'Freakonomics' For Freaky Economics Steven Levitt's best-selling book, Freakonomics, revitalized economics by explaining how economic principles affect our daily lives. With the economy so prominent in our lives today, how should we interpret what's going on?
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'Freakonomics' For Freaky Economics

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'Freakonomics' For Freaky Economics

'Freakonomics' For Freaky Economics

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This is Weekend Edition from NPR News. I'm Scott Simon. Coming up, we head to Peru to check on the success of its One Laptop Per Child program.

But first, Steven Levitt's bestselling book, "Freakonomics," revitalized economics by explaining how economic principles affect our daily lives. Well, with the economy so prominent in our lives today, we wanted to turn to Professor Levitt of the University of Chicago for his reflections now. Steven Levitt joins us from the studios of WBEZ in Chicago. Professor, thanks so much for being with us.

Prof. STEVEN LEVITT (Economics, University of Chicago; Author, "Freakonomics"): No, it's always a pleasure to talk to you, Scott.

SIMON: A lot of the undercurrent of "Freakonomics" is the whole idea of perception versus reality, and I wonder if you see any of that at play now. For example, if you take a look at proposed bailouts or consumer spending, certainly during this holiday time or certainly any plans that are afoot for the U.S. auto industry.

Prof. LEVITT: What makes this time different, I think, than almost any other economic crisis we've faced is that virtually every American feels a lot poorer today than they felt a year ago. And so it didn't used to be that so many people invested in the stock market, so if the stock market went down, that didn't matter to most people because they didn't have a lot of financial wealth. Housing prices have never gone down the way they're going down now, and so almost anyone who owns a home feels poor in that regard.

It used to be that recessions were mostly things that hit relatively poor people - that unemployment would go up, the people who are on the margin would loose their jobs but affluent people wouldn't feel it. But in today's world, everybody feels poorer. And I think, in fact, they are poorer. So this is one case where really the perceptions of wealth and the realities are there, and the right thing to do if you're poorer than you were a year ago is probably to spend less money and to hunker down and be cautious. So that is the challenge to government deposit makers.

So what do you do when the right thing for everyone in the economy to do is to hunker down? That may have bad macroeconomic effects. Bailouts, typically, are not the right thing to do. What governments should be in the business of doing is helping markets function, that the market's done pretty well for us over the last 50, 100 years. By the market, I don't mean the stock market; I mean the functioning of the capitalist system. And part of capitalism is that when people are producing products that people don't want or when the executives are making bad decisions that make their company no longer viable that those companies go by the wayside.

SIMON: But you know the practical hazard in that because all of that would have to be accomplished by politicians, and politicians are very sensitive to fact that when you let an industry like that - huge industry like that slip into bankruptcy, it's in fact not the executives that may have made bad decisions who suffer but the people on the line. And politically, that just becomes untenable.

Prof. LEVITT: There's no question that politics trumps economics when it comes to what governments do. And so, I think the role of the economist, someone like me who is not accountable to anyone, is to say what I think, you know, what economic wisdom tells you, even knowing that it will never happen because the politics are too dicey.

But ultimately, I think we will not have a car industry in Detroit if things don't change. It may just be that United States shouldn't be making cars, that we're better at doing other things relative to the Chinese or the Japanese. And it's - the nature of the modern economy has changed and the ability to be adaptable to change, and I think it's very dangerous if we get locked into the past.

I mean, if you look at the initial stocks, the companies that made up the Dow Jones when it was started back in the 1880s, only one company - I think (unintelligible) is the only company that's still around in the same form that it was a hundred years ago. That sort of creative destruction is the nature of capitalism. And while politicians will fight it, I think ultimately economic forces are stronger than political forces.

SIMON: What do you notice as you look over the economic landscape of the country?

Prof. LEVITT: The macro economy is sort of like the weather. We have complex models that more or less can predict the weather a day or two out, but we're terrible at predicting the weather a week or two out, and the macro economy is on the same order of complexity as is the global climate. And so, economists are really stabbing in the dark a lot when we try to say what will happen, and I think you wouldn't want to believe any economist's - individual economist's forecast about what will happen in the future.

But I think what we are better at is thinking about the past and what's happened in the past and how we've gotten to where we are today. For instance, with the financial crisis, we can look back and say, how did all of these big investment banks come to the brink of disaster? And I think there we're back to individual behavior. And what's really remarkable is that the people who manned these investment banks are incredibly smart and yet they made these fundamental errors, it seems, in the calculations of their models in not recognizing that housing prices are gone up 50 or 60 percent in five years but they might just go down pretty quickly, as well, and took these huge bets that were going to destroy the company if housing prices would burst.

SIMON: Are there any questions that aren't - that you notice aren't being asked now that maybe you'd like to raise?

Prof. LEVITT: It may simply just be a fact of life that what we were living over the last 10 years of boom was somewhat of an illusion. And we may actually have to scale back our expectations and think that indeed, the future may not be as rosy. I think people are approaching the current economic situation as if it's cyclical. It may actually be something more fundamental.

I think every economist believes that in the long run the performance of the economy has to do not with factors about demand and what people want to buy but in our ability to produce, that we are as rich as we are as a function of whether or not we are making goods and services that other people are willing to pay for. And ultimately, I think that the risk we have in this downturn is that the government ends up putting impediments in the way of actually making American - manufacturing American services as productive as they possibly could be.

So if I had one word of advice to the Obama administration, it would be to focus on how we can not put in short-run government fixes which will eventually become long-run government talent(ph) programs that will get in the way of making America productive, but instead think about what can make America productive. And I think to the extent that the investments and infrastructure are a good attempt to try and build in things which will make us productive in the long run as well as create jobs in the short run.

SIMON: Always good to talk to you. Thank you so much.

Prof. LEVITT: Thank you, Scott.

SIMON: Steven Levitt, professor of economics at the University of Chicago and the author and inventor of "Freakonomics," speaking from WBEZ in Chicago.

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