377. The $1.5 Trillion Question-How to fix student loan debt?

As the cost of college skyrocketed, it created a debt burden that’s putting a drag on the economy. One possible solution: shifting the risk of debt away from students and onto investors looking for a cut of the graduates’ earning power.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 0:38Stephen J. Dubner?

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• 1:10Stephen J. Dubner?

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• 2:00Stephen J. Dubner?

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• 2:39Stephen J. Dubner?

  Hey there, podcast listeners. We're working on an episode about the economics of household innovation. That is, when people invent things for their own use without the explicit goal of commercialization. Are you that person who tinkers in their workshop? Or maybe you've hacked together some software for your own specific needs? If you've ever invented anything worth telling us about, well, we'd like you to tell us about it. We'd like to hear about the invention itself, your motivation, also how much time and money you put into it. Make a brief audio recording, just use whatever voice memo app is on your phone, and email the file to us at [email protected] with the subject line "Invention." Please be sure to tell us your name, what you do, and where you're from. Thanks.

• 3:24Stephen J. Dubner?

  Also, if you'd like to see Freakonomics Radio live, tickets are on sale now for upcoming shows in Los Angeles and Philadelphia. Tickets and info at Freakonomics.com/live. Hope to see you there.

• 3:48Stephen J. Dubner?

  You recently called higher education a racket. You're selling a product that everyone is convinced is essential. It's got uncertain ROI, quality that's difficult to measure, and you can raise prices without losing customers. That doesn't sound like something we're used to hearing from a college president.

• 4:07Speaker 01

  I was being a little facetious, of course, but I was making the point that, at least until recently, higher ed has been in a very fortunate place where nothing much could go wrong. People did feel they had to have what it was selling and that they could charge almost anything they felt like. People had no way to know if they were getting a good deal or not, whether the quality was up to the price. And that's changing now and should.

• 4:36Stephen J. Dubner?

  It's changing in part because of this man.

• 4:39Speaker 01

  I'm Mitch Daniels. I'm currently the president of Purdue University.

• 4:43Stephen J. Dubner?

  Purdue is a large, well-regarded state university, established in 1869 in West Lafayette, Indiana. There are more than 32,000 undergraduates and nearly 10,000 grad students. It's best known for its business and engineering programs. It's produced more astronauts than any other non-military institution. Mitch Daniels spent most of his career not in academia, but rather in business. He worked for the pharmaceutical firm Eli Lilly and primarily in politics. He worked in two White Houses.

• 5:13Speaker 02

  A former adviser to President Reagan and George W. Bush's director of the Office of Management and Budget.

• 5:20Stephen J. Dubner?

  He became a popular two-term governor.

• 5:23Speaker 02

  He was elected governor of Indiana in 2004 and turned around a struggling economy.

• 5:29Speaker 01

  The state was broken when we got here and we fixed that in a great big way.

• 5:34Stephen J. Dubner?

  Daniels was such an economic pragmatist.

• 5:37Speaker 03

  An area Indiana has fared better than most states is by reining in the state budget.

• 5:42Stephen J. Dubner?

  That some people thought he might make it to the White House.

• 5:46Speaker 04

  Now, the latest on the 2012 race and another potential candidate for president, Indiana Governor Mitch Daniels.

• 5:51Stephen J. Dubner?

  But instead of that presidency, he's six years into this one at Purdue. And he's threatening to blow up the economic orthodoxies of college education.

• 6:02Speaker 01

  The all-in cost of attending our school in 2021 will be less than it was in 2012.

• 6:10Stephen J. Dubner?

  Not everyone loves his cost-cutting.

• 6:13Speaker 02

  Callers and cheers erupted when several staff and faculty members voiced their concerns about changes to Purdue's paid time off policy.

• 6:21Speaker 05

  It's sometimes depressing to work out because it feels like it is bad thing after bad thing after cut after cut.

• 6:27Stephen J. Dubner?

  But Mitch Daniels believes he knows what college should be and what it shouldn't be. Water features and climbing walls and concierge services. Today on Freakonomics Radio, there's a college tuition debt crisis in America, and it's even worse than you think. So what's being done to fix it?

• 6:58Speaker 06

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 7:18Stephen J. Dubner?

  If you look at higher education as an industry, which you should, because essentially it is, then you'd have to acknowledge that this industry has been booming. Between 2000 and 2010, undergraduate enrollment at US colleges increased by 37%. As demand rose, so did the price. From 2000 to 2016, the average annual cost of college more than doubled, from around $15,000 a year to nearly $32,000. Over the past 20 years, only two other goods or services have risen as much as college. One is hospital services. The other is college

• 7:58Stephen J. Dubner?

  textbooks. Since 1985, college costs have risen four times faster than the Consumer Price Index. Why? There are a number of reasons. One has to do with what economists call Baumler's Cost Disease. That's what happens when salaries rise, in this case, the salaries of college administrators and faculty and staff, without a commensurate rise in productivity. You also see this in the performing arts and in hospital services, by the way. Even though there's a lot of technology in hospitals and in colleges, they still require a lot of real people spending a lot of real hours to get the work done.

• 8:40Stephen J. Dubner?

  It's not like manufacturing, where automation creates efficiencies. It's not like software, where the millionth copy costs way less to make than the first one did. Another reason the price of college has risen so much? Because college has become even more valuable. People with a college education have always earned more than those without. But if you look at the data from 1970, then from 2000, and then from 2015, the earnings gap between workers with and without a college degree has become an earnings chasm. And so, as Mitch Daniels said,

• 9:19Speaker 01

  People did feel they had to have what it was selling and they could charge almost anything they felt like.

• 9:25Stephen J. Dubner?

  Did the quality of the product rise along with the price?

• 9:28Speaker 01

  The absence of any real, objective way to measure what students are learning. Are they growing intellectually? In fact, we have some evidence that says they're not growing very much. But in the absence of any proof of quality, people have come to associate sticker price with quality. If it costs more, it must be better.

• 9:51Stephen J. Dubner?

  It also helped that the federal government and others were more than happy to lend money for college.

• 9:56Speaker 01

  We know empirically, it's no longer somebody's theory, that flooding the marketplace with third-party subsidies, grants and loans and so forth, enabled higher ed to keep raising its prices. The New York Fed is the most recent of many to identify this phenomenon. And basically, they find that for every dollar of new public subsidy, colleges have raised their price between 60 and 70 cents.

• 10:23Stephen J. Dubner?

  So as demand for college was rising, and costs were rising, and loans were rising, you know what else has been rising, don't you? Student debt. It is hard to overstate the magnitude and the severity of the college debt load in the US. Roughly 45 million people have student loan debt totaling $1.5 trillion. Of those who graduate from a public four-year university, nearly 60% have debt, with an average of more than $27,000. And those are the graduates. Roughly 40% of students at those schools don't graduate within six years.

• 11:02Speaker 01

  And student debt, it doesn't matter whether the student gets a job, gets a good job, succeeds or doesn't. The bill is there and it's going to compound. The interest is going to grow over time. There's no getting out of it even in bankruptcy. And you can see that the consequences in individual lives, now you can see the big consequences for us all, because young people are postponing buying houses, are postponing forming families, postponing having children, they're starting fewer businesses than they used to. Bad deal all around.

• 11:34Stephen J. Dubner?

  There's a lot of data to back up what Daniels is claiming here, that tuition debt is a huge drag on the economy overall. The Federal Reserve Chairman Jerome Powell told the Senate Banking Committee last year that student loan debt, quote, "absolutely could hold back growth." Some politicians are proposing a fairly radical solution. Elizabeth Warren, for instance, the Democratic Senator from Massachusetts who's running for president.

• 12:00Speaker 07

  That's why I'm calling for universal free college and the cancellation of student loan debt of up to $50,000 for 42 million Americans.

• 12:12Stephen J. Dubner?

  Should college be universally free? Some countries do provide that. Should all college debt be forgiven? Warren's plan calls for taxing the ultra wealthy to come up with the money, but let's assume that near term at least, college won't become universally free and college debt won't be universally forgiven. In the meantime, what can or should be done to make college more affordable?

• 12:41Speaker 01

  There have been 36 consecutive years of increases here, as at virtually every other school, and some of those were not small.

• 12:48Stephen J. Dubner?

  Mitch Daniels became president of Purdue in 2013. One of the first things he proposed was a tuition freeze.

• 12:55Speaker 01

  At the outset, all I imagined we might do is take a one-year timeout.

• 12:59Stephen J. Dubner?

  How was that suggestion received? Daniels's previous job, remember, was Governor of Indiana.

• 13:06Speaker 01

  I remember saying, I think probably too sarcastically to folks here, you know, I just landed here on Mars. But back on Earth, they're becoming really concerned about the high price of what we're doing here. And when I suggested maybe just a one-year pause, there were those among the enrollment professionals here who very genuinely said, oh, my gosh, if we stand still while everyone else goes up again, people will think we don't have confidence in the quality of our product.

• 13:35Speaker 01

  And I said, I just don't think that's how the earthlings are looking at all this. So we did it.

• 13:41Stephen J. Dubner?

  And they did it beyond that one year. Tuition at Purdue has been frozen at least through the 2021 school year. The cost of room and board was also cut by 5%.

• 13:53Speaker 01

  And so the all in cost in nominal dollars of attending our school in 2021 will be less than it was in 2012. And that's not the economic model that most schools have pursued, but it's been working out well for us and we'll continue operating on that philosophy the best we can.

• 14:14Stephen J. Dubner?

  How has Purdue managed to cut its price? Not by drawing down a lot more government money.

• 14:20Speaker 01

  Our support from the state has been more or less flat.

• 14:23Stephen J. Dubner?

  No, the Daniels solution lay primarily in cost cutting, the same kind of cost cutting he practiced as governor of Indiana.

• 14:34Stephen J. Dubner?

  On his first day as governor in 2005, Daniels established an Office of Management and Budget, or OMB, the same agency he'd run for the federal government. Indiana at the time had an $800 million budget deficit. Daniels preached efficiency and reform at every turn. He cut the state workforce and consolidated agencies. He created public-private partnerships to run highways and prisons. He repealed collective bargaining, decertified the public employee unions, and made Indiana a right-to-work state. In other words, textbook fiscal conservative moves. On balance, Daniels was incredibly popular.

• 15:16Stephen J. Dubner?

  He even won awards for his wildlife conservation efforts, and John Kasich called him the Michael Jordan of governors. Now he's being called by The Wall Street Journal, "America's Most Innovative University President" for making similar moves at Purdue. He's trimmed the budget of some big capital projects and killed off other projects entirely. He privatized the university's bus service. He replaced cafeteria employees with student workers. He sent out furniture for repair rather than buying new furniture. Some Purdue faculty and staff have complained about the cost cutting. They say their compensation and benefits are being curtailed. They say departments increasingly compete against one another for resources.

• 16:00Stephen J. Dubner?

  They say Daniels's pursuit of corporate partnerships, like a textbook deal with Amazon, is not good for the university. Also controversial was Purdue's recent acquisition of the online for-profit Kaplan University, now called Purdue University Global, which delivered 30,000 new paying customers. Some Purdue professors worried this would tarnish their brand and spread the university too thin. Mitch Daniels argues that his combination of cost cutting and a growth mindset is working out just fine.

• 16:33Speaker 01

  We have grown our faculty actually faster than the student body. And we have one of the best ratios in America of faculty to students.

• 16:44Stephen J. Dubner?

  What about median wage of faculty, though, along with that growth?

• 16:46Speaker 01

  Yeah, they're very competitive. In fact, across the spectrum of professors, assistant, associate, and full, 7, 9, and 13% above the nearest Big Ten school. And we have not shifted to less expensive or contingent or temporary faculty. We have the highest percentage of our faculty who are so-called tenure-track among American research universities.

• 17:12Stephen J. Dubner?

  Your own compensation at Purdue includes performance goals. And last year, you hit all the goals, so congratulations, and therefore received a bonus of, I'm reading, $210,000 on top of a base salary of $430,000, for a total of about $640,000, which is a nice salary, hardly extravagant by college president standards, we should say. Meanwhile, the head football coach at Purdue earned around $3.8 million last year, and his team won only six games against seven losses. So to me, it sounds like you had a better year than the football coach did, to say nothing of the fact that he's only running the football team and you run the entire university. How do you feel about that construct?

• 17:53Speaker 01

  I'm fine. I'm remembering when they asked Babe Ruth, didn't he think it was scandalous? He was paid two or three times the President of the United States. They said, "Well, I had a better year." No, it's the world we're in. You know, life's been kind. My family's provided for. I didn't come here for the money. Without putting a fine point on it, if money were my object, I had other options.

• 18:17Stephen J. Dubner?

  Under Daniels, Purdue's alumni donations, student retention rates, and graduation rates are all way up. And so are applications. They've risen from 31,000 a year to 53,000 during his tenure. Interestingly, this has happened during a recent decline in college enrollment in the US. Earlier, I told you that college enrollment rose 37% between 2000 and 2010, but from 2010 to 2016, it's down 7%. How should this decline be interpreted? You might say that we simply hit peak college a few years ago. The boom came up against its ceiling.

• 19:01Stephen J. Dubner?

  Or you might say the price of college has simply become prohibitive for too many people, or that would-be students and their parents are scared off by the horror stories about lifelong college debt. But you should also consider this fact: college enrollment tends to be correlated with the employment rate. When there are a lot of jobs available, some people skip college to take those jobs. And the employment scenario has improved in recent years, so that could also help explain the overall drop in demand for college. This drop in demand is already affecting the supply side. College closures, while still rare, have been rising.

• 19:43Stephen J. Dubner?

  Some larger university systems, like the University of Wisconsin, are consolidating their campuses. For-profit colleges are particularly prone to suffer from less demand, and their numbers have decreased over the past several years. But a prestigious private college or a big public research university like Purdue, they are still seeing historically high demand. Some students and their parents are so eager to get into college that they'll pay bribes in the hundreds of thousands of dollars and pretend they play water polo. So what does all this mean for the future of college tuition and for long-term debt? More and more elite schools with huge endowments are offering free tuition

• 20:27Stephen J. Dubner?

  for anyone whose family can't afford it. But that covers a relatively tiny portion of the college population. So, yes, Purdue makes news by freezing its tuition for several years, but it still charges Indiana residents around $20,000 a year for tuition plus room and board. Non-residents pay nearly $39,000 and international students pay over $41,000. And so, coming up after the break, Mitch Daniels and Purdue are trying something much more radical than a tuition freeze.

• 20:59Speaker 01

  So, an income share agreement, I first saw it in an essay by Milton Friedman from 50, 60 years ago.

• 21:05Stephen J. Dubner?

  Purdue isn't the only school trying an income share agreement.

• 21:09Speaker 08

  Once they find a job that is paying them a nice salary, it is 17% of your income for three and a half years.

• 21:17Stephen J. Dubner?

  Also, lessons from the Australian version. That's coming up right after this.

• 21:32Stephen J. Dubner?

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• 22:17Stephen J. Dubner?

  Just head to granola.ai/freakonomics. That's granola.ai/freakonomics to get your time back. Try it for free at granola.ai/freakonomics.

• 22:35Stephen J. Dubner?

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• 23:16Stephen J. Dubner?

  happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example? Well, PNC Bank did since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely not YOLO type. PNC Bank. Brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 23:59Stephen J. Dubner?

  Mitch Daniels grew up mostly in Indianapolis. He studied public policy and law at Princeton and Georgetown, respectively, and went on to work in the federal government under Presidents Reagan and Bush the younger. He was also a pharmaceutical executive and was CEO of the Hudson Institute, a conservative think tank. Since 2013, Daniels has been the president of Purdue University, where he froze the price of tuition and cut the cost of room and board. That alone is enough to make him an outlier in the college pricing market, but there's more.

• 24:35Stephen J. Dubner?

  One program at Purdue that you've instituted that I'm really interested in, I think everybody would be interested in, is what's called Baca Boiler, the Purdue Boiler Makers is the mascot. It's an income share agreement in which, if I understand correctly, students can defer, some or all, I'm not sure, tuition payment in favor of repaying Purdue a share of their later income.

• 24:57Speaker 01

  You have the essence right. It's not a deferral of tuition, and Purdue gets paid, but instead of the check coming from the federal government in a loan, it comes from an investment fund. We participated, but so did other foundations and now some private investors. And think of it as equity, not debt. So the student doesn't borrow the money. The risk shifts from the student to the investor. If things don't work out well, it's the investor or the investment fund that's on the hook. Quite the opposite of student debt. So an income share agreement, I first saw it in an essay by Milton Friedman from 50, 60 years ago.

• 25:40Speaker 01

  It's not a complete replacement, but it's a better option, certainly than the private loans that many students have to take on. There's a lid on how much of the heavily federally subsidized loans a student can take, and when they need more, they sometimes wind up with these pretty expensive debt instruments. So, you know, I talk about this as, you know, working your way through college after college. And if it doesn't work out, again, you're not on the hook. Just so the audience will understand, a typical one, and it would vary with what the student studied, but a chemical engineer from Purdue University would pay about 2.5% of income for maybe six or seven years. Somebody who studied...

• 26:26Speaker 01

  Let's say psychology, it might be four or five percent of income, whatever that income is.

• 26:32Stephen J. Dubner?

  And just to be clear, that's because a psychologist is making a lot less than a chemical engineer, correct?

• 26:36Speaker 01

  Likely to make less.

• 26:37Stephen J. Dubner?

  Now, let me ask you this from the investor's perspective. Let's say I'm invested in the fund that is funding this back-up boiler program. To what degree can I handpick the students that I'm investing in? Can I buy a tranche of just the chemical engineering students? Or do I have to have the psychology and history students in there too?

• 26:53Speaker 01

  You can't cherry pick the way we're doing it. You know, if this thing becomes a broad national movement, there could be all kinds of ways others might approach it. We're in our third year now, getting close to a thousand students total and beginning to accumulate some experience. But from the beginning, almost every discipline we teach here, all the way across the liberal arts, the health sciences, as well as our biggest fields, which are engineering and computer science and the so-called STEM disciplines. Still early days, but the repayment history is very good for all of them. And, you know, we have consumer protections. Some of our graduates are going to hit the jackpot early. They're going to do so well, it happens every year, they're going to get promoted two or three times.

• 27:35Speaker 01

  There's a top cap beyond which you're not required to.

• 27:39Stephen J. Dubner?

  It's two and a half times the initial outline, is that right?

• 27:42Speaker 01

  Two and a half times what was invested. You know, sometimes people who either haven't understood or don't want to understand this concept have thrown around terms like indentured servitude, which makes me laugh because it's the opposite of that. I mean, if you want indentured servitude, go get a government loan. You can't escape it. In this case, what you can see is an affordable percentage, low percentage of whatever your income is. And that's it. You know, the real thing that we hope to happen here is that this movement will spread and a lot of other schools start to get interested in it because they see it'd be better for their students.

• 28:21Stephen J. Dubner?

  There are indeed a lot of other schools, and startups, by the way, looking into income share agreements, or ISAs, as a way to rewrite the college tuition equation.

• 28:32Speaker 08

  One of the beauties of an ISA is that you're aligning interests with a student.

• 28:36Stephen J. Dubner?

  Christine Brettemeyer is head of admissions and enrollment at the Holberton School. That's a for-profit software engineering college that opened in 2016 in San Francisco. It's now got a few other campuses.

• 28:48Speaker 08

  The school is free until and only if the students find a job that's over 40K. And once they do find a job that is paying them a nice salary, typically our students are earning over 100K as their first full-time software engineering position. It is 17% of your income for three and a half years.

• 29:06Stephen J. Dubner?

  How does Holberton cover the costs of running a school if they're not taking in tuition? Partly through private investors, like any startup, but also through $2 million in investments drawn from Edly, an online marketplace for income share agreements.

• 29:22Speaker 08

  So I think the easiest way to think about Edly is it's kind of like the NASDAQ, although you're not investing in companies or corporations, you're investing in human potential. Investors only see a return on their money when a student is successful, and same goes for us. So everyone is playing the same game. We want our students to actually find successful jobs.

• 29:40Stephen J. Dubner?

  Holberton's founders were also interested in diversifying the tech world. In that regard, offering free tuition is useful.

• 29:48Speaker 08

  So it's giving a lot more people access to quality education. We have over 60% people of color, 30% plus women. We have a lot of college dropouts. We have teachers and artists, a lot of musicians. Over 40% of our students are first-generation, post-secondary students. And 30% of our students, English is not the main language spoken at home.

• 30:12Stephen J. Dubner?

  Holberton says that all of their first 105 graduates are employed and that all of them are paying their Holberton dues as scheduled.

• 30:21Speaker 08

  If our students are not getting jobs, then we don't get paid and we close as a school. And I think colleges, that's what they kind of set out to be originally was to help get students into careers.

• 30:31Stephen J. Dubner?

  Another career building school with free tuition is Lambda, an online learning startup backed by Silicon Valley's Y Combinator, among others. Lambda offers programs in fields like data science and UX design at no charge, with Lambda getting 17% of a graduate's salary for two years, as long as they get a job paying more than $50,000, with payments capped at $30,000. So, yes, there seems to be momentum for the private for-profit model of an income sharing agreement. But what about the traditional nonprofit college model? And what kind of role can or should government play? The Obama administration pushed to

• 31:12Stephen J. Dubner?

  make federal loans cheaper and put an interest rate cap on loan payments. But other countries have gone much, much, much further. Australia, for instance, has for decades offered free tuition, letting graduates pay back the government once they're employed, with the payments collected through the federal tax system. That is a very tidy system, especially if most of the universities are state-run, as they are in Australia. There was, however, one big loophole. What if an Australian graduates from college and then moves abroad to work? Aren't they stealing a free education from everyone else who stays behind and pays back their tuition? Australia only managed to close this loophole in 2016, after more

• 31:57Stephen J. Dubner?

  than 25 years of expatriate Aussies not paying their government. I wondered about a similar loophole when we had Rhode Island Governor Gina Raimondo on our show last year. She had just made community college in Rhode Island tuition-free. That led me to ask her this. What kind of residency requirement is there afterwards? If I get a free community college degree from you and then I move immediately to Massachusetts or California, do I have to pay you back?

• 32:28Speaker 09

  We ask them to make a pledge that they'll stick around for a couple of years. So, yes, the deal is you have to go full time because we want people to graduate. You have to keep up a minimum grade point average. Can't get into trouble. Got to be in academic good standing. And we want you to live in Rhode Island for at least two years after you graduate.

• 32:50Stephen J. Dubner?

  Ramondo may want them to live there so that Rhode Island recaptures the tuition funding through state income taxes, but Rhode Island currently imposes no penalty if a student gets a free tuition and moves away. It's the Australia loophole. In New York State, meanwhile, Governor Andrew Cuomo is not taking any chances. His plan to offer free college to qualifying families requires graduates to stay in New York for at least as many years as they received free tuition. Otherwise, their tuition bill will be converted into a no-interest loan that would have to be repaid. You can see why this sort of plan, free college education with repayment through the tax

• 33:31Stephen J. Dubner?

  system, why it'd be easier at the federal level with the IRS doing the collecting. In fact, a friend of mine is currently trying to design such a system, and he's gathering allies from the education and financial and political communities. So if you are a high-ranking elected official, Democrat or Republican, and you want to hear more from my friend and his allies, drop me an email, [email protected], and I'll hook you up. My friend, like many others who are trying to think creatively about the college tuition debt problem, recognizes that the current system is unsustainable and that it could

• 34:12Stephen J. Dubner?

  be really damaging to our long-term economy and to our society. But a smart solution will require a lot more political will than would seem to be available at the moment, especially at the federal level. I wondered about this as I was speaking with Mitch Daniels because he's a pretty willful person, and he had a successful career in politics. So I was curious to ask him about that, too.

• 34:43Stephen J. Dubner?

  So as I read what you've written over the years and what's been written about you, it seems that the central theme of your political philosophy is fiscal responsibility. Would you essentially agree with that?

• 34:54Speaker 01

  To me, it's a prerequisite for everything else. It's an essential stewardship assignment. No matter what your philosophy of government, we can have and should have good, honest differences about the size and scope, you know, how big the sphere of government should be. But within that, there's two things we had to agree on. One is you ought to pay your bills, not hand them on to your successors and to succeeding generations. And secondly, whatever government is doing, it ought to try to do it well, which is another badly neglected assignment.

• 35:29Stephen J. Dubner?

  Well, let's talk about spending. So we know your position generally. Let me ask you about your term at the OMB under President Bush, because spending in that case increased. You left that job to run for governor of Indiana. When you left, here's what the Democratic spokesman for the House Appropriations Committee said, quote, "By OMB's own estimates, Daniels, you, has presided over an era which has seen a projected $5.6 trillion surplus in 2001, the end of the Clinton era, turned into a $2.2 trillion projected deficit today. In short, Mitch Daniels is the clown that turned our fiscal house upside down." So that would not seem to match at all the fellow known as the blade for his budget-cutting instincts.

• 36:13Stephen J. Dubner?

  How do you respond to that charge that you come in talking about being fiscally conservative and careful and leave with a greater deficit?

• 36:22Speaker 01

  Well, there may be one syllable of that statement that's true, but I couldn't find it. First of all, the projections were there, and the error I made, but so did everybody else, including Alan Greenspan and everybody in Congress, was to imagine that the happy circumstance, I mean, the first year we were there, we paid off some debt. The happy confluence of a reasonably moderate Democratic president and a Republican House produced a better fiscal situation. There was a huge bubble, and the stock market broke, and the federal government was enjoying a gusher of temporary revenues from capital gains and the...

• 37:00Speaker 01

  Income tax based on options and so forth. And those projections were never going to come true. And history is clear on that. So it took a little while for everybody to figure that out. But that was a fictional surplus. Secondly, I never had a single conversation or debate with the House Appropriations Committee or the Congress, frankly, both parties, where they were for less spending than I was, ever. There were some circumstantial changes. There was that little thing called nine 11, followed by the Iraq and Afghanistan conflicts. And that required some spending that everybody agreed on, but wasn't forecast before.

• 37:43Speaker 01

  You know, I went to the National Press Club not too long after that happened. And I talked about, you know, what Harry Truman did when he decided we had to engage in the Korean conflict and what Franklin Roosevelt had suggested doing. Namely, if you have to spend money on national security emergencies, you stop spending money elsewhere. Congress didn't buy it.

• 38:07Stephen J. Dubner?

  Well, let me ask you this. You were in charge of creating a forecast for the cost of a potential war in Iraq. And as I've read, you've put that number in the roughly $60 billion range. The ultimate cost was actually in the $800 billion range, just Iraq.

• 38:24Speaker 01

  I'm glad you brought it up because there's been some misunderstanding and occasionally some very big misrepresentation of that.

• 38:30Stephen J. Dubner?

  I'll let you answer, and I want to get any corrections. But really, the larger question I want to ask is this. It strikes me that a lot of US policy, tax policy, spending policy and so on, is a result of these sort of accidents of history. Wars often, whether preventable or not, I think back to World War II and how that changed for many, many, many, many years, tax policy in the US. It also changed for many, many, many years, continuing to this day, the way our health insurance is set up, connected to employers, which was not the case in most other countries, was not the case here, as I understand it, before World War II. So I guess what I'm asking is, it's a little bit like, you know, the famous Mike Tyson quote, everybody's got a plan until you get punched in the mouth.

• 39:12Stephen J. Dubner?

  And I'm curious to hear your assessment of how your plan stands up in a world where these things do happen and throw all the plans out the window.

• 39:22Speaker 01

  Well, that's a great question. Let's go back to the front end, just to get that taken care of. When the president made the decision to go to Iraq, this wasn't in anybody's budget. So there had to be what's called a supplemental appropriation bill. Congress loves these, by the way, because they generally become an opportunity to serve as the Christmas tree and put other things on there. It was a supplemental appropriation for a specified period of time. The question was, how much will it cost to defeat the Iraqi army and to stay for six months? In the naivete of the planners, the thought was, that's all you'd have to be there. You'd win the war, stabilize the situation, turn it over to somebody, and

• 40:05Speaker 01

  leave. Now, OMB is not war planners. We didn't decide to go to war, and we didn't plan the war. But someone having done that, our job was to produce the best estimate we could to answer that question. It turned out to be pretty darn accurate. In fact, I think it cost a little less than that. If someone had asked, what will it cost to beat the Iraqi army and stay for 10 or 15 years? Well, you'd have gotten a very different answer. I argued during the time at OMB that natural disasters are going to happen. We have history. And now, Congress doesn't fund those. I said, why don't we, every year, fund what looks

• 40:44Speaker 01

  to be an average amount of cost for taking care of floods and hurricanes and the sorts of things that happen. But nobody wanted to do that. It's a lot more fun to wait till it happens. Then you can have a supplemental bill, and you can buy all kinds of other things you wanted to buy and couldn't get in the regular budget.

• 41:07Stephen J. Dubner?

  Colleges and universities in the US are famously liberal, at least in terms of political identification among faculty, let's say. So, one study of more than 7,000 professors from 40 leading US universities found a democratic to republican ratio of 11.5 to 1. In some disciplines, it's less, economics. Is less, law is less, but in others it was much higher in journalism. It's 20 to 1 in history. It's 33 and a half Democratic to 1 Republican. Obviously, you are a Republican. You are a university president. I realize that Purdue and Indiana are generally more conservative than a lot of other parts of the country, but still, I'm curious what you think this says about the state of universities

• 41:51Stephen J. Dubner?

  generally and what can or should be done about it.

• 41:54Speaker 01

  Well, first of all, I'm not a Republican. I'm really, since the middle of 2012, on the day I accepted this job, I said I would forswear any partisan activity out of respect for the place, and I've maintained that. But, you know, those ratios, how did it happen? Well, there's probably always been a leftist tilt in the academy. I can remember a French intellectual, this is 25 years ago now, saying, you know, Marxism is so discredited over there where they've seen it close up. He said, "When we need a Marxist, now we have to import one from an American university." So, there's nothing new about that. I think it's a self-selection process. People probably pick people more like themselves. Meanwhile, I think a lot of folks de-select. They just say, "I wouldn't be comfortable there.

• 42:39Speaker 01

  I'd be isolated or ostracized." So, you do that for two or three generations, you're probably going to get where we've gotten. But I think young people, by and large, they've got pretty good BS detectors, and I think they can, over time, figure out if they're being force-fed or are not offered a range of facts and opinions to consider. But here's the real problem, as a lot of recent books have pointed out, the advance of knowledge, forget politics and ideology for a minute, the advance of knowledge requires the collision of ideas. And that's what's beginning to trouble, I think, even people of more liberal or leftist persuasion, is where you get this complete homogeneity, this dreary conformity.

• 43:26Speaker 01

  And then the free inquiry stops being the driver of new discoveries and ideas.

• 43:32Stephen J. Dubner?

  Well, let me ask you this. In your book, Keeping the Republic: Saving America by Trusting Americans, you wrote the following: "Large majorities of Americans are clueless about their own history and the history of past fallen empires. Encouraged on every side to think of themselves as victims of an unfair system and their country as nothing special, they react to economic adversity not with a bootstraps resolve, but with self-pity and a search for villains." So, let's assume none of us are fans of self-pity or even a search for villains. I'm curious the extent to which you think that a bootstraps resolve is really enough to succeed in the modern American economy, because it strikes me that

• 44:13Stephen J. Dubner?

  the political discontent of voters on the right and left argue against that. In other words, your assessment could read as though, well, people have just kind of gotten lazy, taken too much for granted. But the fact that that situation exists means the solution would not seem to just say to people, "Hey, change what you're doing." In other words, is a political solution of the sort that you propose really possible, given our track record?

• 44:38Speaker 01

  Maybe not. First of all, that book was resolutely optimistic about the character and the readiness for self-government of the American people. I talked about the fact there are a lot of people peddling victimization and self-pity, and you say, "Let's assume nobody is a fan of that." Well, there are fans of that, and there are advocates for that and make careers of it. If you look back at the birth of this country, it was the birth of self-government. But the first requirement of self-government is to be able to govern oneself. That is, if you want to live in a country that is free, where people come together and decide about their common future, it presupposes that people have some

• 45:22Speaker 01

  measure of autonomy and are happy about that and want to live their own lives. I continue to believe that there's still plenty enough of that in the American character that we can come together, as we're going to need to at some point, and address problems like our national debt. And make some mature decisions that place tomorrow ahead of today.

• 45:44Stephen J. Dubner?

  I guess when I hear you say that, I think that there will always be a certain segment of any population that's willing and able to do that. But it seems as though every population is majority ruled by people when left to their nature, their instincts, or the incentives that are presented to them, that absolutely will not engage in long-termism, including, I should say, roughly 534 or 5 people in DC. So I'm curious whether that optimism that you expressed, do you still feel it, having seen the political climate in the last seven or eight years?

• 46:21Speaker 01

  I confess, I'm a little shakier about it today. You know, we've been lucky enough, most of us, to live all our lives under conditions of freedom. But we, I mentioned in the book, I tripped over the fact that on some of the original coinage of the American Republic, there was the Latin phrase, "exit in dubio est." The outcome is still in doubt. At the very beginning, people said, boy, this experiment in governing ourselves is really unproven, and it might not last.

• 46:55Stephen J. Dubner?

  Apparently, you thought medium hard, maybe really hard, about running for president of the United States in 2012, and perhaps again in 2016. And you had quite a bit of support, including in the punditocracy. Of course, it's easy to support people who weren't running yet, that's free. Why didn't you run on either occasion?

• 47:15Speaker 01

  Well, 16 is easy to answer. As I tell people here at Purdue, I held out and got a better job.

• 47:20Stephen J. Dubner?

  And you could still get called president, too.

• 47:22Speaker 01

  Yeah. Sometimes I'll say, look, at this point in life, I'm not taking the demotion. But 2011 was different. I didn't take it seriously for a long time. A stunning array and number of people said they thought it was a good idea. So I did take a little while and think hard about it. But, you know, at the end of the day, my family was, which has five women in it, and when they are unanimous on something, they are a formidable group. They were very uncomfortable with it. They had seen public life, not just at the state, but at the national level. They knew what it was about. They had young families forming, and they just didn't feel that they wanted to spend

• 48:06Speaker 01

  the next several years in that. One of my friends said, you know, you've got a fatal problem in this whole presidential thing. I said, well, probably a lot of them. Which one are you talking about? And he said, you can live without it. And, you know, one almost has to be fully possessed with the idea. As I told people at the time, I don't ever remember, you know, looking in the shaving mirror and seeing a President of the United States staring back. But the other thing, I mean, a father of four daughters has no good answer to the statement, Daddy, please don't.

• 48:48Stephen J. Dubner?

  Let me just ask you finally, the Trump presidency has been unusual on a lot of dimensions. Knowing what I've gleaned about you, I'm guessing that a lot of his policy directives and instincts are in line with what you like. Knowing what I know about you also, however, I'm guessing that a lot of the conduct is not to your liking. So I'm curious whether that reading is accurate, or rather, I should probably just shut up and let you tell me a little bit about what you think of the president and the presidency thus far.

• 49:20Speaker 01

  I'm the one that should shut up about, you've already gotten me to say more about things political than I generally do or wish to. Again, this is a public university, and I have taken very seriously the vow, like I always say, vow of political celibacy that I took years ago. I'll confess to you that it has its pluses, especially in an era as contentious as this one, you know, where folks get so riled up on both sides. It's awfully nice to be neutered. Not too long after 2012, after I said I would come to this job, it was, I think it's fair to say, a disappointment to allies in the party,

• 50:00Speaker 01

  including candidate for governor, Mike Pence, at the time, that I said, I'm not going to go give speeches or make commercials for anybody this fall. But anyway, I got a call from a fellow governor who, it was some kind of a shop talk call, I can't remember exactly, but how would you handle this issue? I got this problem, what would you do about it? We got done, he said, okay, great, thanks. He said, so I'll see you in Tampa next month at the convention. And I said, well, no. And I explained. And I hope the audience won't object the direct quote. There's a little pause, and he said, "You clever bastard."

• 50:41Speaker 01

  And, you know, there have been many times since when I've thought, this is not a bad time to be on the sidelines. You found the cleverest way out, didn't you? Well, let me just say, it worked out well for me and my family.

• 51:05Stephen J. Dubner?

  Coming up next time on Freakonomics Radio.

• 51:07Speaker 10

  I'm Anne Wojcicki, and I am the co-founder and CEO of 23andMe.

• 51:12Stephen J. Dubner?

  23andMe is at the center of a personal genetics revolution. It's revolutionary in more ways than you know. There's this.

• 51:21Speaker 10

  For somebody with a fatal illness, that can be maddening. Like, I just gave you my data. Do something.

• 51:29Stephen J. Dubner?

  But there's also this.

• 51:31Speaker 11

  Let me tell you what it's like to find out you were wrong, just plain wrong, about who you are and where you come from.

• 51:40Stephen J. Dubner?

  That's next time on Freakonomics Radio.

• 51:45Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Harry Huggins. Our staff also includes Alison Kreglo, Greg Rippon, Zach Lepinski, Matt Hickey, and Corinne Wallace. Our theme song is "Mr. Fortune" by The Hitchhikers. All the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or wherever you get your podcasts. The entire archive is available on the Stitcher app or at Freakonomics.com, where we also publish transcripts and show notes. If you want to hear our entire archive ad-free, plus lots of bonus episodes, go to StitcherPremium.com/Freakonomics. We also publish every week on Medium a short text version of our new episode. Go to Medium.com/FreakonomicsRadio. We can also be found

• 52:30Stephen J. Dubner?

  on Twitter, Facebook, and LinkedIn, or via email at [email protected]. Freakonomics Radio also plays on many NPR stations. Please check your local station for details. As always, thank you for listening.

• 52:55Speaker 05

  Stitcher.

• 53:01Stephen J. Dubner?

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• 53:32Stephen J. Dubner?

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• 54:22Speaker 13

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