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13,000 Economists. 1 Question.

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13,000 Economists. 1 Question.

13,000 Economists. 1 Question.

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UNIDENTIFIED REPORTER, BYLINE: This is PLANET MONEY from NPR.

NICK FOUNTAIN, HOST:

Jacob, last week we went to the big American Economic Association conference.

JACOB GOLDSTEIN, HOST:

AEA.

FOUNTAIN: This year, it was in San Diego. And, boy, did it deliver.

GOLDSTEIN: It was so economic. It was so conference. There were thousands of economists and grad students...

FOUNTAIN: Nobel Prize winners.

GOLDSTEIN: ...Former Fed chairs. And they took over not just these two big hotels in downtown San Diego, but they took over, like, all of downtown San Diego. You would be, you know, just walking around some neighborhood, and you'd hear people talking about difference in differences and about maximizing utility. And then you would realize, like, this is just the way these people talk when they're - whatever - ordering tacos. It's at a conference like this that you realize that economists are not normal people. They think in this very particular way, not just about, you know, the world, but also about their daily life.

So we're there in this econ nerdtopia.

FOUNTAIN: The Coachella of econ.

GOLDSTEIN: We got our mics. And, you know, our job is making a show about the economy. And so we figured, OK, here's what we're going to do. We're going to ask a bunch of economists a really simple question, what is the most useful idea in economics? And the idea is - the hope is this will get them to talk about ideas that are, yes, that are really useful in thinking about the economy, but also that are useful in just thinking about daily life and thinking about the world and ordering tacos.

FOUNTAIN: So we get off the plane. We go to the conference center.

GOLDSTEIN: (Whispering) That was Janet Yellen.

FOUNTAIN: That's her. There she goes. And she's just walking by like nobody - oh, somebody just shook her hand.

And the first economist we want to talk to is Lisa Cook of Michigan State.

GOLDSTEIN: Can we walk you to your next thing? Is that OK? OK.

LISA COOK: Oh, sure. Sure, sure, sure, sure.

GOLDSTEIN: Lisa's supposed to be at this panel discussion right now, but it's taking forever for her to get there because we're talking to her. And also, everybody else wants to talk to her, too.

COOK: Hey, Mary Daly. Do you all know Mary Daly?

GOLDSTEIN: She talks to the president of the San Francisco Fed for a minute.

MARY DALY: I've got a lot of things on my to-do list for you, so I will be in touch.

COOK: OK, thank you so much for everything.

FOUNTAIN: A few steps later, she runs into Brad DeLong, worked in the Clinton administration.

COOK: How's it going?

BRAD DELONG: It's fine. It's fine.

COOK: Good, good, good.

DELONG: As always, you run into people in the hallway.

COOK: That's right. That's right.

DELONG: And that's the most important and interesting thing to happen, so...

COOK: That's right. Well, good to see you. Might I see you at the Berkeley reception?

DELONG: You should.

COOK: OK.

DELONG: Where is the Berkeley reception?

COOK: I don't know.

DELONG: You don't know.

COOK: I don't know.

DELONG: OK.

FOUNTAIN: Lisa is obviously super busy. But at some point between everything else, we get her to stop, and we ask her our question.

GOLDSTEIN: What is the most useful idea in economics?

COOK: It is, I think, opportunity cost.

GOLDSTEIN: What is opportunity cost?

COOK: It is what you give up in order to engage in some activity.

GOLDSTEIN: What you give up in order to do something.

COOK: Right.

GOLDSTEIN: Opportunity cost tells us the cost of doing any one thing is giving up doing anything else. So the cost of going to college is not just the tuition you have to pay. It's all the wages you give up by not working or by working less because you're in college. Businesses also think, or should think, about opportunity cost. You know, the cost of, say, building a new factory is not just the money the business has to pay for the factory. It's also whatever other thing the business doesn't do with that same money, right? It's, say, giving up on that new R&D plant that might've yielded the billion-dollar idea.

FOUNTAIN: And in a more personal sense - you know, day-to-day life - opportunity cost means the cost of doing something at any given moment is not doing something else at that exact same moment. And literally at this moment, Lisa Cook is giving up the opportunity to do so many things.

GOLDSTEIN: Can you just, like, rattle off a few of them?

COOK: I could be at the session on the economics profession's race problem.

GOLDSTEIN: OK.

COOK: And I could be running. I have my running shoes with me. I have lunch in my bag. I could be finishing lunch.

GOLDSTEIN: So sorry.

COOK: Oh, there's one other thing that I really want to be doing, and I am binge-watching "Chernobyl."

GOLDSTEIN: That is not even to mention, like, all of the just meeting, talking with a thousand other economists, every happy hour, every talk, every poster. All of those things you are not doing right now...

COOK: That's right.

GOLDSTEIN: ...Because you're standing here talking to me.

COOK: That's right.

GOLDSTEIN: The opportunity cost of this interview is incalculable.

COOK: That's right (laughter).

GOLDSTEIN: Thank you so much for talking with me.

COOK: The pleasure's all mine.

FOUNTAIN: Can you say, hello, and welcome to PLANET MONEY?

COOK: Hello, and welcome to PLANET MONEY.

FOUNTAIN: I'm Nick Fountain.

GOLDSTEIN: And I'm Jacob Goldstein. Today on the show, the most useful ideas in economics, according to a bunch of economists at a big economics conference.

FOUNTAIN: It's going to be an intellectual sprint and, at one moment, a literal sprint.

GOLDSTEIN: OK, so you're going on soon. We won't keep you any longer. Thank you so much for your time. We really appreciate it.

COOK: No, thank you so much. (Unintelligible). Thank you so much.

GOLDSTEIN: Great to meet you. Thank you.

COOK: Same here. Good luck.

(SOUNDBITE OF CLAUDE PELOUSE AND LE FAT CLUB'S "CLUB SODA")

GOLDSTEIN: Where are we standing right now?

BETSEY STEVENSON: Where are we standing right now? The Macmillan booth at the AEA.

GOLDSTEIN: Why are we at the Macmillan booth at the AEA?

STEVENSON: I just wrote a book with Justin Wolfers - "Principles Of Economics."

FOUNTAIN: This is Betsey Stevenson. She worked in the Obama White House. And we talked to her in, like, the main exhibition hall. All of the big publishers in econ were set up. And Macmillan - that's Betsey's publisher.

GOLDSTEIN: In your whole economics textbook, what is the most useful idea?

STEVENSON: The most important idea that I think doesn't come naturally to students is that when you make a decision, decisions are best made incrementally. So if you're trying to make a how-many decision - how many hours should you sleep tonight? How many books should you read? How many classes should you take? How many hours should you work? Break them down and think about them incrementally.

GOLDSTEIN: Thinking at the margin or about marginal benefits, marginal costs. This is a phrase you hear all the time in economics.

STEVENSON: Every economist thinks on the margin.

GOLDSTEIN: So we're here at AEA. There are a lot of parties at AEA, like at a lot of conferences. Talk me through how to think about drinking at a party at a conference when you're thinking on the margin.

STEVENSON: So I think that that's a great example. Should I have one drink at the meeting? So the first drink - marginal benefit - maybe I become easier to talk to, loosen up a little. I transition to, you know, being relaxed. It tastes good. It's enjoyable. What's, you know, what's the cost? Whatever I had to pay for the drink, the calories I'm consuming. Now let's go on to that second drink. Well, now I'm not just loosening up, but maybe I'm loosening up too much. Maybe I'm more likely to say something embarrassing, right? So we can think about that incremental cost. And we know that even though the price stays the same for drinks when you're paying for them, the incremental risk of saying something embarrassing, it's going up with each drink you have.

GOLDSTEIN: Right.

STEVENSON: So we want to think anytime you face a how-many question.

GOLDSTEIN: OK.

STEVENSON: Anytime it's how-many, break it down to the incremental parts and ask yourself, should I do one more? Should I save one more dollar for retirement, or should I go out and spend one more dollar going out to dinner or going on vacation? Should I work one more hour? Should I go home? When should you stop? Well, you should stop at the point where the marginal benefits are no longer going to exceed the marginal costs.

FOUNTAIN: Great. Can you just, so we have it, say your name and your job?

STEVENSON: Betsey Stevenson, professor of economics and public policy at the University of Michigan's Ford School of Public Policy.

FOUNTAIN: It's a lot.

STEVENSON: But I am perfectly happy with Betsey Stevenson, an economist at the University of Michigan.

FOUNTAIN: Sure, that's the essential information. Definitely diminishing marginal returns after that.

STEVENSON: So, I mean, yeah, that's a great example - right? - of thinking on the margin. Like, did you really need that extra information? Did you need the professor of and the public policy and the - like, you know?

GOLDSTEIN: No, no. Cost exceeds the benefit.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

EMILY OSTER: My name's Emily Oster. I am a professor of economics at Brown University. I think the most useful idea in economics is comparative advantage.

GOLDSTEIN: A big one.

OSTER: A big one.

GOLDSTEIN: And I know when we talked before, you told me you have this way of explaining comparative advantage by talking about your marriage. Tell me the story.

OSTER: So to understand this, you need to understand, probably, that my husband and I are both economists...

GOLDSTEIN: OK.

OSTER: ...Which helps explain many things about our household. But when we first moved in together, there was the inevitable question of sort of who should do what. And at the time, I was better at, more or less, everything that we do in the house - all of the house stuff. So that included, in particular, cooking, and also doing the dishes. And so we had to figure out, you know, which of the things should he do. And I'm quite a bit better at cooking. I'm only somewhat better at doing the dishes and loading the dishwasher.

GOLDSTEIN: So you're a way, way, way better cook than him, but only a little bit better at washing the dishes.

OSTER: Exactly. And because I'm only a little bit better at washing the dishes and much, much better at cooking, we'd say that I have a comparative advantage in cooking and he has a comparative advantage at washing the dishes because the gap there is small.

GOLDSTEIN: I see. So for those two tasks, he's closer to you at dishwashing. Therefore, that's his - yeah.

OSTER: He's comparatively better at dishwashing. And actually, you know, when we teach this in economics, we usually teach it, we say, in the context of international trade, and saying, you know, it could be one country is better at making everything than the other country, but it isn't efficient to have one country make all the things. And so when you want to think about what's the optimal way to organize production, you want the less efficient country to make the things that they are comparatively better at, the things where the gap is smaller.

GOLDSTEIN: Good. Why, among all economic ideas, do you think comparative advantage is so useful for thinking about the world?

OSTER: I mean, I think it comes up all the time because we have - very frequently, we're thinking about, you know, who should do what task. And I think that it is very tempting to constantly be thinking, well, the person who's the best at the task should do it.

GOLDSTEIN: And the important insight here is that is not true.

OSTER: That is not true. That is not true. The person who - you could be the absolute best at every single thing, and you still shouldn't do all of the things.

GOLDSTEIN: And what matters is the gap. Like, there's a world where you shouldn't do the thing that you're best at because there's somebody else who's almost as good as you.

OSTER: Yes.

GOLDSTEIN: But then there's some other thing where there's, like, a giant gap. The second-best thing for you you're way better at than the other person. You should do that...

OSTER: Yes.

GOLDSTEIN: ...Even though there's something else you could do better.

OSTER: Exactly. And that's, like, a very unintuitive idea.

GOLDSTEIN: Yeah.

OSTER: So I think in some ways, that's what makes it so useful is that it's right, but it's also not something that obviously occurs to you.

GOLDSTEIN: OK, thanks for your time. It was fun to talk to you.

OSTER: All right. Thanks, Jacob.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

SCOTT CUNNINGHAM: OK, everybody. We're going to - we're going to - about to start. We're about to start the race.

UNIDENTIFIED PERSON #1: Ten, nine, eight, seven, six, five, four, three, two, one - start.

(CROSSTALK)

FOUNTAIN: We're going.

GOLDSTEIN: Yeah, we're going. All right.

FOUNTAIN: All right. You ready?

GOLDSTEIN: Yeah.

FOUNTAIN: Scott, can you say your name and your job?

CUNNINGHAM: Yeah. My name's Scott Cunningham. I'm a professor of economics at Baylor University in Waco, Texas, and, perhaps more importantly, the co-organizer of the AEA 5K.

GOLDSTEIN: Yeah, co-organizer of the AEA 5K.

CUNNINGHAM: Pretty awesome. We got great shirts. It's hard to explain it. There's this line from a game theory textbook, assume goats are continuously divisible.

GOLDSTEIN: So goats, like the animal?

CUNNINGHAM: Yeah, like the animal. That's, like, really funny to an economist.

GOLDSTEIN: What's the most useful idea in economics?

CUNNINGHAM: I can tell you a useful idea. I think that one of the more useful ideas in economics is causal inference. Causal inference is a field within economics where you attempt to figure out how do you know one thing caused another, which is really important.

GOLDSTEIN: It's a big question.

CUNNINGHAM: It's a big question. That's right.

GOLDSTEIN: I mean, is there some - I feel like it's impossible, but, like, can you at all boil down how you do it?

CUNNINGHAM: Yeah. So lots of times, you're looking for these natural experiments.

GOLDSTEIN: This is a bit much to explain while running the AEA 5K, so just real quick, here is what a natural experiment is. It's something that happens naturally in the world that allows you to understand whether one thing causes another. Like, for example, does raising the minimum wage cause employers to cut back on low-wage jobs? And there is this really famous natural experiment about this question. Back in the '90s, there was this moment when the minimum wage went up in New Jersey but stayed the same right next door in Pennsylvania. So a couple economists surveyed fast-food restaurants in both states. They did a bunch of math, some analysis. And they found that the number of jobs in New Jersey did not decline relative to Pennsylvania. They inferred that in this instance, raising the minimum wage did not cause employers to get rid of low-wage jobs. So this was a natural experiment that allowed economists to make a causal inference.

CUNNINGHAM: So, you know, causal inference allows you to answer questions that have never been answered, you know? And it's really important for designing optimal policy.

(CROSSTALK)

GOLDSTEIN: How'd you get the idea to do this race?

CUNNINGHAM: Well, the profession can be really lonely. And so I felt like there needed to be an egalitarian space just for people to have fun because econ is a cutthroat profession. You know, races are fun, and people seem to really value it. This is our second year to do it.

FOUNTAIN: Easier in San Diego than the colder cities.

CUNNINGHAM: Yeah, Chicago's next year. There might be - the 75th, 50th and 25th percentile might be three people right next to each other.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

GOLDSTEIN: After the break, more most useful ideas - maybe a bottle of water, too.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

DAVID AUTOR: My name is David Autor, professor of economics at MIT. And I think the concept I'm going to talk about today is the lump of labor fallacy.

GOLDSTEIN: And for the record, I put you up to talking about the lump of labor fallacy.

AUTOR: That's true, but I think it was a good choice. I've adopted it wholeheartedly. In fact, if you asked me a minute ago, I would have told you I thought of it. That's how much I've embraced the idea.

GOLDSTEIN: Great. So you came to me and demanded to be...

AUTOR: I demanded.

GOLDSTEIN: ...Allowed to discuss the lump of labor fallacy. Tell me about the lump of labor fallacy.

AUTOR: The lump of labor fallacy is the notion that there's a kind of a finite amount of work to do, and so that if more work is done by machines or potentially by immigrants or by workers overseas, then we will run out of work at home. So first, let's say, well, why is the lump of labor fallacy a fallacy? We know that usually when work is, you know, substituted by machinery or by, you know, foreign labor or by immigration, it usually means that it's being done, you know, cheaper and faster, right? You know, Americans used to spend, a hundred years ago, something like 70% of every dollar on just food, clothing and housing.

GOLDSTEIN: The basics of survival.

AUTOR: What you would call necessities.

GOLDSTEIN: Yeah.

AUTOR: Now, at this point, they probably spend something like 40% of income on that. So 30% of income has been freed up.

GOLDSTEIN: Right. So then they, or we, take that 30% - right? - and then we use it to - whatever - to eat out more, to take yoga classes, to fly on airplanes, to do all this spending that creates new jobs. So, like, the lump of labor fallacy is telling us here that there is not some fixed amount, some lump of labor to be done in the world, right? It's like we are just going to keep coming up with new jobs that we could not have imagined would exist.

AUTOR: OK. But now let's get to the other side of this.

GOLDSTEIN: OK, good.

AUTOR: So, you know, economists always invoke the lump of labor fallacy to, you know, to sneer at the layperson who's so naive. Don't they understand that, of course, you know, automation is our friend. It raises productivity, and we don't run out of work.

But there's a nuance here that's quite important. It's not simply that everybody, you know, as, you know, some work is displaced and new work is created, that everybody's, you know, just better off. They just move into new work. People have, you know, skills that are specific to the type of work that they do. And when the shape of labor demand changes, when they set - you know, the places and the skills and the industries and the occupations change where work is available, some people are left behind.

So there's no evidence to think that we're running out of jobs, but that doesn't mean that everybody's getting a better job. Some people are getting worse jobs. And a lot of the growth in employment we've seen for people who have high levels of education is in fairly low-paid, economically insecure personal services, like food service, cleaning.

GOLDSTEIN: Well, there's sort of the policy question, right? Like...

AUTOR: Yup.

GOLDSTEIN: ...Can we do something about this? Does having this insight help us help the world?

AUTOR: Yeah, definitely.

GOLDSTEIN: OK, how?

AUTOR: Because it tells us where we ought to focus our energy, right? So, you know, people are always worried about running out of work, but we're not. And so that's all we should be focusing our energy. We ought to be focusing our energy on figuring out, gee, how do we improve people's skills so they can qualify for better jobs? How do we make productivity higher in many of these personal services so that they can actually pay more? So there's many, many avenues of policy that open once you focus on this question the right way.

GOLDSTEIN: Good.

AUTOR: The fallacy is that we'll run out of work.

GOLDSTEIN: But the fallacy of the fallacy is that that means there's nothing to worry about.

AUTOR: Exactly.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

FOUNTAIN: Do you want to do the credits?

GOLDSTEIN: OK. If you have any story ideas, send us an email - planetmoney@npr.org. We're also on Twitter, Facebook and Instagram. Nick Fountain, you are the superproducer.

FOUNTAIN: I'm running right now.

GOLDSTEIN: Co-host Nick Fountain right here. The man is running with a shotgun microphone, a big audio recorder and big headphones - running. Bryant Urstadt edits the show. He's also at the conference giving us good ideas. Alex Goldmark is our supervising producer. I'm Jacob Goldstein.

FOUNTAIN: I'm Nick Fountain. This is NPR, running on a bike path in San Diego. Thanks for listening.

(SOUNDBITE OF ROGER JULES BOURDIN'S "FLUTE SAMBA")

GOLDSTEIN: Last, like, hundred meters, right?

CUNNINGHAM: Or we can just sprint.

GOLDSTEIN: I think so.

CUNNINGHAM: OK.

GOLDSTEIN: We did it. It's a beautiful thing, man. Thanks for putting that together. It was really fun.

CUNNINGHAM: Yeah, yeah. Cool. Thanks, guys.

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