Episode 530: Marijuana, Law School, And Centuries Of Inequality

Apr 9, 2014

After today's show, you'll be ready to design a tax on marijuana, pick a law school, and explain centuries of inequality — and the hottest book in economics — without having to read a page.

For more on these stories, see:

* What's The Best Way To Tax Marijuana? It Depends On What You Want

* Comparing Law School Rankings? Read The Fine Print

* Mystery Of Mounting Inequality Might Find Answer In Brand-New Tome

Music: Foster The People's "Are You What You Want to Be?," Active Child's "When Your Love Is Safe," Glass Animals's "Black Mambo," and Laura Mvula's "Green Garden." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2016 NPR. To see more, visit http://www.npr.org/.

JACOB GOLDSTEIN, HOST:

Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.

ZOE CHACE, HOST:

And I'm Zoe Chace. On the show for you today, three short PLANET MONEY stories that have never before been heard on the PLANET MONEY podcast until this moment.

GOLDSTEIN: After today's show, you will be ready to design a tax on marijuana...

CHACE: ...Pick a law school...

GOLDSTEIN: ...And explain centuries of inequality and the hot new book in economics, all without having to read a single page.

CHACE: You're welcome.

(SOUNDBITE OF SONG, "ARE YOU WHAT YOU WANT TO BE?")

GOLDSTEIN: Now that marijuana is legal in some states, people are starting to ask some fun, wonky questions, like - what's the best way to tax it? Dan Bobkoff looked into this question for us, and he realized the best way to tax marijuana depends on what you want. Do you want people to smoke less, or do you want to collect as much tax revenue as possible?

DAN BOBKOFF: Let's start with an example, Like a Kit-Kat bar. Let's say it costs a dollar-seven - $1 for the bar, 7 cents in tax. Now, there are two main ways the government could collect that 7 cents. They could collect it from us, the consumer, at the register, or they could collect it from Hershey's, the company that makes that Kit-Kat.

JACOB GOLDIN: Traditionally, public finance economists haven't thought that it matters.

BOBKOFF: But Jacob Goldin, economics researcher at Princeton, says it turns out it matters quite a bit, and it has to do with what you see when you pick up that Kit Kat bar. If the government had taxed Hershey's, they'd pass that tax on to you. So when you see that Kit Kat at the store, the sticker price - the price posted next to the bar - would be a dollar-seven. But if the tax is designed the other way, the sticker price you see is a dollar. The seven cents gets added later at the register.

GOLDIN: Consumers tend to pay more attention to taxes that are included in the posted price than to taxes that get added on at the register.

BOBKOFF: What this means is if we see that Kit Kat bar for a dollar, even if we know there's a sales tax, we don't actually do the math in our heads.

GOLDIN: At least for me, I just, you know, swipe the credit card, just pay the cash. I don't - it's not even until the end when I get my receipt that I even know how much was taxed and how much wasn't.

BOBKOFF: So that extra 7 cents didn't factor into whether Goldin bought that Kit Kat bar. But if the tax had been applied directly to Hershey's, and the price you see on the shelf as a dollar-seven...

GOLDIN: Then I would be less likely to buy that Kit Kat bar, even though I knew that - if you had asked me - I knew that the amount of the tax was the same in both cases. How the tax is presented to me has an effect on whether or not I buy the taxed item.

BOBKOFF: Economists have actually quantified this. One study found that when taxes were included in the sticker price, demand went down 8 percent. So the implications of all this are pretty big, especially when it comes to so-called sin taxes. Government often puts a big tax on something in order to discourage people from using it - cigarettes, liquor, big sodas, candy. But the weird thing is that often governments use the wrong tax.

GOLDIN: Soda taxes, candy taxes - these are areas where policymakers have really screwed up if they're trying to get people to drink less soda.

BOBKOFF: Connecticut, New York and New Jersey are just some of the states that have done it wrong. Goldin says policymakers should be designing taxes that inflate the actual sticker price of soda and candy. Instead, the tax they design gets added at the checkout, where it's less likely to influence our behavior.

But there are some cases where it's less clear what kind of tax you should use - for example, Colorado. Voters there legalized recreational marijuana last year. But if you're taxing marijuana, what kind of tax do you want? You could argue that marijuana is in the same class as cigarettes and alcohol, where you want the tax to discourage use. But on the other hand, voters there legalized marijuana because ads promised the taxes would help build schools.

(SOUNDBITE OF AD, "MONEY FOR SCHOOLS")

UNIDENTIFIED SINGER: (Singing) Money for schools - who could ask for more?

DAN PABON: We wanted to make sure that marijuana paid for itself.

BOBKOFF: Dan Pabon is a state representative who helped write the marijuana taxes. He says discouraging use was not a big part of the discussion. They were always trying to raise as much revenue as possible with the tax. And yet, by Goldin's thinking, they didn't do a very good job. They went with a 10 percent sales tax, which is the right tax if you want to raise money, but they added a 15 percent tax on producers. That raises the pot sticker price. Goldin of Princeton says they might have been better off with a straight sales tax. Statistically, that would mean people would buy more pot, so the government could charge a lower overall tax and still bring in the same money.

GOLDIN: If we're smart taxpayers and voters, we want to elect people who are going to design systems that cause us, when we're making purchasing decisions, to make mistakes.

BOBKOFF: In other words, not realize what the total price actually is. So there you have it. Government, help us make mistakes at the cash register. We might all benefit.

(SOUNDBITE OF SONG, "WHEN YOUR LOVE IS SAFE")

CHACE: Economists love unintended consequences.

GOLDSTEIN: They cannot get enough unintended consequences.

CHACE: That is correct. Somebody comes up with some rule that's supposed to do this one particular thing, but then when the rule is applied out in the world, out in the wild, people react to it in these totally unexpected ways.

GOLDSTEIN: For example, say, you're in the business of ranking law schools, and you decide one of the things I'm going to consider is what percentage of students get law jobs when they graduate. Sounds simple enough, but guess what happens next.

CHACE: Actually, you don't have to guess. Ashley Milne-Tyte, a reporter working with us - she's about to tell you.

ASHLEY MILNE-TYTE, BYLINE: Prospective law students who can't make it to Williamsburg, Va., can learn all about the law school there on the web.

(SOUNDBITE OF WILLIAM AND MARY LAW SCHOOL VIDEO)

UNIDENTIFIED MAN: William and Mary is the oldest law school in the United States...

ASHLEY MILNE-TYTE: Complete with elegant buildings, famous names.

UNIDENTIFIED MAN: ...Founded in 1779 at the urging of Thomas Jefferson.

ASHLEY MILNE-TYTE: And if you delve into that website, you can see the graduates of William and Mary Law School are doing great in the job market. They have a 90 percent employment rate, but not all those positions are big-paying law firm jobs. When you dig down, there's a surprising fact. A fifth of graduates are employed by the university itself. They're not working for the school. They're in a fellowship program that pays graduates a stipend to work in public service jobs or for nonprofits. Dave Douglass is dean of the law school.

DAVISON DOUGLAS: In this market, where jobs are tight, a student needs to have the opportunity to show what they can do.

ASHLEY MILNE-TYTE: He says with these jobs, graduates gained valuable experience. Within a year, most of the university-funded graduates land full-time jobs.

DOUGLAS: And this is what this fellowship program does, and that's why these students succeed.

ASHLEY MILNE-TYTE: It does something else, too. It boosts the school's place in the best law school rankings produced by U.S. News and World Report. William and Mary Law School jumped nine spots this year. It's now the 24th best school in the nation. The dean says that jump happened in part because of the school's improved employment numbers. Moving up in the rankings is a big deal.

KAREN SLOAN: I think it has an outsized influence - this sort of rankings obsession in the legal profession, which is very sort of obsessed with prestige.

ASHLEY MILNE-TYTE: Karen Sloan is a reporter with The National Law Journal. She says a lot of things go into these rankings, but one crucial factor is how many graduates land jobs. The rankings count someone employed if they have a professional job nine months after graduation, but they don't care who employs you, so many top-ranked law schools have these school-funded job programs - Georgetown, NYU, George Washington University. Sloan says these kinds of initiatives became popular during the recession, when legal jobs got scarce.

SLOAN: So there's really no doubt in my mind that the primary motivation for these programs was to boost employment numbers.

ASHLEY MILNE-TYTE: Now, there's been debate in the past about how transparent law schools have been about their job numbers. Until fairly recently, you could be working at McDonalds after graduation, and you'd still count as employed in the rankings, then the rules changed. Now schools provide a more detailed breakdown of the kinds of jobs graduates get. But Kyle McEntee of the non-profit Law School Transparency - he says there are still problems with these school-funded programs.

KYLE MCENTEE: They're not purely intentioned. These programs exist to help appearances, whether it's improving the rankings criteria for U.S. News rankings or improving their employment rates.

ASHLEY MILNE-TYTE: McEntee says students can't make an informed choice about the return on their investment if they don't know which are real jobs and which aren't. Law schools say, look, anyone can see the nitty-gritty of our employment numbers on our websites. We make it clear how many graduates are on our dime. And the law school students we spoke to didn't feel like anything nefarious was going on. Andrew Bayda (ph) goes to George Washington University Law School. He says any job, even one funded by your school, is better than no job.

ANDREW BAYDA: Well, I mean, it's a tough market, I mean, especially since the economic crisis in around 2008. Frankly, lawyers aren't retiring or dying nearly fast enough in order for us to fill their spots.

ASHLEY MILNE-TYTE: And the schools that run these programs make another point. These temporary jobs are a way to get students into public service. Brian Dana (ph) graduated from the University of Virginia Law School in 2011. He had a job offer from a private law firm in Washington, D.C., but he turned it down to go and work in a temporary position on Capitol Hill. A University of Virginia fellowship made it possible for him to do that.

BRIAN DANA: And the fellowship program was actually a year long, but after about five months, I guess I proved my worth to my bosses, and they brought me on as full-time counsel.

ASHLEY MILNE-TYTE: Some of his classmates also graduated to jobs in public service right from their fellowships. Karen Sloan of The National Law Journal agrees the programs are a great opportunity for students at the universities that offer them. But she says, overall, a small percentage of the country's law school graduates even have this option.

SLOAN: Some of the schools lower down the U.S. News rankings just - I mean, they don't have the kind of endowment money - they don't have the finances to do something like this.

ASHLEY MILNE-TYTE: If you're one of those schools that doesn't have an employment program, your students are on their own in a legal job market that still hasn't recovered from the recession.

(SOUNDBITE OF SONG, "BLACK MAMBO")

GOLDSTEIN: A few decades ago, inequality started rising in countries around the world. And a lot of economists were shocked by this because they thought inequality tended to go down over time, not go up.

CHACE: But now a guy who is one of the world experts on inequality, a guy who, in fact, is largely responsible for the phrase The 1 Percent - he thinks he has solved this mystery.

THOMAS PIKETTY: My name is Thomas Piketty. I teach at the Paris School of Economics.

GOLDSTEIN: Piketty's answer to the mystery of inequality is right here in my hands.

(SOUNDBITE OF THUDDING)

CHACE: (Laughter).

GOLDSTEIN: It's a book...

CHACE: It is.

GOLDSTEIN: ...Called "Capital In The 21st Century" that just got published in English.

CHACE: Jacob, you read this book, and you did a story for us about it.

GOLDSTEIN: Piketty's book is big in every sense of the word. It's almost 700 pages long. It makes big, sweeping claims about history and the nature of capitalism. Basically, it's the it book that every economist is taking to the beach this summer. Here's Steven Durlauf of the University of Wisconsin.

STEVEN DURLAUF: The aspect that I think is extraordinary is the fact that it developed a vision that is this big in terms of thinking about how societies evolve.

GOLDSTEIN: To get to this big vision about how societies evolve, to solve the mystery of rising inequality, Piketty started out by reading a bunch of old novels - Jane Austen, Henry James and especially Balzac. He was not in it for the love stories.

PIKETTY: All of Balzac's novella are all about money. And in fact, all of, you know, 19th century novels are all about money.

GOLDSTEIN: Piketty got obsessed with the way inequality was portrayed in this one Balzac story. A young, penniless nobleman moves to Paris to study law, and he meets an ex-con. The ex-con sits him down and basically says, look, work is for suckers. And the ex-con actually goes through all the math. He says, so you become a judge. This is how much you'll make. If you make all the right connections and get really lucky, maybe you'll get to be a prosecutor general. Then you'll make this much. But no matter how lucky you get, the ex-con tells the nobleman, you are not going to get rich by working. You want to get rich? Marry that heiress who lives down the hall.

PIKETTY: And you know for a long time, I was wondering - is it only because Balzac was personally obsessed with money, or was he - was he really describing something real?

GOLDSTEIN: Piketty dives into the numbers. He figures out what lawyers made back then, goes through tax receipts, looks at inheritances, and he realizes the ex-con was right. It was almost impossible to get rich by working in Balzac's world. It was a world where to get rich, you basically had to inherit money or marry someone who did. Then Piketty digs through numbers for more countries - the U.S., England, Germany, Japan - not just in the 19th century, but the 20th and the 21st. And he comes up with this grand theory - his theory of everything.

Piketty says take any society and look at how much money people are making on their investments. When they buy stock or bonds or rent out land, how do they do? If those investments are growing faster than the rest of the economy, you're likely to have a society where inequality is increasing, where wealth is piling up in fewer hands. This is what was happening in the Balzac world. It's also what's been happening in the U.S. and other developed countries for the past several decades.

But sometimes the opposite is true. In fact, a lot of the economists working today grew up at a time when inequality was falling. In the 1950s and '60s, the economy was growing really fast. Investments were not growing so fast, so many economists came to believe this was just the normal state of affairs. In modern economies, they thought, inequality just tends to fall.

BRANKO MILANOVIC: And we had big problem explaining why inequality didn't picked up again in the 1970s and the 1980s and 1990s and now.

PIKETTY: This is Branko Milanovic, an economist at the City University of New York. He says Piketty looks at the big sweep of history and figures a big chunk of the 20th century was a really unusual economic period. You had a world war, a depression, another world war and then a massive post-war boom.

MILANOVIC: Piketty would say that was not a normal world. That was really an exceptional world. And, you know, that is where actually this perception that Piketty brings in is so dramatically different.

GOLDSTEIN: The normal world, according to Piketty, is the world we're in now - the world where inequality is increasing. Now, that does not mean we're back to that Balzac world. For one thing, today there is a middle class with some wealth - people who own their homes, who have some money saved for retirement. But, Piketty says, that may not be true in the long run.

PIKETTY: The key question is - is that going to last? So are we going to have an expanding middle class in terms of wealth, or are we going to have a shrinking middle class?

GOLDSTEIN: Piketty argues that unless there are some big policy changes, wealth is likely to become more and more concentrated among the very rich. Inheritance will become a bigger deal, and it'll be harder to get ahead by working.

(SOUNDBITE OF SONG, "GREEN GARDEN")

GOLDSTEIN: As always, we want to hear from you. You can email us at planetmoney@npr.org.

CHACE: You can find us on Facebook, Twitter, et cetera.

GOLDSTEIN: And if you're looking for something new to listen to, there are lots of other NPR podcasts. You can just go to iTunes and search NPR.

CHACE: I'm Zoe Chace.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

(SOUNDBITE OF SONG, "GREEN GARDEN")

LAURA MVULA: (Singing) Oh, ah, oh, ah, oh. Oh, ah, oh, ah, oh (ph). And I'll fly on the wings of a butterfly, high as a treetop and down again. Putting my bag down. Taking me shoes off. Walk in the carpet of green velvet. Dance in my garden like we used to. Transcript provided by NPR, Copyright NPR.