Question and Answer Session

0:00The typical people you see on the financial news, you know, what they had to say about, you know, they seem to be getting optimistic again. What is it that the mainstream media is missing out on, other than their lack of understanding of the brain as well? Well, actually, yeah, there was a gentleman, he had lunch with years in place, Tells you that, interesting, they just shut the sound off and just watch the picture on CNN. You can tell just from the way they're smiling, the way they're talking by the mouth marker, whether they mark us down or not, and maybe even learn just about as much, you know, from watching that. I, it's been about two, about two, three months since I've watched some of the economists speak about the economic indicators, And they just don't look at it, right, it doesn't change very systematically at all.

0:56And so I usually don't watch because I find it just gets me annoyed, you know, it's like knowing how to repair a car and seeing the garage mechanic put a lousy jug around that. No, but with respect to CNBC and those other, CNBC in particular that I have some familiarity with, clearly they have a wonderful market. I mean it's amazing, of course when you look, I spoke to somebody on TV not long ago who said that, you know, she, nobody believed that she could actually do a whole day long show on just, you know, one sport, you know, the markets, and it used to exist. But obviously, you know, your team has to win with a reasonable rent and average, otherwise the fans won't watch, you know. And so they have a certain stake, you know, in hoping that market will rise.

1:43And so, for that reason, I don't personally learn very much at all from much of those shows and the reason why it's so, other than just being sort of annoyed or at times understanding what conventional view, so I wouldn't trust them either. But I mean, with that said, I actually, while I don't totally disagree with what Sean said about inflation, I do think that not very different from the consensus and certainly not different from, Frank, that the market has said that the economy is, is poised to rebound. It will be a subpar rebound in the sense that it will be like 4% of the rebound from recession, which is actually below average. It usually does about 5-6%. I hope the market, the stock market, will flash. Certainly one of these valuations, I hope we don't see any kind of bull market from here. That's just a hope, not a forecast.

2:41and then just one other point on what Mark here was talking about, war, the other question mark that's overhanging the economy is to what degree will productivity be subject to a drag because of September 11th. You put up a building, you need twice as many guards around it, you need to protect your capital, you need to have duplicative computer systems. and so everything, there's that surcharge that's imposed on the economy and so we're seeing some evidence of it already and that will mean that some of the investment that we're going to see is just, unfortunately, investment that's similar to having a crime wave and having to make new decisions to protect yourself against the criminals.

3:30The hope and the interesting interaction between innovation and need is that possibly we won't need twice as many guards. There are lots of companies that are geared up to try to provide a cheaper way to protect the building. But that's a question mark about going forward. Anyway, I'll shut up for a moment. Well, I think Jean has made the point that we all know that CNBC has become America and probably Western Europe's national sport in the last few years. and quite rightly I concur with the fact that you don't expect the guys trying to sell you something to sell you news that puts you off those purchases. So there is a huge seasonal adjustment bias that needs to be done when you listen to that program. I'd like to ask Mr. Epstein, speaking of experts, very often we read, the public reads, op-eds by various economists, certainly many, as to what ought to be done, or explaining what happened, or various theories, and so forth, but would you agree there needs to be some truth in advertising?

4:43For instance, when you read an op-ed on the IMF, would it be helpful to the reader if they knew how much subsidy that particular author had received from the IMF? Has that ever been discussed in newsrooms as a possibility just to alert the audience, the bias or the vested interest the author has in the institution about which they're running? I wonder if you have something in particular in mind? Well, what I'm thinking actually involves Brzezinski. He was writing a lot about Chechnya during the Bosnian campaign. I found it particularly irritating because at the same time he was collecting very handsome fees as a consultant to Big Oil when they're trying to build this east-west energy corridor.

5:40and I felt very definitely that critical information was being misrepresented to the public and that he writes as a former secretary of state and that confuses the audience, not in his position as a consultant to big oil.

6:10If he isn't specifically being bribed by power, his whole identification is with the men who run the world that can immediately discount it. Even though, of course, I heartily agree with you that all affiliations should be stated, I partially will credit the media because usually they want to find out if somebody writes a letter to the editor, what is your affiliation, who do you work for specifically, but then more subtle consultancies and so on and so on are less well known. But still, I think Brzezinski is a good example of all of them. I mean, there's not, I mean, Paul Krugman writes The Conference Times and he teaches at Princeton, so I don't know what else he gets. But it doesn't really matter. His whole identification is with those people.

6:57And so, you know, more or less make an adjustment, whatever you read to any of these people, without discounting your point,

7:34Journalism is corrupted by the fact that it always wants to put sizzle in the story and overly sizzle. There's an exaggeration of what goes on by grabbing your attention. That's always a problem with journalism. So I would still say my main concern is always understanding that whether this person has really been bribed or not, I think there's a little aphorism about that with CNBC and something about it should carry a Surgeon General's warning which says that smoking what these guys smoke can seriously damage your wealth.

8:21You know, it strikes me about the business press, just how they're sort of swayed by whatever the most recent number is, and you know, once or twice or three times a day, there's some new piece of data that comes out, and then however it's reported, they try to draw some broad conclusions, so you know, jobless things are up, and oh no, we're still in recession, wait, housing starts are up, you know, we're recovering, and this kind of This relentless panel, I mean, it just goes on all the time, and if you look at something like Yahoo Financial page, you can see them sort of piling on top of each other, you know, good news bad news, good news bad news.

9:21to cross-examine them, although Mark Haynes' cynicism and quiet nuances of tone sometimes gives the impression that not everybody is dead from the neck up, but I mean it's a 24-hour rolling commercial for the stock market and you have to take it as it comes. I'm going to pick you up at Jeff's point. I mean, I certainly know the Commerce Department, the Bureau of Economic Analysis, always will stress, if you speak to the statisticians, that these numbers, first of all, are subject to revision. Like the unemployment insurance plan, typically two weeks subject to revision, also can be extremely volatile. and so I don't need not a single economic indicator that doesn't require a little six-clay arithmetic. Unemployment insurance spends conventionally a four-week moving average and then even then you don't know that trend.

10:13But that, unfortunately, has been kind of a collision between the demand of the market. If the market closes down on a Friday, then it's not revised on Monday, that it did close down. And so the market wants a certain amount of assurity about a particular number, a particular estimate, and unfortunately the statistical bureaucracies are just not up to it. And so even though the rules of reason don't make things most valuable, it's most subject to revision and also such results, so it needs to be smoothed out. And that, as Jeff was saying, you read over this particular number and that particular number, and it's meaningless, except other than inputting contents of the reading habit. The revisions aren't they ever headlines, right? Yeah, because they're old news and financial markets work on the premise that somebody somewhere comes up with a forecast, a consensus of those forecasts is put together, and then the market trades off what the discrepancy from the consensus forecast is and then there's a double bluff of seeing whether we've reacted to the discrepancy in the right way,

11:13which gives you a hint of the psychology of the market. So it's meaningless anyway, it's just a marker on the football pitch against which we can measure whether we've carried the ball or not. Is it possible to say, well, look, here are three or four things that you should really look at, and just kind of put everything else aside. Not always, but I mean, right now, for example, I mentioned unemployment insurance, and the fact that the average over the past several weeks has been a little above 400,000, which compares close to 500,000. That's some kind of education the job market right now strengthens. What's called the National Association of Purchasing Management, or whatever they change their name, I forget.

11:58ISM, I think, yes. Institute of Supply Management, I think. That ISM figure actually correlates the recently reported number, and it does have a history of stability. It doesn't usually get revised the way it changed that much, not that volatile. It does correlate with a slight rebound in manufacturing, and I think it's a good indicator right now. Some of the things I would point to are signs that the economy is probably rebounded. I think that one number that is extremely useful to say the work that I do is really about getting a handle on price inflation. It's useful in income issues, etc. And you know, they're punching with this thing for years now, and they're about to do this again in October. You know, is there a better indicator? Is there some better way, reliable way, perhaps not as reliable, but you can still use it as your price inflation?

12:53Well, I don't know what Sean prefers, but I myself feel, I do tend to prefer that inflation is turning up. The consumer price index is a skewed mean wheel and because it's skewed, as with any skewed mean, a median is a better indicator. It's simply just, it's actually a weighted mean and I need a blackboard to explain that, and so on. But it's 41 different price components and all you do is take the midpoint so that all information is relevant. I mean, if energy and food are out, which is about a dollar, then they might pull the midpoint out because you look at the array and you take the middle.

13:45And that median price index has been trending up. I think it's better than what's conventionally called the core index, which is x food and energy. So that's the one I think is most reliable. And it also is indicating that inflation is trending up.

14:26NAPMISM as it's called now in the Philadelphia Fed survey of producers, there are prices paid and prices received and prices expected to be paid and received components which can give you a kind of a qualitative feel for it at least I think. For example, in our company, cost-ex compensation, for example, have been going up on a fixed basis, much higher than their reported numbers, like all the other things. And anybody who spends money to feed a family or go to a bookstore knows that price inflation has been stronger than what has been reported. I'm looking really for a realistic number rather than some government numbers. I see, I see. Well, that's of course a problem. I mean, the government has sort of moved very, you know, preempts what, you know, any private sector initiative.

15:20And it is unfortunately true that the government's fiscal agencies are more trustworthy than the few, you know, cottage industries that can track at different numbers like retail sales and so on, because they've sort of been a little bit too much in bed with the market, so it would have taken on much. We would have required many more years of a tradition whereby private sector could keep these numbers, and unfortunately we don't have it. I personally don't think that the government's discrepancies are corrupt in any obvious way. I mean, there are bureaucracies that do their job and they can make mistakes. I mean, I think it is true that in the 70s, they were subject to pressure to exaggerate, to recognize all the ways in which inflation was being up, and to minimize the ways in which it was less.

16:14And when the Boston Commission came along in 1996 and tried to cut it down a little bit. I'm not sure about your point. I will admit, I'm not sure that you're correct in saying that, I mean, there certainly have been a lot of prices, a lot of things are cheaper. It's kind of interesting the way the media reports the CPI and the PPI. If it's up a great deal, up 0.5 they always say very quickly, but minus food and energy it's only this. And yet if it's up just a little bit, food and energy are down. The last report was up 0.1 and then at the end of the statement they said if you exclude food and energy it goes from negative 0.1 to a positive rate of inflation.

17:09So the media always sort of biases the reporting of that statistic to a lower level of inflation. I would say they're often looking, usually looking for sizzle. What's the media want? The media want sizzle. And there's a sizzle at one way or the other. I don't know, because we, you know, because we struggle, we could trade prices. But, you know, maybe you're right. I've got to look into that more. Maybe they aren't severely understated inflation. Core inflation is that we don't buy the media, we don't live by the media. But I would certainly say that media inflation, core inflation, as measured by the media, that's certainly trending out. So they're really definitely understated. Jean, I've got a serious question about this correlation problem. All right, well, it's no frivolous questions, anyway. It's not only a bit similar to what I was talking about.

17:55We're talking about CPR, which is food and energy. It doesn't represent human beings here. In other words, it doesn't represent people who don't eat, don't drive a car. It's called correlation. I'm sorry. It's a post machine. Well, your point is well taken, Frank, and it's really the reason why, and it just indicates how tone deaf economists are, and how they sort of think in terms of statistics rather than in terms of human action and human realities, to call something the core that doesn't have food and energy in it. Or taxes. Yeah, and of course, I mean, it's that attempt to cause food and energy are extremely volatile. I mean, no, energy is down, but I mean, the core of the person will say, but energy could be up, so it is volatile.

18:43So their idea is that the statistical core is the trend. And as I was arguing with this gentleman, I wouldn't have used the so-called core, misnamed the core. It's really like what they would argue is the trend rate inflation. That's what it mostly looks at, the core. Well, misnamed the core, it should better be called the trend rate inflation, Inflation, if it's going to mean anything, to refer to the statistical issue they're trying to get at, but then even then, because of inflation and because of energy and food are very volatile, but even then, I think that excluding anything from what we have of prices in the CPI is foolish, we should look at the median. And also I was going to add as a footnote, as some of you who follow Mr. Greenspan might know, a while ago, one of his supposedly his favorite indicator was not the CPI of all, but the personal consumption deflator as part of GNP, and that to my mind was just an interesting ruse that he would supposedly prefer this indicator, even though it was lower.

19:41Well, it's always lower, isn't it? I'm sorry? It's always lower, that's why. I think the story of the course CPI is quite interesting because I believe I'm correct in saying that when inflation was running out of control in the Nixon era, he called Arthur Burns in and said, can you fix up an indicator which doesn't look as bad? Yes, as Sean, you mentioned a modest bear market in bonds. I was wondering how high the 30 years I know. Also about the dollar. Is this the year that foreign has started to get up with the dollar? What kind of magnitude is this?

20:43In essence, a zero-sum game for the last six months. They can't both go up together, which does tend to suggest, for a start, that even the extraordinary extra amount of liquidity in the system is not quite doing the work that it was doing when everything was sunny three or four years ago. I would think that we could certainly see 5% in 10-year yields, maybe add another 25, 30, 40 basis points on, say 5.5% for 30-year yields in the basic scenario. Of course, the thing that we have to immediately say here to qualify our own attempts at a foolish prediction is that we all know that financial markets never do anything linearly or smoothly and there's an enormous amount of volume which swills around in these markets every day. There's a quick digression. Derivatives, contracts and futures and all these other forms of hedging used to be an idea by which you took some economic protection or insurance from a real economic quantity changing, usually expressed through a financial claim on that economic quantity

21:40and then you had this derivative contract which gave you some insurance. The market is so distorted with the huge volumes that the pyramid actually works the other way around that you end up with a real economic quantity often hedging the derivative. So the point of this is that making a prediction saying the course scenario 5%, 5.5%, 10 and 30 years modest increase in interest rates is subject to the fact that we could at any point trigger a big self-feeling move within the financial market community Community. So the forecast is self-defeating inherently, so I would have to put that out to everybody as the health warning on it. And the dollar? Well, the dollar is the one that's killed us all for the last four years. It's been like Mark Twain's famously exaggerated death. Every year we look at it, every year the numbers get worse, every year the US manages to find a way to keep foreigners holding onto those dollars and accumulating more.

22:31At some point there will be a revolt, whether of the market or of the geopolitical forces. There are some hints at the moment that the Russians are quietly trying to rebase their economic reserve base, although with 30 billion dollars or so, that's not a huge amount on the world stage. The Chinese are supposed to be buying euros rather than dollars, although we've heard that before. The Europeans have introduced their new notes and coins to give some tangible evidence of fiat currency Two questions. First, I want to get stock market forecast between both of you. But there are of course some economic advantages to that because people think it's money. So again, there may be some subjective valuation change. But as I say, that's the one thing that whatever else we've got right and wrong, every year we always say the dollar goes down and every year they get away with it. It's the great Houdini Act.

23:21I've got two questions. First, I want to get stock market forecast from both of you. Second, whenever mainstream economists seem to be unanimous about anything, or nearly unanimous, they're wrong. And certainly, they are pretty unanimous about Greenspan's rate that's going to get a recovery by the second half. What? That's the pre-unionist that we're getting a recovery right now. So are they all some right this time? With respect to the stock market, I'm going to have to ask Sean to do both his and mine. So he's going to get most of the floor. With respect to the economy, actually, if you look at the consensus since 1996, along with Greenspan, by the way, and I think actually this is the key to why Greenspan did what he, one of the big keys, is that they constantly underestimated the strength of the boom, the consensus did, so it wasn't wrong in the sense that consensus was wrong for a while there, in terms of estimating, in terms of projecting that kind of growth, just underestimated the boom, and at this stage I honestly think that they're pointing to the consensus, I hate to be more optimistic than the consensus, but unfortunately I am in the sense that I think that they're pointing to all kinds of rather weak canards that believe that this is going to be a recovery

24:40One of the sickest recoveries ever to be recovered, they believe it's going to be a recovery to the tune of about two and a half percent. And they use reasons that don't really make any sense in historical context, for example, that manufacturing capacity utilization is 73%. It was 69% in 1982 when capital investment exploded by 11%. It's a number that just has been hypnotized, and so I think the consensus is wrong to that extent. But, you know, with that said, as I say, it could be some sick aspect. Can I follow up on this before he talks about this prediction? When you talk about recovery, you talk about GDP. Well, if I sell all my production at the loss or at the cost, that adds to the GDP.

25:30I'm sorry? You have follies and all these sales supermarkets are selling goods at no margin, at cost or at a loss. That has to be GDP, but we know that the key to this whole thing is profits. And with our profits, we're going nowhere. And where is the visibility for profits? Well, actually, yeah, well, actually, I mean, I don't think it's, I mean, it's not a profit list. There are profits. But I actually do agree with you that, in this sense, it's not probably the fourth quarter The rise in profits will probably not pace the rise in GE. It may be against the big write-offs that have been typing, the $60 billion goodwill of write-offs that have been typing, about cash profits, gap profits, no one is making money.

26:18Eventually the markets realize that this whole thing is just, when you have no profits, Well, you're talking stock market now, but I will agree that, unfortunately, we're not talking about anything. I think companies are declaring earnings and they're completely bogus. There are profits being made, but I do at least agree with you to this extent, that if I talk about a 4% rise in GDP, I don't think the profit rise will pace it. So I agree with that. But therefore, I'm not very optimistic about the stock market, except of course it can always do surprising things, but that's the stock market's response. Well, I think the, thank you for that, the evidence of the last several years is there have really only been two classes of purchasers of US stocks and that's been foreigners who now have both their own economic problems and to some extent have had the scales lifted from their eyes about the supposed effortless and vaunted superiority of the Anglo economic model, so they're unlikely to be quite as gullible as they were and the second category was corporates themselves.

27:24with their stock repurchase schemes which are basically there to inflate their earnings per share to make flat revenues and poor sales and whatever look much more imposing when presented in the two-minute soundbite on good old CNBC. Now corporate balance sheets are so stretched that it seems unconscionable to believe that they can continue to raise debt finance simply to retire equity just for the purposes of this cosmetic addition to their reporting events. So we potentially have the two biggest sources of equity purchasing not as active as they have been in recent years. The other thing, of course, is we are talking about a vast monetary inflation. We've added more money and broad money terms to the system in the last 15 months than we did in the first 200 years of the Republic. Now somewhere along the line that does get spent on something and that is possibly what's pushing all these stock valuations higher than it should be.

28:13But it may be that that requires a maintenance of pace, if not an acceleration of pace, in the absence of any justifiable economic rationale for buying these companies And given the inordinate surge in money supply, it's very difficult now for the Fed to keep accelerating it So on those kinds of things from the market action, I think there are huge negatives In terms of the economic thing, I would agree with you, I think capital spending is still going to be a big problem this year Federalizing expenditures, corporate profits tend to go down anyway, and we're narrowing the productive structure, we're shrinking the flow of corporate revenues, so there's less pie there to take your six cents slice off it, so no, this could well be a profitless recovery, GDP will go up, but the economy will weaken, that's an intrinsic difference that we all have to bear in mind, although we know we'll have to realize as well, the market will react positively to the GDP numbers because it's been taught to, but it doesn't mean that things are getting better.

29:09If GDP goes up, does that mean that jobs are created? Does that mean that everybody is better off? Somebody is, right? I mean, profits matter, I heartily agree. But my projection is that GDP will rise by 4% and unemployment will probably stabilize, which is, I think, a great thing. 86,000 sky marshals, he's not going to do much, he'll do one for GDP, but it won't do much for the future of the world, will it? The kind of jobs being created, people with a machine on their back blowing leaves at the end of the corner, people's lawns, I mean these are not really jobs. A lot of the job creation was sub-par employment and we know that. I'm sorry, what are you talking about?

29:55I mean these are 65 year old men working at McDonald's, I mean these are the jobs that are being... Which period are you referring to? The last 10 years. The last ten years, the inflation adjusted wage rose substantially. Last several years we had a 4% unemployment rate and wage rates responded smartly. We had wage rates each year rising faster than prices, which had not been true prior to that.

31:01The government has been probably bearish from the day he was born. Nothing ever rises, nothing ever gets better. I mean, when do we ever make material progress in this country? We haven't made it to some extent over the past several years. We did. It's just that part of the boom is unhealthy. And part of the boom, part of it is going to be unhealthy in ways that I, not just in the old world, but in the new world, because part of it is going to be additional protection for those buildings I think also we've lost, you should bear in mind also that the overall numbers hide the disaggregation, we've had a clear shortening of the productive structure and a collapse in aggregate earnings in aggregate hours in the manufacturing sector, We've lost well over a million jobs in the last 12 months in manufacturing and transferred them into the services industry.

31:57Now, in the end, we cannot have a society which gets richer if one half of the country is keeping, attending the bars and the other half are collecting the taxes off them. Some already have to make something other than simple, immediately extinguishable services. Most of the service industry, most of what's called the service industry really works in the goods industry anyway. And the average wage in the so-called service industry is almost as high as in the manufacturing industry. I mean services matter too, but in many cases they say most of what we call services is really goods oriented, moving goods in one way or the other. And so we still live in a goods oriented economy. But in any case, those jobs and services can pay almost as well as those jobs in manufacturing.

32:42And probably the manufacturing jobs in balance pay a bit better because they narrow the focus of the unions, the more unions. But can they pay as well, but can they create as well? We've been talking all here about the difference between spending, which is what the GDP measures, and wealth creation, which is what we need for economic progress. Well, I agree with that, for some people. This is probably one of my charms, Carl, right in your hand, because this recovery may be unhealthy. If it's unhealthy, how long is it going to be? Well, I think, I mean, that would be the standard Austrian response, in that this recovery will have been generated by an inordinate amount of liquidity injection, widening Dr. Garrison's gap between savings and investment, and thereby hollowing out the structure once more.

33:27So it can all look good, but it can potentially lead us to further, it's like over-revving the engine, the car needs a service and all we're doing is running it faster down the road in the hope that when it gets hot, some of the stiffness in the engine will loosen up for us, but that means we're going to probably wreck the engine even more severely by the time we get to the next curve. And this is what you guys call recovery? Well, the past nine years, we're unhealthy. I mean, there's always, unhealthy things are always happening in this economy. Because of the unhealthyness of credit expansion. On the other hand, we also did have a productivity revival. We've also had a lot of tangible material progress on all levels of the economy. The dollar is always going to collapse each year.

34:17Well, unfortunately, we can't always expect just because it's unhealthy that the healthy aspects won't also survive for a while. But I completely agree, it's going to be partly unhealthy because it's been fueled on predispensions, also partly unhealthy for another reason, because, as I say, we're responding to September 11. I quit reading the print edition of Barron's when Robert Blobber was retired, which was some years ago, and recently I've read the online version because you get it for free if you subscribe to the Wall Street Journal.

35:06The question was raised by your quip about the permabear and barons, and I was wondering why Abelson is no longer on the masthead. Is he retired? Does he still have his column? Is he no longer a bear? Is he still living? Who actually writes his columns? He writes his own columns. I mean, Alan Emelson, the fact that he put it back to that, in mid-1993, when he had just gotten fired as editor-in-chief, which was early 1993, he had already suggested to me a month before that I do, that we could tell him about the economy, and I initially balked because I didn't know that, my God, I was covering the company, something new every week, but then one day after he got fired and was a lame guy, I came to see him and asked him if we could still do the column. He said, yeah, let's stick it to those bastards.

36:11Now, of course, he was, but he was also given his column to write. He was told, by the way, for the same salary, you can also just do your column. So he took that, and that's what his situation is. But in any case, I have, you have him, and to thank, if you want to thank him for the fact that I'm around, I thank him for that. I wanted to ask Sean what his prediction is for the European market, and also Mr. Tye has asked me to remind that he hasn't yet heard your prediction for the U.S. stock market. I thought I'd get out of that one. Too kaleidic to be talked about. Europe's an interesting case.

36:59We are going through something of a contraction there. Europe, obviously, the danger is always that their inherently socialist governments will interfere and make matters worse rather than better. We haven't had the same malinvestment boom and already there are signs that the GDP slowdown is being accompanied by a healthy decrease in personal consumption. So already the savings ratios are beginning to build again in Europe. in Europe. So on the assumption that governments can't do enough in the short period, particularly with big political elections in France and Germany this year, which should paralyze their policy process somewhat, they may recover better. But Europe has an intrinsically lower rate of growth than the US anyway, partly a measurement effect because the Europeans don't cheat with all the measurements the way the US does in the GDP accounts. But you could see probably no growth in Europe for the first six months, but then that could The U.S. GDP accounts a few years ago decided to get much more honest by weighting goods and services in terms of the actual prices that are paid by the government.

38:20in any particular year. What that means is that, for example, if you produce a computer, if you have fixed weights, which is the way the Europeans do it, if you're using weights as of 1990, which is what they used, then all the computers you produce are weighted according to 1990 prices. Now, U.S. GDP accounts, they knew for a long time this was an absurd, always absurd, but of course with computers they recognized how especially absurd it was being, and so they shifted to what's called chain weighting, and according to chain weighting, this year's computers get measured in terms, get weighted in terms of the economy, in terms of this year's prices, not 1990 prices, the way they do it in Europe and Japan. And so what actually happened when they introduced this was the U.S.

39:08The reason why the US introduced this is that it meant that the measured output was reduced in relation to the past because, as I say, they were no longer using this distortion because they recognized the basic principle that the expanding industries always start out with high prices and then the per unit price drops when they move to mass production. The Europeans have yet to awaken to this. When they have an expanding industry, they're going to measure the output of the expanded industry in terms of the price that was charged when the industry was just coming into being and charging high prices. And so that's, as I say, that would introduce a particular distortion and distortion with respect to computers. And so in that sense, the U.S. accounts are more honest than the German or Chinese accounts.

39:54Do I get a refutation of that? Do you have a number? Well, no, no, no, no, no, no. I'm not talking about, I'm not talking about ad hoc measurement, I'm talking about the one thing the critics of ad hoc management completely ignore or refuse to even try to understand, which is what's called chain rate, which is that if an ad hoc measurement, The hedonic measurement, which by the way I would defend as a procedure, but if an hedonic measurement means that a computer price is one-tenth of what a computer price was ten years ago, then that computer is going to be weighted by one-tenth as much per unit as ten years ago.

40:39And so hedonics has its revenge on the National Income Account, because at the same time that hedonic measurement is being used, what also happened was they moved to what's called chain waiving, which the Europeans have yet to introduce. Now as for hedonic management, all that hedonic measurement says is that if a car has power steering and power brakes, and if a few years ago the cars didn't, Then a car that costs $20,000 with power steering and power brakes versus a car that costs $20,000 without power steering and power brakes, that that car is actually being sold for a lower price because of substantial quality improvements that are being introduced. That's all the down-to-measurement says. And all it does is also move away from the Europeans' quasi-socialist notion of how to measure output, which is that output never improves.

41:33That's absurd. The nation, not just to expand the output, but to improve what you turn out. And the data only recognizes that improvements which might have taken time and effort necessarily mean that what you're buying is more valuable and that the output is more valuable. That too, the Europeans, because of their socialist notions, don't understand that either. That's another problem. But don't worry, the National Income Accounts are not overstated because to the extent that Eudonyx lowers a computer price even more than the price has actually been lowered, that implicit price is the way in which that unit gets weighted in the National Income Accounts. That's how it works.

42:19Can't believe that? Well, it's true. Okay, last one back there in the back. Yeah, Mr. Epstein, I want to look at your statement that security is going to be a drag and first of all, let's set aside government mandated security. Let's talk about private security measures. And then, in the sense that we wish that there weren't terrorist attacks and we did have to spend money on security. Clearly, we prefer that situation than what we have, but in the same sense, I might wish my feet had their own souls, and I didn't have to spend money on shoes, so I'm not clear why, if you count that differently than shoe spending...

43:19I'm worse off in terms of my economic well-being. I'm even having trouble crawling to the refrigerator. So that's all. You know, it's a reality. You've got to hide under the bed. But it's just that that was then and this is now. You know, things are rousing now because of this. But by the way, there too, there might be a silver lining. It's unfortunate that the government mandated airport security workers because there too we get government doing it. but still there might be more innovative ways to protect, to introduce security measures and it may well be that that surcharge that might be imposed on the economy will diminish and of course one also hopes that there won't be any more terrorist attacks and that we'll be less legitimate here, but that's all, it's just unfortunate.

44:06I would say to that that I take your point that if the data have changed and so our subjective valuations have ordered security higher in the level, it's not for us to say that this is a bad thing, it's an expression of human subjective choice and preference. The only purpose, the only thing I would say is that this is likely to be more unproductive consumption in the sense that spending money on that security isn't going to be, isn't going to generate more capital goods and more output in the future. So a switch of consumption, one to the other, that's our choice. Fine, we have that instead, but it's taking away from the pool that we can be investing in more productive means, presumably. That's all right. That's all right. That's too bad. But we have to live with it, absolutely. Okay, we're out of time. We'll have some time for informal questions.