What’s man-made and what’s natural? One of the single biggest problems that you have with respect to trying to figure out global warming is that you have to deal with the background situation, which is one of high levels of natural variability with respect to temperatures and everything else. And so, for example, if you want to go back to one of the great debates: Do we look at climate change as a series of ups and downs where we have the Medieval Warming Period, the Little Ice Age, and then it starts getting warmer and colder again? Or do we want to treat it as Michael Mann says, as a “hockey stick”? Everything is perfectly constant until about 1900, and then the whole thing starts to blow up.
Richard Epstein: Well, if you look at the data, the reason they called it the Medieval Warming Period and the Little Ice Age is that the temperature variations were very hard. And you could find this out in all sorts of ways. So, for example, in the medieval period, you could go fairly far north and grow very fine grapes into wine. The moment things start to get colder, it turns out that the available land is going to start to shrink. If you start looking at glaciers coming down during this particular period, they come down fairly far from the north and they start to recede.
This takes place over cycles of several hundred years. It also takes place over cycles of thousands of years; that can happen. 10,000, 15,000 years ago, Sweden was a block of ice, a mile thick and so forth. And so it starts to get warmer. Once you have natural variability, you then have to figure out what it is that the human beings are adding that’s going to change that natural variability. And you know, you’re trying to talk about 10% changes in the level of carbon dioxide. It seems to me that’s a very small lever by which you’re trying to move the rest of the world. Because as I mentioned to you before, carbon dioxide has many properties, some of which may tend to trap greenhouse gases, but trapping greenhouse gases means that you keep the sun out, so it’s kind of a wash. It also improves photosynthesis, which is a general positive. And if you start having all of that stuff, you just really don’t want to make these kinds of statements so rash and commit yourself to programs that have known collateral defects. So again, I think on the global warming stuff, a little bit more humility and a little bit more comprehensive stuff will come.
Inflation, Monetary Policy, and Political Incentives [28:15]
Richard Epstein: There is no natural source of inflation because money itself is a human commodity. And what we do is we know that the velocity of money, which is the amount of money you have in circulation plus the number of times it changes hands, is going to increase. One of the things that I think is wrong about the current situation is instead of looking at monetary policy and the work of the Fed, what we’re always trying to do is to say, “Aha, it’s COVID. It’s supply chain difficulties of one sort or another.” But we’ve had difficulties like that from the beginning of time. And it turns out in a particular situation, it may for a month or a day or two contribute something to dislocations. But markets are pretty good at overcoming those things.
You start talking about supply chains; they’re not as bad now as they were before. People are building air fleets so they don’t have to go through harbors. The harbors are staying open 24/7 and so forth. There are adaptations that can start to take place. And so those things are not going to be chronic. What is really very difficult is to figure out how you’re going to control public spending. And we do go through cycles on that, but the cycles have been somewhat discouraging. In the good cycles, what we do is we reduce the rate of growth of the size of government. We don’t really shrink it. And in bad times, we increase the rate of growth in government. And right now we’re in a very bad time.
And how do you measure this? It’s not just the monies that you put into the system; it’s the regulations that you start to impose upon it. And the progressive mindset does much too much of this. And what’s so difficult about the conservatives is it’s not that they take a strong “no subsidy” position or “no tariff” position. They tend to have different targets. So try to go into the state of Iowa, Bob, and say, “You know what? I think all these ethanol subsidies are really a terrible thing. Let’s get rid of them.” And if you get rid of them, you’ll get cheaper food stocks and better gasoline, but the farmers in Iowa may be a little bit worse off. That’s Republican territory, right? And then you see them doing this kind of thing over and over again.
And so what happens is the great tragedy here is the difference between the two political parties is often whom do we protect in an illicit fashion rather than trying to say we don’t protect anybody at all. Which is one of the reasons why I’m extremely reluctant to have any kind of a party identification. I’m an academic. And when you’re a party member, you take the whole market basket—the things you like and the things that you don’t like. I just can’t do that because I don’t want to vote for a market basket which has eight good things and two terrible things in it. What I want to do in my own peculiar capacity is to say, “Here are the good eight things, here are the bad two things, and we should keep the good ones and try to get rid of the bad ones.” And what you’re saying, in effect, is actually pretty much correct. You have to understand a theory of causation in order to have a theory of what things are immutable and what things are not.
Supply Chains and the Climate Change Debate [32:40]
Bob Zadek: I want to get into the issue of the two words “supply chain,” which are used every minute of every day now in the media, in the public discourse. But I don’t think there’s much understanding of what those two words mean. And what lessons have we learned from the disruption in the supply chain, which has been pronounced in 2021, so as to change the policy going forward?
But Richard, before we do, one other just a question, if it lends itself to a short answer—and I’m really going to ask you to stretch yourself a bit. When in the whole argument at the highest level, the argument on climate change is, in effect, scientists (in air quotes) get in front of microphones and predict what’s going to happen in the intermediate or distant future, and how that is a bad thing, what’s going to happen, and how we are causing it by selfish behavior today. That to me is a successful public relations argument. Why wasn’t the other side of it—why wasn’t there a, I’ll say movement, but maybe a school of thought that got in front of the media, in front of cameras, with an equal number of equally erudite scientists who patted the world on the back and said, “You are delivering a better planet in 500 years,” because of the reasons you have said, Richard—more arable land, more moderate climates? It seems to me an equally persuasive argument could have been made the other way. Why wasn’t it made? And if it was made, why didn’t it succeed?
Richard Epstein: Well, I think the first thing is it was made. I mean, there are a large number of people who write on a number of sites which sort of put this stuff out. Some of them, like Will Happer, are actually in government—they worked for a year in the Trump administration. There are really good books like Johann Norberg’s, trying to explain the rate of progress that takes place over the last umpteen years, which is simply spectacular. If you start going back and sort of retrofit the models and you take all the doomsdayers and what did they say in 1988, what did they say in 2000, and how did it turn out? There are many people who can start to discredit the way this thing goes.
If you start looking, for example, at hurricanes, it turns out that they’re very weakly correlated with temperatures. There are long gaps in the record; other things come back; they come in bunches. It turns out that they’re chaotic events, meaning that they’re fully predictable if you know everything about the world, but you don’t know it. So what is in fact governed by a scientific law looks to you to be erratic. And what happens is we say, “Ah, the world is going to drown because of what happened in Houston in 2018.” The same thing happened in Houston in 1935. You have huge floodings. Sometimes the storms are basically waylaid over an area and they continue to drop water; sometimes the winds push them out. There’s all sorts of randomness associated with all of this stuff that has been attested.
But there is the following kind of general truth about these things. If you look somebody up who has an alarmist story, you are going to be able to point to a villain, and that’s what sells newspapers and what captures attention. If somebody else is saying, “Okay, here’s a really nice model of the world and it’s moving much better than what everybody ever thought about it,” oh, that’s just boring. And so what happens is the people who give you the, quote, “boring” story are now accused of covering up all sorts of sins.
To give you one illustration about this, there was for many years a, quote, “successful” campaign called “Exxon Knew.” Are you aware of that campaign? And what happened is the attackers of Exxon said that if you look back to the company’s internal records from the mid-1970s, you will discover that they had full knowledge of the level of temperature increases that would start to take place at the equator and also at the poles, where in fact there would be systematic global warming. So Exxon knew everything. Well, you go back and you actually read those studies…
Alarmism and Information Markets [35:40]
Richard Epstein: It turned out they didn’t know everything. Most of the predictions they made were wrong. They understood that they were very fragile kinds of predictions. You start looking at the global ice, and what you discover is the same thing you discover about every long-term global phenomenon: they’re not linear, they’re not monotonic, they don’t always go up, they’re cyclical. And so it turns out there have been periods of very low global ice in the North and South Poles, and then there are very large increases that take place at other times. Right now, we’ve had recently record colds in the Antarctica and a rare, vast increase in the size of the ice cap. The ice cap, which was supposed to be gone by 2020 in the northern hemisphere, is very much there. It goes up and down; animals are able to adapt to it and so forth.
You do all the retroactive stuff, and it turns out the doomsday predictions that you saw 20 years ago are the same kind of predictions you had with Ehrlich and with the Club of Rome, who predicted mass starvation. You’re aware of that from the 1970s. Ehrlich was able to fill huge places talking about all this stuff, none of which came true. Julian Simon—you could put his crowds in a phone booth listening to him—and you remember they made the famous bet about the cost of commodities that would start to take place. Ehrlich said that the world was going to pieces, so commodity prices would go up. Simon said the world’s getting better, so commodity prices will go down. Simon was right 100% of the time, and everybody still writes as though Ehrlich somehow or other won the particular bet.
You have to constantly push at this stuff. But there are so many people there who have a kind of a Marxist-like suspicion of private enterprise that any time you say something, what you’re doing is you’re swindling us, and these things are not the truth. And that includes information. And if it gets into the wrong hands, bad things will take place. There’s this huge debate right now about Facebook—and not so much Amazon and Google—as having a control over information. And I’m actually quite worried about it because what they do is they shut down people with whom they disagree. If you look at the Twitter site, they announce that if it’s not stated by the CDC or the WHO, the World Health Organization, we’re not going to publish it, which means that any sensible criticisms that are made by outsiders are going to be suppressed by highly influential sources who frankly don’t know what they’re talking about on these kinds of issues.
So I regard the state of public knowledge as really lamentable, and I regard the constant effort on the part of government people to propagandize as being one of the things. One of my friends, a man named Jay Bhattacharya, who has been a skeptic with respect to the lockdowns on COVID and so forth, and has been a defender of the proposition—which I also accept—that natural immunities beat the vaccine every time. And he’s constantly denigrated by government officials as being some kind of a fringe lunatic whose words should not be covered.
So what’s happened is the public debate, being taken over by dominant parts of the press, aided and abetted by the government, working in very close contact with each other, have ruined information markets. And it’s extremely difficult for those folks on the outside to get heard. I certainly put myself in that particular class. I’ve made many a blunder; I’ve always tried to correct them and so forth on respect to the ways in which these diseases operate. But I’ve also said some things that have turned out to be correct. And so it is just a very, very frustrating situation to see what we do is we have this constant alarmist type situation. And what we do, for example, on COVID is the only thing we care about are COVID levels of either diagnoses or hospitalizations. We don’t care about the collateral costs that come from people being denied cancer treatments, from schools closing, from children having measurable psychological defects and so forth. So we do a very warped kind of accounting with respect to this. And you know, the reason I’m always happy to appear on your show is you’re willing to let the other side on these issues be heard.
Bob Zadek: Richard, help us—by the way, on COVID, just a comment to join in with what you have said. I listened even in the news feed which preceded the show this morning; there was some comment about the number of new cases on some warship. All the media talks about now is the number of cases. At the end of the presentation on this station, on the end of the news feed, it said all of the cases were mild, as if that’s almost irrelevant, but they threw it in as the last line to focus on cases. It’s like counting the number of sneezes on a warship and changing the mission if the sneezes are under the national average of sneezing for the past five years.
The Mechanics of the Supply Chain [41:15]
Bob Zadek: But I don’t want to get into COVID just yet. The next topic where you can help us understand what has happened and what caused it, what mistakes and what lessons can be learned, is what has been called the headline for this discussion, Richard: the disruption in the supply chain. So, first, what is the supply chain? What is there? Is there a disruption? Of course there is, I suspect. And what have we learned from the 114 ships outside of Long Beach and Los Angeles Harbor? What have we learned from that to carry into 2022?
Richard Epstein: Okay, well, first of all, what happens is the word “supply chain” or the phrase “supply chain” is a half description and half metaphor. What happens is the moment you’re going to have a system in which there are gains from trade because of the division of labor, it’s going to follow that one person is going to be able to do something more cheaply than somebody else, such that if they basically link themselves together through the so-called chain from start to finish, they will be more efficient than if one person tried to do everything himself. This is called the system of vertical integration.
Sometimes this vertical integration takes place within the firm, so that what happens is if you’re a firm and you make shoes, what you may do is take in all of the input—the leather, the rubber, the seals, and so forth—and you start off with these raw materials, and then what you can do is you can turn out a shoe and sell it. But in other cases, it turns out it’s more efficient for somebody perhaps to create a given kind of chemicals, and those chemicals are sold to somebody else who finds another product and then they put the chemicals on the product, and that combined product gets sold to somebody else, and there’s high degrees of specialization and they’re completely variable proportions across industry.
So you never know if you make something—say a hundred units of it—if you merge with another company that only needs two units of that thing, what’s going to happen is you have to find a place to sell the other 98% out. So you don’t use vertical mergers when the variable proportions are such that an efficient production by unit one is only either a tiny fraction of or a huge multiple of the amount that’s needed by somebody else. What you do is you enter into a requirements contract or output contract. So I guarantee to give a certain amount of the stuff that you need and we put some upper and lower bounds on it, and then they go up the chain that way.
Now when you do that, it’s no longer a chain because what typically happens is if you have a single chain, so there’s only one producer at each particular level, if somebody goes bankrupt, if somebody gets snowed in and so forth, everybody on the bottom of the chain can’t switch things further up, and people at the top of the chains are going to be starved. So what typically happens is that you have multiple chains linked together. So if you are going to have, for example, to ship goods from one location to another, you may have a contract with Federal Express, and you may have another contract with UPS and a third one with DHL, and what you do is you have parameters, and the theory is that each of these things may be producing at 30%. Each of them has a capacity to go up to 50%. So if one of them gets shut down, the others can start to pick up the slack on a kind of an insurance basis.
So now what happens is it’s not a chain anymore; it’s an elaborate grid with multiple linkages at multiple prices. What happens is you then have under these circumstances to look for something which you would call a common mode failure. And you’ve already given an illustration of how that could happen. Suppose it turns out you’ve got three perfectly reliable companies and they all ship their stuff into San Pedro Harbor. And then the harbor gets shut down. The fact that you diversify getting things there doesn’t allow any one of these three carriers to get things through.
Supply Chain Adaptability [44:11]
Richard Epstein: So if, in fact, you have a blockade that hits everybody on the chain, then the duplication that you have up-chain and down-chain on this thing is not going to help. You have to be able to remove the barriers. Now, how is this going to start to take place? Well, you always think about these things in the short term and in the long term.
And in the short term, what you do is you say, “Ah, we better change this particular regulation so things should come into San Pedro Harbor,” or “We better settle this labor dispute so these people are no longer out on strike,” or “What we better do is we better make sure that we get better weather under these things.”
In the long term, you say, “I can’t risk this thing being shut down again.” And so you’ll start to diversify, make the chain more complicated so as to avoid that single node. You’ll start using airplanes because they can go from any place to any place and they’re not linked the way boats are or railroads are. You’ll do that. What you’ll do is you’ll open up another harbor if you have to, somewhere else. You’ll get a chain that goes from east to west, and then you get one that goes from west to east, going around the globe in the other way. What you’ll do is you’ll add additional stops outside of the place where you can put things together. So you don’t have to get everything into the United States in San Pedro. You may be able to find a way to do some stuff through Hawaii and so forth.
So the private sector is going to be infinitely adaptable. The question is whether or not the public sector will be infinitely pliable. And this is where international trade protectionism, so-called, comes in. Because if a protectionist says that we don’t want to get too many of these shoes coming in from China, what you’ll do is you’ll blockade the entire United States. So the diversification strategy—planes, Hawaii, whatever else you’re trying to do—will not work.
How good are firms at doing this stuff? I think the answer is when supply chains are secure, they don’t worry very much about it. But the moment these things start to become precarious, that’s all they start to think about. And if you look at the number of stories about blockades, they’re matched and probably exceeded now by a number of stories which have told you in the long run, not the short run—in the long run, these particular companies are trying to take steps that will avoid these kinds of problems. And they are major changes in the way in which production goes.
So it turns out that shipment is every bit as important as production. And if your shipping costs go way up, it’s not going to be worthwhile for you to have a cheap, cheap source of production. If you have an expensive travel, you may shrink the geographical nodes one way or another. There are a million dimensions on which to do this. You’ve got a million companies trying to do it with themselves. And that part of the story, I think, will work itself out pretty well. And so what you want to do for the government is to make sure that they don’t impose barriers, because government barriers can be monopolistic, whereas supply chain glitches will tend to be localized and therefore capable of circumvention.
The 2021 Supply Chain Crisis [49:25]
Bob Zadek: What happened in 2021? Because before 2021, we weren’t learning about and seeing pictures of 114 container ships sitting at anchor outside of Long Beach and LA, and no trucks to move the goods even after the ships could get in and be offloaded. So what happened in 2021 that we would urge it not to happen in 2022? Why was 2021 the first when they’re going to be able to do that?
Richard Epstein: In 2020, the level of production went way down. And so companies, whether they were trucking companies or shipping companies and so forth, what they did is they simply put some of their stock and let it idle because they didn’t have any use for it. Then in 2021, what you’re doing is you’re not only trying to get the demand for this year, you’re playing catch-up for all the stuff that was missed. So you get this huge surge in demand coming as the markets start to liberalize, but all the firms that are engaged in various portions of the activity of moving these things down had basically reduced their supply.
So now what happens is you have to stock up and stock up very rapidly. Well, it turns out it’s very, very difficult to do this. Why the problems? I’ll give you just one. The Biden administration wanted to give people large cash subsidies for a very long time. And we’re now aware of the fact that the Republican states, which tended to resist this, had full employment come back sooner than the other cases of the states which had done this.
So you’re trying to run this, and then all of a sudden everybody wants to hire truckers, and there’s just an absolute fierce competition. The private market responds as it should respond. What it does is it gives you signing bonuses, it gives you higher wages, it gives you retention bonuses, it gives you better working conditions, and there’s still a kind of a shortage.
Why is that? Because it turns out that you need 1,500,000 people to get these jobs, and they have to be hired in an industry which is highly decentralized. Truckers don’t live in any one location. You could be a trucker and start out from Renton in Washington State and go to Phoenix, Arizona, or wherever it is that you want to move, just so long as you could get a load from one place to the other. So it’s very difficult to sort of get these things up simply because of the huge rate of growth that you’re trying to achieve.
This will eventually be done. The market will accrue. But one of the ironies, of course, is that the Biden administration believes that there are huge monopoly forces—they’re called monopsony forces, that is, buyer control situations that have taken place—which have artificially depressed wages. That is obviously crazy if you’re looking at the current market. Well, anybody who ships anything has got a shortage. Whether it’s a trucking company, Federal Express, it doesn’t matter. They’re all desperately trying to get these workers, and they’re not working in harmony with one another. It’s a nationwide market with lots of sellers and lots of buyers. And what you did is you had this short-term disequilibrium, and if you try rapidly to increase these things, stuff is going to break.
I would dare say, not being a real expert in this area, if you started to look at the supply chains now compared to what they were three months ago, you would see that they would be somewhat better than they had been because of these kinds of overall situations. It’s also important to understand that lifestyles have really changed. The number of people who want to go back to work full-time now after being at home is much smaller than it’s been. The norm in the academic business was three days in the office, two days at home. That’s a complete transformation. It’s wonderful. I spent five days at home, zero in the office—I gave it back—and I feel like a kid. I love it.
Bob Zadek: So, Richard, thank you. Thank you so much for sharing your wisdom. If 2022 is not better than 2021, it’s clearly because government has not learned the lessons of the mistakes of 2021. In other words, government collectively did not have the good judgment to listen to this morning’s show with Richard. Richard Epstein, thank you so much for sharing your thoughts with us. Richard, how can our friends follow you at Defining Ideas?
Richard Epstein: Oh my God. Look, I do several shows. I have a column, Defining Ideas, at the Hoover website. I talk with John Batchelor pretty much most weeks. I have two talk shows—three actually, now, that I do independently. One is called Reasonable Disagreements with Adam White, which is called a Washington politics show. I have a show called The Libertarian, now with Tom Church at the Hoover Institution, where we talk about the same set of issues that you talk about here. And then Troy Senik and John Yoo and I do a show called Law Talk, which is half serious and half banter about the same kind of political issues. All of them differ a little bit in emphasis. Probably the most wonky of them is The Libertarian, which is a little bit more technical, and the others are slightly more popular-oriented.
Bob Zadek: Richard, thank you so much for a valuable hour of your time this Sunday morning, and thank you very much to my friends out there. Have a good day.