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  Global Economic Viewpoint



n Monday, April 23, Nobel-laureate economists Gary Becker, Kenneth Arrow and Myron Scholes sat down at the annual Global Conference of the Milken Institute in Los Angeles to discuss the future of capitalism. Excerpts follow:

By Gary Becker, Kenneth Arrow and Myron Scholes

Gary Becker: I'm optimistic about the future of capitalism today -- with some concerns. There are several developments over the past few decades that are the cause for my positive outlook.

One development is the growth of China and India, which comprise nearly 40 percent of the world's population. In 1980, neither were capitalistic in the sense of a market-based private enterprise system in which prices and wages are flexible. Both of these countries have made tremendous strides toward the market in the intervening years.    

The second development, closely related, is globalization. While global domestic product has been growing rapidly, trade has been growing twice as rapidly. The world is much more connected. It is, indeed, “flatter.”

Third, central bank policies have improved. The macroeconomic environment provided by central bank governors has become much more stable as they have learned over the years to concentrate on inflation. This is certainly true of the U.S., with its low inflation and low interest  rates. It is also true of the European Union, Great Britain, Canada, New Zealand and Australia, among others.

Fourth, on a global scale, nations have moved toward lower taxes. Even the Scandinavian countries have lowered their top rates. Not long ago I was rereading Milton Friedman's “Capitalism and Freedom,” first published in 1962. One of the facts he mentions in that book is that the top tax rate in the U.S. at one time was 91 percent! Now, of course, the top rate is in the 30-plus percent range for personal income tax.

Every single country in the world has moved in this direction. Some Eastern European countries and Hong Kong even have a pure flat tax.

Now, some concerns. Radical Islam, in particular the Wahhabi brand of Islam practiced and promoted by Saudi Arabia, is a problem. If we get significant terror attacks on the order of 9/11 again, it will put a damper on the world economy.

The other concern is that when capitalism flourishes and provides great, if uneven benefits, you tend to get a backlash against wealth. There is a tendency to tinker with the goose that laid the golden egg -- in other words, regulation and state interference.

So, there is a constant battle going on to find ways to improve our lives with the wealth capitalism produces without undercutting it. As countries get successful, I'm afraid, we will find more and more attempts to destroy the foundations of that success. That is a fear I have.

Kenneth Arrow: Certainly one area in which successful countries will try to improve their lives with the wealth they generate is in health care and retirement benefits as people live longer into old age. This creates some real issues for the relation between the state and the market, particularly in the form of higher tax rates.

Although the U.S. is in the middle level of this phenomenon, the citizens of successful countries, in particular Japan, Spain, Italy and Germany, have voluntarily reduced their birth rates. One consequence of this is that, by definition, the percentage of the older population must rise. And people are living longer thanks to increases in health and medical knowledge.

Therefore, as societies, we find it worthwhile to spend more on medical care. In the U.S., expenditures on medical care were on the order of 4 percent of the American national income in 1960. In 2007, that figure is 17 percent of a much higher national income -- the highest percentage of any country in the world, though that does not translate into either higher longevity rates or general health compared to many other countries that spend far less.

In addition, since health care is one area where the consumer typically has less information than the provider -- the doctor and hospital -- they are not in the position either to treat themselves or self-regulate to keep down costs. So, historically, government has stepped in to ensure people have some level of health coverage. Even in the U.S., the government pays 60 percent of health care costs one way or another.

Now, since there are fewer younger people working today to produce the wealth needed to pay for this increasing medical bill, inevitably the cost will fall on higher taxation of the aging, but still active, population. This seems to me an inexorable reality. But it also doesn't seem to me the end of the world. The Scandinavians, after all, devote much higher fractions of their GNP to the state than anyone and still have satisfactory growth rates.

Becker: No doubt this is right as a linear prediction, but it is not inevitable. There are surely good reasons as a population ages to spend more on health care and social security. We economists use a metric called “the statistical value of life,” which measures what people are willing to pay for improvements in their lives. They are willing to pay an enormous amount, as we have seen in recent decades.

It is not surprising that as income rises, people are willing to spend more on their well-being. To do so, of course, they have to put more money away for their old age, either publicly or privately.

The interesting question will be what fraction has to come from government or come from people spending their own money and making their own choices. I think allowing individual choice is the way to go.

Myron Scholes: If the cost of health care is increasing according to linear projections, which it is, the real debate ought to be about the inefficiencies of health care delivery. What we really ought to be focusing on is (ITALICS) increasing the productivity (END ITALICS) of our health systems. Then, even if there is more demand, it doesn't necessarily mean that costs will rise commensurately.

Just one example: Unhealthy lifestyle choices from diet to smoking to lack of exercise to obesity lead to a large fraction of health care costs. If you want to cut costs of the $1.7 trillion a year American spend on health care -- 1 trillion of which is due to lifestyle causes --  this is obviously the place to start.