it's no "secret" that you can save hundreds with esurance. make it your "mission" to click or call esurance today. >> now on espnews, shawne merriman finds himself in legal trouble. details ahead. we'll give you an idea in sam

bradford's return will be closetor sooner or later. how big will that giant deficit be in the national wild card race at the end of the day. and we will tell you when you can expect to see danica racing with the good ole boys. espnews is now. >> we begin with a check on the phillies and astros. it's as day game. not good for cole hamels. bottom of the fifth, carlos lee reaches out, singles to right. two runners score. the astros up 3-2. and they go on to win a final score of 4-3. so cole hamels falls to 8-9 on the season. going six innings, striking out six. but four earned runs in seven innings. one in four in his last seven

starts. carlos lee, you saw a base hit, his third ribby and houston with its first sweep since july 20 through the 22nd against st. louis. >> one game separating the rockies from the giants in the n.l. wild card to start the day. rocks beat the d.backs 7-1. bottom of the fifth. homers from seth smith, ian stewart. carlos gonzalez. giants and brewers tied at 1-1. they are in the top of the tenth inning. >> hi there and welcome back to espn nussments alongside kevin connors i am michael kim t. latest on sam bradford's shoulder injury in a bit. but first, it's off to the national football league. >> not sure anyone could have predicted that tia tequila would have impacted the san diego chargers' season. chargers linebacker shawne merriman was arrested this morning and accused of choking and restraining his girlfriend, reality tv personality tia tequila as she tried to leave

his southern california home. tequila signed a citizens arrest warrant charging merriman with battery and false imprisonment. merriman was suspended four games prior to the 2006 season after testing positive for steroids. the chargers' season begins a week from monday night in oakland. chargers g.m. a.j. smith book principal of economics with federal chairman ben bnanke and co-authored the book the winner-take-all society with philip cook and dysphoric was named nable book of the year by "the new york times" and was included in business week's list of the ten bes books from 1995. professor frank holds a b.s. degree in mathematics from the georgia institute of technogy and he also holds an na a statistics and ph.d. in econicfrom uc-berkeley. so let's pleased a warm commonwealth club welcome to professor robert frank. [applause]

>> thank y very much. >> thank you, joe, and to the commonwealth club for inviting me. i am a regular listener to the commonwealth club lecres. we hear them and if the cut new york. they've been great over the years and i @m honored to be in your company i'm going to start by making a prediction you of course don't need warning frol me to be skeptical of prictions made by economists that haven't turned out well over the yearr. i will predict if you ask economists, professional economists who is the intellectual father of their discipline you would get 998 out of 1,000 responding adam smith. that is the clear consensus i think among my contemporaries, and smith's modern disciples would ci his celebrated invisible hand idea. the idea that if you turn

selfish people loose in the marketplace and tell them seek your owndvantage, chaka and border with one another, the end result wl be the best possible outcome attainable as a whole. that claim brings little hollow these days. i feel the invisible hand was never a claim adam smith put forward in those terms. his modern disciples are more enthusiastic about the invible hand idea than he ever was. he was azed you could rn selfish people lose in the marketplace and sometimes get good results so when he stated his claim it was alws qualified in that way. still it is a major intellect will advance, the idea producers would compete with one another to steal market share from their rivals with no intention of benefiting society the end result would be competition would drive prices down, high-quality products would be introduced to appeal rival firms

buyers and the consumers in general would be the ultimate beneficiaries of the competitive process. they would get better products at prices high enough to cover the production. it's quite a remarkable story. what else i know it, adam smith himself didn't believe it was a general description what happens when selfish people go about their business. it was an interesting claim about a certain subset of activity. here's the prediction i will make. if we ask economists 100 years from now, a safe prediction for me t make sense, and i guess no one else in the room will be around to test to see if it came true, was the intellectual father of the discipline to i am going toredict they wod not respond by naming adam smith. my prediction is that a majority, maybe not 998 out of 1,000 but majority would site charles darwin now as the father of modern economics. the reason i make that prediction is that charles

darwin had a different emphasis on the effect of competition on how this develop and emerge competitive systems. one of his ctral insights in my view is natural selection focuses oj what benefits the individual. it doesn't care directly about what benefits the species, so tree or behavior in so far as it promotes the interests of the individual bearing the treat. of course oftentimes the treat that helps the individual also helps the species to which the individual belongs, so if you think for example about mutant gene that codes for keen eyesight and the hawk, the hawk at bears the gene gets a clear advantage. he can spot mice from a higher altitude soaring above the valley and he will catch more mice and feed his k more fully

and raise more offspring. if that gene spreads through the whol population, which it has a tendency to do, so much for the better hawks as well. they're not any of them disadvantaged by having keener eyeight. so that's the invisible hand played o in the darwinian setting but pastore was well aware oftentimes that treats the benefits and vegetables don't play out at all to the benefit of the group and heri want to tell a simple narrative story i have taken to altering the way i give talks the last several years because have in recent years been studying the lack of effectiveness of the introductory economics course. i hate to reveal there are studies in which students who take the coue, traditional introductory economics course are given testso probe their knowledge of basic economic

principles. six months afterhe course is over. and those students don't score any higher on the tests than the students who never took the course at all. it is an extraordinary shameful performance from the dismal science you have to say. in other fields it would be the subject of malpractice lawsuits. you have to wonder why is it in economics? parents are paying $40,000 a year why hasn't sobody filed suit? you are spending all of those hours with my kids and charging all that money and are not teaching them anything? and my hothesis is we haven't seen this because most people in the world don't know economics either so it is n at all evident we ar sending people out who are poorly tined. ben bernanke in our textbook had a hypothesis about why this is so -- bically it is a simple conjecture that we try to throw away too much stuff that students during the semester. thousands of ideas literally

wrapped up in equations and graphs many of them and really e human mind doesn't absorb information in thatorum effectively so in the and it's not such a surise itll goes by in a blur. it wou be interesting if it didn't. at learning theorists teach is the way to get information to the human brain the most naturally is to wrap it up in a narrative, so if you can take the economic principles that do most of the hea lifting and the good news there is only about lf a dozen and wrap them in storage that illustrate what is going on in context familiar to people that information gets into the brain, it is dredged easily from memory, peoplean see analogs as they go about their business in the world and so it is a way more effective way to master new concepts so it is our claim you could learn the basis without great difficulty it just you will cast the information in t form which it is mostly absorbed and keep sure

to keep coming back, drilling and repeating off to read the story i will tell you ia darwinian story and illustrates in simple terms the central theme ofy talk so stay awake through this story and then when somebody as you what was that about you can say i didn't hear the whole thing but this is the gist of the talk as he explains of the outset. bar when asked this question, why is it the members of vertebrate species most of them are asymmetric male versus male? the iales in genera are bigger and generally more colorful than the femes, why is that, darwin wanted to know. so for example the elephant seal, the meal of the species ways upwards of 6,000 pounds, that is as much as a lincoln navigator, a big sport utility vehicle.

prodigious animals, 23 feet long is it good for meals to be big darwin pointed out no, not really in fact it is quite burdensome for males to gdt big. they get orthopedic ailments and have a much more burdensome work day they have to eat prodigious quantities of food to maintain their body mass. worst of all they are not good peacekeeping from predators. the great white shark can catch a 6,000-pound seal much easier than the female. the female ways one-fifth as much, eight to 1200 pounds so why are mails so big? door win's answer is provocate, simple, logically sound. the answer h suggested is because like most other inrtebrates the elephaft seals are polygynous that means they take more than one meet if they can. you ha to stress the if they can park. if some males take more than one made that means others don't get one at all and in darwinian

terms that is the worst outcome imaginable. the game is over for you. your stuff doesn't get into the next generation so naturally the males take seriously the task of finding and acquiring meets and fight with one another typically for species and lo and behold you are slighy larger than your rival then you have an advantage in a fight and so if there was a meat and gene that coated for size that would tend to make the bear of the gene more le they are bloody horrible fights to behold, there's footage available nature archives. they pummel one another for four or five hours and then they are bloody and exhausted and finally one of them is on able to continue. the winner claims access anywhere from 50 t 100 the gene that made him a little bigger that helped him win shows up in the pops of all of those and then another mutation comes along and it builds on itself so

e bulls get bigger and bigger and not without limit they don't weigh 100,000, they weigh 6,000 pounds, but 6,000 pounds as a group is a bad number if they can take a vote and say at the count of three pushed the green button and you will all away 3,000 pounds they would jump up the chance to do that. they can't some 6,000 pounds is where they end up. that is the example of the trait that serve the individual but is in direct conflict interest of the group and there are many traits like that. they all have this genera collective action pblem feature in stadiums people stand up to see better and nobody sees better than if everybody had mained seated and yet it is more burdensome to remain standi so that is the basic theme i am ing to talk about that if you turned it s loose in the marketplace, you don't get

optimal distribution of resours buy any presumption that comes out of our best avlable theory of competition. sometimes you get good outcomes, oftentimes you get inefficient outcomes. where we are different from other animal species as we have the capacity far more than other animals to make rules to make the inefficiencies less severe and i will talk about some of them let me try to set them the rest of my remarks in the context of the current downturn and looking forward to its aftermath. this is a bad downtur it's the worst one in a professional economist active today has ever seen. the ones active in the great depression in the 30's are no longer alive or professional active. it had the steepest decline in employment ever on record. the great depressi didn't see as steep a decline as we have seen at the outset of this. maybe it won't get to be as ad

as the great depression. probably it won't be because now on like than we have an idea what to do about an economic downturn. herbert hoover was the president when the great depressionegan 29. he dn't ve a clue about what to do. he thought you need to balance the budget. he had never read john meter cane's books explaining what to do about the great depression because it hadn't been written. it would then be written another seven years. 1936 was the publication date. rumsld however seem to have intuition what to do a a lot of it squared with insight that cannes unleashed. so you won't remem any of this even ifou took an economics course i will remind you national income is the sum of several components consumption and investment, government spending we would add net exports today we didn't talk much about in those daybecause it was such a small share. but thosare the main components of spending and when spending falls short of the amount necessary to generate a

job for every one it can remain in a low level equilibrium for quite some time. we are in such a situation now, consumption has fallen sharply because was at unsustainably high levels to begin with. people were borrowing money against home-equity that wasn't really home-equity, they purchased high prices if they were borrowed against. we are not going to see consumption at those levels anytime soon. private investors are spending less than normal. why would anyone want to build a factory right now? people already have capacity to produce more than what people want to buy at the moment it doesn't make any sense to add to your capacity now. so, consumers are not going to rescue the low-level equilibrium from its current track. the investors are not going to rescue it. that leaves one other actor on the scene with capacity to do anything and that's government. and kinsey and insight is government in that situation can help solve the problem by

increasing spending in massive quick bursts to prime the pump to get the economy going again. and so, he couldn't st saying thait wouldven be better than to nothing to hire people to do useless tasks so one of his famous examples was we could hire people to dig holes and fill them back up. the idea being well we would pay the salary to do that, they take their salary, go to the grocery and spend it, pay the landlord rent and by closing. the recipients would inurn go and spend it on other things and you would get the now familiar new concept of the multiplier at work and the economy would be pushed back on a trajectory that would be sustainable a full employment again. government is the only actor who can do that, keynes argued and i say that it's u.n. controversy yoel all of the living rmer

members of the president's council of economic advisers who served under democratic and republican presidents alike have come out and form of some form of come in favor of refm of the stimulus package. there are some economists that sayt is not a good idea. the archaeolocay narrow group generally not as distinguisheas the broad group that supports. i want to say it is essentially a non-controversy all judgment the camera should be borrowing money, printing moneand taking money from wherever it can get and priming the pump spending on activities that will get the economy going again. but with that said ye spend money having people dig holes and filled them up? what a dumb idea that as if there is in the alternative would be useful than digging them up. does anyone doubt there are ample alternative that would be a more useful? think about the bridge across the mississippi river lie 35 that collapsed as people were driving to minneapolis a few

years ago. people were not expecting the bridge regarly. if they d so that it was deficient they would have said we will fix it but not now because we don't have the budget. a lot of peopl were killed when the bridge collapse. ed rendell, the governor of pennsylvania was quoted saying he has 6,000 bridges in his state like that they are all ready to be fixed it is just the lackf money preventing it from starting to work today. ere are shelves already people -- shovel-ready people. so there is money we can get the pump primed and get the economy going again. so it is something we need to do. people are complaining about deficits. we can't afford to do his because there will be a deficit and a double burden our children and grandchildren. that's wrong. if we don't do this the economy will remain and low-level employment and there will be a t of unemployment, tax

receipts will be lower, the government will have to barter about money to carry the basic service. you see this differently in california in the current budget crisis. you've got 50 state governors acting as many herbert hoover's cutting back becse tax receipts are falng and that is just exacerbating the downturn and so deficits be damned. borrow and spend right now, because if you don't borrow a spend right now the deficit are going to be even bigger. it isn't good to have deficits in the long run we want to pay the deficits down, but not now. now is the time to be spending. if you want to have a vibrant project of national renewal you can dthat with borrowed money goin forward borrowing from the chinese now that is good. but if we want to rebuild the nation's infrastructure we have to come up with ways of spending so the pundits are looking ahead and they say things looking

forward look pretty grim. consumption will be below the peak level for many years to come so people are going to be unhappy the standard of living is going to be lower. not only that but we live in a taxable the country so we will not be able to raise tax revenue needed to carry out an ambitious program of national investment and real so we are going to go limping along with our current dysfunctional system just as we have the past dades. that is a bleak view in my opinion and is unnecessarily pessimistic. a couple of pois. first of all, the pundits are right, consumption will remain below the peak for many years to come. that is true. but that is not the end of the world. joe mentioned negative a peace corps lunteer and nepal. i lived at a very low state of living during those two years. my house had two rooms, no electricity or pluing.

no one here woulwant to live in a house like that. your kids would be embarrassed if they saw where to live in a use like the one i lived in but i never for a moment felt embarrassed about that house. it was a good house in the context where i lived so the consumption standard goes down thats on pleasant but we are surprisingly equipping to that. think back when you were a student in all likelihood your income was less. were you on heppe? if so you are on like most. most people were happier than they are with more income and adulthood. there's a context that is right with every situation and if you are in the ballpark r the standard, that's basically the thing you need to achieve in order not to be weighed down in a permanently depressed state because of your economic circumstances. on the tax side that is too pessimistic view. there is just a waste stream out

there i would guess two to $3 trillion a year of mey that could be harvested from the waste stream and the united states economy that would be more than enough to pay for universal health care, high-spe trains, fixing bridges, catching the roads on time, all the things we say we should do and haven't done we could easily do by shifting the mix of things we tax. right now our tax system focuses on activities that are generally beneficial like to fees. we tax savings when we tax income, peoples savings, job creation through the payroll tax. there are things we taxight now that are positively useful. people think of tax as a device that generates revenue and that is one of the two effects, but the second effect to discourage the activity we levy the tax. when we tax useful activities that's bad.

that makes the economy less efficient. if we would shift the tax system to emphasize taxes on activities that cause harm to others, and i will describe examples of this, there are so many of them we could tax each one of those xes would actually ke the economy more efficient, not less efficient d free up reurces to pay for these other activities mh more useful than the things bng spent now. people are accustomed to hearing government is the source of waste in the economy, we hear about the 640ollar pengon seed that proves without question the bureaucrats in washington think they know how to spend money more wisely than you but in fact spend it carelessly when we turn it over in fact that isn't a good example because the pentagon toilet seat they bought for $640 was actually a space shuttle will seat that had special designs to satisfy. therere wasteful government

projects to be sure the bridge to nowhere is a conspicuous example it got stopped because it came to public attention but the are other wasteful government projects. they should be fair out and killed whenever and wherever we can. every president has promised to do that. the disappointing thing is presidents haven't been good at doing that. when you try to ferret out government waste it doesn't yield easily in the problem is government programs have constituents so when we go after waste what we end up cutting off is not the most wasteful prrams typically but the ones whose constituents screamed least loudly when we go after the budget act s think of some of the examples from t bush adnistration. self proclaimed enemy of gornment waste the cut the nsf budget from basic research at a time when we are losing patent shares worldde. th cut medical rehabilitatio expenditures on injured were terans. they cut nutritial assistance

programs for poor mothers of small children. all of those programs are going to bring back much me in return than they cost. it's not a good idea. my example during the bush years because the energy department program for rounding up loose nuclear material in the former soviet union. these are dangerous materials, terrorists want them. they are in poorly fortified facilities guarded by soldiers and drink too much and don't get paid regularly. we should bepending more on that proam rather than less. the moment a terrorist gets a handle on that material itill be smuggled out of the soviet union and shipped here ande don't want to think what next. cutting government waste we should do it but don't count on getting any big extra stream of dollars from doing that. private waste i am speaking contrary to the conventional wisdom here understand private waste is vastly bigger than plic waste, number one. number two is much easier to

eliminate than public waste. this is actually good news, the current sittion is grossly wasteful but that fact means we can harvest additional resources without forcing people to undergo painful sacrifices. so, why is there so much pride wast it's not because people pay too much for a toilet seat. competition keeps prices where they belong. the problem is many of the goals we try to achieve cost more than is strictly necessary to achieve because of the context of facts and spending. i am not getting the message y are trying to communicate, write it on a little sheet and send it up. so i will give you one example. aristotle wanted a special yacht committee is the late millionaire, to retrofit a

canadian frigate. there's a tile floor installed in a swimming pool that at the push of a button with a rise from the water and in the evening become a dance floor. the bar stools had a whale ivory foot rests covered in the detter of the harvested from the sperm whale penis, expensive sought after skins. these were high expenditures but they worked because he was able to say truthfully he had gotten a special yacht for his money. his rival wanted a special yacht, too and so starve those hired a naval architect and gave specific instructions to build the atlantis. his speech to 50 feet longer than the cristina. that is one of the minds of the contract. he didn't know how long the

cristina was. he was to build the speech to a little longer. another example of smart for one, for all you want something special? we all want something special and when we stand to see better we don't see any better than before. if we spend a little less somebody would have gotten something special. even so, and fewer resources would have been spent. we see this in the housing market. everybody wants to send his ild to a good seto become school. was a good school? it is one that is better than other schools. another relative concept. this just in, 50% of children will end up in bottom half schools no matter what we do. ..

>> it's like the military arms race. they build bombs because they

don't want to be invaded andon requesterred by rs. there's a tendency therefore for arm's races to cipher out resources from other categories that would be more beneficial for the population atarge. when evebody builds more bombs, there's no help, that just creates a new balance of terror at the higher level. if we can make an agreement to build few wish that would be attractive. often they do everything into such agreements. if they announced such an agreementaying they robbed the individual nations for their find to build as many bombs as they wanted to. ll, yes, it does. that's the whole point of those agreements. if we know we're free to build as many bombs as we want, it's too many. individual interest and collective interest don't

coincide either. it's quite common for that to be so. you want to have a special casion, a gift to celebrate a spial occasion. economist wrote that a man proves to his wife that he loves her by giving her a rose. in a rich country, h must give a dozen roses. peopleon't read that passage and say what's he talking about? that's just the way it is. the 25th anniversary is coming you. it's a special occasion. the gift will have to signify that i understand it's a special occasion. and i will spend considerably more i assume you if i was stilling living as before. that's just the way life is. that's not a wasteful thing to worry about. many of our other spendg patterns follow those sam basic

behavioral forces and do lead to steful spends patterns. you want a special occasion for your child's coming of age. how much do you spend? depends on the frame of reference. one ceo spend $10 million on the coming of age party. that sms like a lot. is he a bad perso i don't know. he's not a bad person to wanting to have staged the special occasion. th fact this e did, though, spilled over ton to other people. people just below have to -- i don't see somebody snding 10 million and say i have to spend more. he's out of my league. but there are people just below his league where we went to that party, we better spend more or we'll seem like, and it cascades down one step at the time. i was going to my office. i saw a clown get out of the car

and go into one the nyu faculty apartments. i realized that professors ten year old have their birthday party. if there's not an entertainer, it wasn't an occasion. in every domain we see cascades like this. i'll mention the victoria secret category has a bejeweled bra that they offer. in the recent year there was a nice picture of giselle odding that year's bra for $12.5 million. sapphires and diamonds all over. i talked the marketing director and learned in the ten years, they'veever sold any of the bras. they sit there. there's aig photohoot when they unvl.

and people see them in the catalog, of course they reharvest and recycle them. people see and say, that's the chumps buying that one. i'm going to buy the value $350 for my girlfriend. so it shifts the frame of mind. they've been spending the money at the top. the mon has been going toward the usual cool things that everyb wants to have. that generates a cascade that people are spending more now. the media new house in the u.s., 350% larger than it was in 1970. not because the median earner earns more, the real income is kept pace with the level then. it's because others are spending more. why? because of this frame of reference shift one step at a time. this is wasteful.

it's not that -- it's purely wasteful. the big houses are nice. the gas grills are nice. the bejewels bras are all nice things. there are other things to spend moneon. li the program, like fixing, we have to ask ourselfre we spending our money in the ways that best serve our purposes? it's not very good deal for a rich pson to get a tax cut financed by money borrowed from the chinese a then build a bigger mansion and discover that everyone else also has a tax cut and built a bigger mansion. now the bar has been raised. where's the gain? there's no gain in happiness from that. in fact, if we can measure accurately, the prediction is the people with the larger mansion would be less happy. why, because it's a lot more trouble toeep track o the staff that you nee to rruit

and maintain the bigger mansion. so this is money that could be diverted from those spending patterns to pay for other things that would really make a difference in realeople's lives. that's the claim. it sounds like name oil. money from nothing. it's just based on the obvious vision that i attribute to reward in many situations on relative performance, not absolute performance. and when northeasterly situations like that, arm's race that generateaste are the norm. and they are very simple policies for short circuiting races and freeing u resources. i will mention very quickly in conclusion a simple policy step that we might take. right now we have a progressive income tax. my proposal is to scrap and adopt in its place a much more

steeply progressive consumption tax. th's not a good marketing game. let's call it an unlimited savings tax. you would report your income to the irs, the same as you do now. then you report how much you saved the way you documt your 401k. the difference between those two numbers, the income minus your savings is how much you spent this year. let's tax that number minus the big standard deductions and then let the rate go up and up and up the more you spend. think about how that would affect the decision of a wealthy family who currently spends $5 million a year and faces just, for example, aarginal tax rate on consumption of 100%, that just means if they want to spend $1 it has to spend and pay $1 of tax. so it wants to put a $2 million

edition. with that tax the addition would cost $4 million. wow, that's a big hit. let's scale back and build an addition only half a large. then we'll pay the tax, it will be $2 million. the same that we would have spent. we won't get as big becau everyone elsewre scaleback too because they will save more and consume less awe do. and theovernment gets more savings and investment. the economy grows faster. there's real besources created out of thinir. there are many other harmful activities, pollution, noise, transactions in the financial markets that are just an endless list of activities. getting on a con justed highway. there's an endless list of

activities that people engage in that cause harm. taxes those activities make the economic tie bigger, and when you do that it's always possible for evybody to get a larger slice than before. again,y prediction 100 years from now we' think back and idtify crles darwin a the father of modern economics. i think by that time people will realize that there's no presumption that it means generally r the best results. sometime it does. often when it doesn't there are simple and policy measures we can adopt that will bring us closer in line in what our real possibilities are. imals can't do that. we can do that. what a shame it woulbe. again, i know in san francisco you have a full menu of other things. thanks for takin time out to hear me speak. i know we have time for questions. i see a lot of them here on the

desk. [applause] >> thanks. the author of the newook, the economic nationalist field guide." it's about time for our audience to ask questions. i'm anxious to get started. i thi a lot when i get ready to do this about the proper way to frame the discussion period with our speakers. so for tonight's q and a, for example, i thought it would be appropriate to covers many points as we can so we can all gain a very good understanding of what professor, you are teachings about acquiring a greater undstanding of psychological and sociological factors that affect how we can make the best decisions. let'segin.

you sort of ended your prepared remarks in a sse on tax policy. i have several questions on tax. si. and several of them agent the question about taxes our ss, tobacco, alcohol, and maybe the jeweled bras as well as well. >> yes, there's a separate case u can make for taxing activities that people engage in even though they know they are bad for them. these are not conflict between indidual and group activities. smoking, for exale, there are very clear data now that there are hardly any smokers who are grad they smoke. almost every smoker wishes he didn't smoke. the logic of a tax on smoking is that your ss likely to start smoking if the tax is heavy on smokin because most smokers start when they are teenagers, and if you think aut the

limited disposal income of a teenager, adding $2 to the price really mes it a much bigger hurdleor a teenager to smart smoking. i think you can think about those taxes as being taxes on harm not that cause to orrs, but to otherwises. and often times we cause harm to otherwise simply because we lack the self-discipline to avoid the sweeter fat food, the express drink, and so on. by taxes those things we can in the popular phrase, nudge peopl closer to the spot they want to be occupying. >> professor frank, let me ask another question and follow up on the tax question issue. this is short of a two-part question. number one and you may not think initially then it applies, but you'll see it ds. do we have too many hedge fund

managers? and the second part is why does the internal revenue service treat the 20% fee we all know about charged by many hedge fund managers as a capital gains tax which is taxed at 15% and not as an ordinary income tax as 35%? is this just another example o greed and the power of lobbiest in representing some ecial interests? >> the fst question are there too many hge fund managers? answer, yes. there are several reasonsor that. one is that it's kind of like a tragedy of the commons problem. there are too many votes that go out bause no individual fisherman takes account of the fact that fish he catches, many of them would have been caught by the boats that were out there. theyre like fisherman. they are prospecting for deals. there are only so many deals out there. when you get an extra hedge fund, i'm using he because most

of them are hes. many of the deals would have been done by the managers that are out there. so you have -- just as you see too man fisherman launch boats, you see too many peopl proscting for these deals, real estate agent, private equity firms. no office to the people who are in that industry. you are not violati any law. it's perfectly rational. it's just a conflict between individual logic and group logic. we don't have an interest. the 20% fee they get which they call cared interest and have managed to get the tax authorities to tax at the capitol gains at 15% rather than ordina income rate the 14%, that's a peer boondoggle. that's the look and feel of ordinary ince, i think it is. it aught to be taxed at the same

rate of ordinary incom >> which is 35%. >> it's going to 39% as soon as the bush tax cuts expire at the end of 2010. >> okay. here's another two-part question. how come people operate contrary to their spending capacity leading to large amount of debts? is this american? and the second part, what is the most common misconception tha people have when to spend versus when to save? >> it was quite easy t take on more debt because of the chang in the financial industry under ich the people who once loan you money a held on to your loans had a real interest in making sure that you are going to pay the loan back. that gradually gaveay to a differentet when banks would initiate loans, and then bundle them into a mortgage-backed security and sel it to someone else. th if someone defaulted, that

was their problem. they got their commission, the transaction was over as far as they were concerned. that's a recipe for people trying to generateees for themselves by loaning money to anybody wh will borrow it. and so you saw people earning $35,000 getting loans to buy $750,000 condominiums, no questions asked. liars loans they were called. financial regulation is the onl y to prohibit that. i think we're on a path to implementi some regulations that will make things more like it was when i bought m first house. i had to have 25% done, there was no interest only or a.r.m.s. you have to have equity in the house. that was powerful incentive. >> the list of california radio program and our speaker tod is economist and robert frank. he's discussing how we all can make the bes economic choices

in troubled times. >> you have a second short, i'm sorry to that question. what's the mter of people choosing between saving and consumer? think suppose you are seby who'snly goal in life to nsume as much as you c. that's probably not an interestg life goal to hold. but if that were your goal, the way to go about it would be to save a much of your incomes you possibility can at every moment. if you are not saving 20% your consumption over the course will be smaller than it would be if you can boost your savings rate. why? because if you save then you experience the miracle of compound interest. you get interest on the interest on the interest. and it's truly a miracle how fast your balance grows when you keep adding to it and leave the interest in the. that interest is part of your income and so if you consume0%

of your income rather than 100% of it, it's true your consumption will b smaller at first. as your account grows anteinterest -- and the interest on it gws, the income you wl consume out of includes the interest on your account. and so the 80% of that new higher income is going to be much larger than 100% of the spent thriftsower income figure. don't ever borrow money to buy something that you can possibility save and pay for in cash. maybe your first house, that's the time to borrow money. your first new car, well, don't buy a new car. buy used. >> thanks for picking up on that send pt of the question. you know, when i read your book had the same question that was just handed to me about your tax policy on aggressive consumption. and this is the way the audience person submitted the question. i understand where you are

coming from in suggestin a aggressive consumption rather than a progressive tax. given the downturn of the economy, wouldn't this have the adverse of effect of deterring spends at a tame when you mentioned we uld b spending to stimulate. >> that's a great question. and the premise of the question is correct. we do not want a tax consumption right now. absolutely not. as i said at the outside, it is to get people to spend more not less. the nice thing about a progressive consumption tax. if it were adopted now under the provision that it would be phased in gradually only after the economy reached 5% unemplment again, it would kill two @irds with one stone. people would see a csumption tax on the horizon. and those who could would thing i better build the wing to avoid the consumption tax.

you get an immediate jolt of spending which is exactly what we need right now. then once it beginning to phase in you start shifting the future stream of expenditures away from consption, not all at once, away and the capital market allocates those extra dollars to the best inventment projects that people bring application for. and investment grows, capital stock grows in the country. and theountry is productive capacity grows over time as a result of that. so you would get exactly the right mixf incentive both short run and longeron. people ask me is this a pie in the sky vision of consumption tax like this? no, i wrote about this tax in 1997. and i got a very friendly letter from the late milton freedman,

saying he didn't see the government needed more revenue. it it did, this would be the way to raise it. he st me a reprint of h own article where he had recmended as the best way to pay for the wa time. it's a tax that liberals can favor, conservatives can favor, it's a tax we ought to be talking about. it's not really unrealistic pie in the sky thing. >> didn't dr. freedman also talk about the negative income tax? how does that differ? >> he did. i wrote a column. e tights i submitted w milton freedman, really a bleeding heart. d the times of course changed the title. the nice thing was that i got to put the titles i wanted on each

one. so yes, he proposed a negative income tax. if you don't earn any money, the government pays you better than you pay the government. and the more money earned, we take it back and form taxes. and so, yes, it was the precursor to the current tax credit which is theost wisely copy welfare program the u.s. has ever come up with. countries around the world have begin adopting this. it's a way to make it more attracve to employers to hire workers. that's one effect of it. and it also gets people higher income than they would have earned just fromheir wages alone. it's really a greatolicy. and milton was the original designer of it. >> milton freedman, i can't tell you how many times he's spoken at the commonwealth clu one of the greatest thrills in moderating was doing a program. one time he had his wife who

also was a phd in economics. they were really interesting programs. he was quite a guy. i want to shift grs bor a minute and talk about some individuals, actually that you ta about in your book under a chart known as, you refer t rather trailazers. before i get to that, i want to talk about some people currently that have a role and have d a role in o current economic crisis. can you compare the economic rescue methods of our last treasury secretary hank paulson and our current one tim geithner. are they really in a ssehe same person? >> you know, hank paulson was the former ceo of goldman sachs. tim geithner was i think was offered high positions at goldman sachs. he was also at post relationships with goldman sachs.

the people who have been critical of both men has been critical on the grounds that theirolicies have be if anything too friendly to the investment banking community. there's a coherent set of questions that have been raised about that. i don't know that i see a huge broad policy. they are both have ten the aggressi effect so that if w don't bail out the large institutions that will have a broad negative effects on th economy as a whole. and so i think they've been quite aggressive in trying to keep those institutions from having to go under for that reason. >> a professor frank, you talked about ben bernanke as well. you know, the fed chairman quite well, coauthored a book entitled "principals of economic" he's

under a lot of fire right now. his term expires in january 2010. do you think he will be reappointmented or more important think, does he think? >> i don't ever call him -- i imagine he's sleeping many few hours a night than i am. he has a very full plate. i wouldn't call him and ask him any question like that. i think there's some events to play out between now and 2010. but his term expires. we don't know how the economy willnfold between now and then. i think if things turn up sharply between now and then, it would be very hard not to. i think he's done a very aggressive job trying to lean against this negative wind that's been blowing. i think there's almost no one i know of who could have been nearly as effective in generati monitor stimulus for

th system as he has been. he's done some very sort of path breaking innovative things to get new money supply into the credit stream. and so i think his broad expertise as a scholar and his deep concern about the huge human cost of appointment make him rlly the ideal candidate to have en appointmented to that job. i don't know how the events will play out i think there's a good chance if things get better he'll stay on. >> we really don't have enough time to go through a lot of these people. there are some incredible economist. let me just ask a question or two, milton freedman characterized john's work as not so much economics as it is socioly. was he correct? >> i think if he had gone to the

berkeley inhe last ten years, he would he couched his arguments differently. if you look at the points he argued for, he was a phd from the 30s,hey didn't have gain theory in the curriculu then. there was none of this sophisticated smart for one dumb for all lines of thinking available to people who were in the curriculum then. t he identified what were actually theroblems tt have proved to be the ones that have plowed the -- plagued the economy. the that idea that private sector, fanciest goods, bigger goods, that don't seem to yield any lasting inime while at the same time we neglect to the shocking degree. that diagnosis has proved as a portrait of what was going to end up being america's b