How to Prevent Another Great Depression

Last week on the show, we started a conversation about the massive job loss from Covid-19:

Betsey STEVENSON: The true unemployment rate is probably around 19, 20 percent right now.

No one was prepared for this:

Abigail WOZNIAK: If a year ago, the same person had brought me this table of statistics and said, “This is what I calculated,” I would have said, “You did something wrong.”

So, how will re-employment happen? Last week, the U.S. Department of Labor delivered a huge surprise. Its jobs report for the month of May found that the economy, rather than losing another 8 million jobs as was predicted, actually added back 2.5 million jobs. That said, the unemployment rate is still higher than it’s been since the Great Depression, and a lot of the lost jobs — in retail and restaurants, for instance — are unlikely to return anytime soon. Many high-income employees like consultants and lawyers and middle managers will suffer; but a lot of lower-paying jobs may simply disappear, whether due to lack of demand or the increase in automation.

Last week, we looked at one employment policy that was designed to help a certain category of low-income employee: former prisoners, often young men without a college degree. The policy is called “Ban the Box,” and it got rid of the box that job applicants used to check to indicate that they had been in prison. The idea was that employers would be less likely to rule out such an applicant early in the process, and give them a better chance of getting hired. But the policy has mostly backfired, punishing applicants who hadn’t been to prison but who shared demographic traits with many young men who had.

Jennifer DOLEAC: We found that on average across the U.S., in places that ban the box, employment fell by 5 percent for young black men who didn’t have a college degree, and by 3 percent for young Hispanic men who didn’t have a college degree.

Making good economic policy is hard, even in a stable economy. In a crisis, like the current employment crisis? Even harder. Today on Freakonomics Radio: What kind of policies are being considered, or should be? What happens if millions and millions of lost jobs never come back? And what kind of lessons — especially terrible lessons — can we learn from the past?

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The first half of this episode features our one guest today who’s not an economist. Andrew Yang is a former lawyer-turned-entrepreneur-turned-Democratic presidential candidate who didn’t win many primary votes, but he did win a great deal of attention — primarily for his diagnosis of the U.S. economic malaise and one bold proposal to treat it: a universal basic income, or U.B.I., of $1,000 per month for every American adult. Yang has been on our show before — episode No. 362, if you want to hear it. We also did an episode back in 2016 called “Is the World Ready for a Guaranteed Basic Income?” episode No. 242.

Stephen DUBNER: Let me ask you this, I guess the big question. You’ve been preaching a job-loss apocalypse due to automation. Instead, we got a job-loss apocalypse nationally, globally due to a pandemic. How does this change your thinking about the diagnosis, the prognosis and U.B.I.?

Andrew YANG: It changes the timeline and the urgency. The reality is that this is accelerating the automation of many of our industries and jobs. Hundreds of thousands of retail jobs are gone for good. And many of the companies that were on the fence about investing in technology to automate work have doubled down during this pandemic for obvious reasons. We need to adopt universal basic income today, right now.

And we need to do it in a much more dramatic way than even what I was championing, in large part because we’re facing Depression-level unemployment statistics that yet understate the calamity in our labor markets. Right now, fewer Americans as a portion of the population are working than has ever been recorded in our country — and many of these jobs are gone for good. We need to get money into people’s hands immediately to prevent the unthinkable from happening right here in the United States. And we’re already seeing multi-hour-long food lines and material scarcity in communities around the country that is going to get worse, not better.

DUBNER: There’s a new working paper by a trio of economists which estimates that 42 percent of recent Covid-related layoffs will result in permanent job loss, and that the loss will be spread very unevenly between industries. So, tell me how you see rehiring happening and especially what lessons there might be, good or bad, from rehiring after the Great Recession.

YANG: The Great Recession is a phenomenal reference point, where what we did is, we bailed out the banks and then said, “Hey, banks, lend money to small businesses that will then rehire.” Obviously, none of that actually happened. And so the danger is that we try the same approach this time. We have to adopt an everything-on-the-table approach to creating jobs in this country. No. 1 is putting money into people’s hands, which will help shore up jobs in people’s communities. Because if you have money to spend, then the local businesses will get some of that money and will have a better chance of staying open.

No. 2, we have to put money into state governments and hospitals and nonprofits and schools and healthcare orgs that are firing people right now and say, “Look, don’t fire people. Your finances will be secure.” The third thing is the government should start employing people directly for things like contact tracing of infected patients. We’re short hundreds of thousands of workers to do that sort of work around the country. Infrastructure — that stuff will take time.

But you still should start it immediately because we’re going to be short tens of millions of jobs for the foreseeable future. And when someone’s out of work, what you want to prevent them from doing is leaving the workforce entirely, which many people will do after a period of, let’s call it three, six, seven months. That’s the time that we have to try and beat. It’s like an hourglass and the sand is ticking away for many Americans.

DUBNER: What could the federal government do right and wrong in the coming months having to do with re-employment? How could they either really help the tide turn and get more people rehired? How could they turn this into a long-lasting depression?

YANG: The simplest way to turn this into a long-lasting depression is to not do enough. Right now, our economy is $21 trillion-a-year, pre-crisis. If you have a $21 trillion fire, you don’t worry about how much water you’re putting on the fire. You just put the fire out. So, if you want a Great Depression, all you have to do is do nothing or do not enough. Thirty percent of small businesses may close forever. One thing I think the government should have done more of is to just become the payer of first resort.

The big problem right now is that we’re trying to get money into the hands of people and businesses, and our systems are not designed to do that. And so all of these people and organizations and companies are falling through the cracks. Instead, we should have just had the government say, “Look, don’t worry about it. Just send us your bill. Send us your rent payment. Send us your fuel bill. We’ll take care of it.” This is something that our government could do, rather than adopt this, “We’re going to get money to you so you can pay your bills,” and then miss millions of people and millions of businesses.

DUBNER: Let’s pretend for a moment that Joe Biden wins the presidency in November. What would be a good position for you in a Biden administration?

YANG: I talked to Joe last week about some of these needs. We need a new Marshall Plan-scale initiative to rebuild our country to avoid a new Great Depression. But I want to be contributing in any way I can to help get us out of this historic crisis that we’re going to be dealing with for years. The scars from this time will be long and deep. Millions of these jobs are gone for good. And the sooner we accept that reality, the sooner we can start focusing on what we’re going to do to help give millions of Americans a path forward.

The big change we have to make is we have to start measuring our economy and our progress by how we are doing, how our families are doing. Right now, the measurements we use are leading us the wrong direction. Stock market prices go up even when you have record layoffs. G.D.P. will go up. Well, it’s not going to go up now because we’re entering a deep, deep recession. But G.D.P. and our families’ well-being now have very little relationship.

What we have to do is we have to start measuring our well-being by our health, our mental health, our kids’ success rates, our environmental sustainability. And then you start investing massive levels of resources to try and make it better, which would include creating tens, hundreds of thousands of counseling jobs and health care and mental health professionals’ jobs to try and improve that measurement. That, to me, is our best-case scenario, where we modernize our economy around how we are doing and then we create millions of new jobs to help improve our way of life.

Much of Yang’s energy is still directed at his core campaign issue: the need for a universal basic income. He set up a nonprofit, called Humanity Forward, which has helped launch a U.B.I. pilot program in Hudson, New York, a city of fewer than 7,000 people a couple hours north of Manhattan.

YANG: Hudson, to me, is like Everytown, U.S.A., in many respects.

How so?

YANG: Hudson’s diverse. It’s got a lot of poverty. A third of the residents are below the poverty line.

Twenty families there will each get $500 a month for five years.

YANG: If you know you’re getting money for five years, I mean, that could really change your planning in a way that’s different from even one or two years.

A two-year U.B.I. pilot program was recently completed in Finland.

YANG: Well, in the Finland study, the findings were very positive and exciting. And they said that people feel more positive, more optimistic, more trusting, stronger, healthier, mentally healthier, when they’re receiving this kind of cash supplement. I do want to share that the biggest trial going on of universal basic income is the Y Combinator research trial that is $75 million over three years, with randomized participants and double-blind studies. Their data is going to be a treasure trove. And I’m super excited about the findings because I’m very optimistic they’re going to be positive.

DUBNER: Tell me about any conversations you’ve had with Barack Obama about universal basic income.

YANG: I talked to Barack about this issue a number of days ago, and one of the data points he said that drove him to think bigger about this issue was the financial crisis in 2008, where he saw that firms did not rehire on the way out the way that you would hope. They figured out that they could do more with fewer workers. And after that, he said we should start thinking about a shorter workweek, because that would create jobs at the margins and would have other benefits as well.

DUBNER: We’re starting to hear more and more about what sounds like and looks like a U.B.I., coming from Democratic leaders in D.C. Talk to me about how involved you’ve been in those conversations and that proposal.

YANG: I’ve been in contact with maybe a dozen members of Congress, almost all of whom have signed onto the emergency cash relief bill that right now is championing $2,000 a month for every American for the duration of the crisis until we bounce back to pre-pandemic levels of employment.

DUBNER: How much will it cost and where will the money come from?

YANG: If you look at precedent, when we were in exigent circumstances like this during wartime, we spent over 20 percent of G.D.P. If you extrapolate that to today, you’re looking at $4 or $5 or $6 trillion over time to help dig us out of what could be another Great Depression. And as for where the money comes from, the money comes from the same place that the $1.5 trillion in corporate tax cuts came earlier in Trump’s term. We produce it. Right now, we have this ability to actually make money. And we need to use it and put that money into people’s hands as soon as possible.

DUBNER: And what’s the purpose in making these payments across the board and not means-tested? I mean, I am working fully. I don’t need $2,000 a month. My family doesn’t need it. So why would it go to everyone? Why would there be no income cutoff?

YANG: I’ll say three things about it, Stephen. No. 1, we can send you the money this year, and then if it turns out you didn’t need it because when you file your 2020 taxes, you were just fine, then we can just claw it back in that year’s taxes or even the following year’s taxes. You’d rather be overinclusive than underinclusive in this circumstance because you can just get the money back.

No. 2, if you use 2018 tax returns, which is what the government has been using, there are many people who had good years in 2018 that are in desperate circumstances now. The third thing is that many Americans didn’t file taxes in 2018. There are many Americans who are falling through the cracks through the current means of distributing money.

DUBNER: Do you think there’s a way, if you look down the road, let’s say three years, five years now, that the need or the desire for U.B.I. can become a bipartisan endeavor? Or do you think it will, like just about every other economic policy, become riven, split between Republicans and Democrats?

YANG: Right now, the vast majority of Americans agree that this is the right approach, and that’s the majority of both Democrats and Republicans. A survey just came out that 76 percent of all Americans support direct cash payments to everyone. So I’m optimistic it will be bipartisan. Republicans historically are not that against money in people’s hands and economic independence and autonomy. Republicans tend to be against large bureaucracies that make a lot of people’s decisions for them. And universal basic income does not create any new bureaucracy. It puts the resources into people’s hands.

Unless the Democrats capture more power in Washington in this fall’s election, Andrew Yang’s optimism is unlikely to be rewarded. House Democrats recently passed a $3 trillion aid package, including an extension and expansion of direct cash payments that both chambers passed in the earlier CARES Act. But Mitch McConnell, the Senate majority leader, declared this new Democratic package “dead on arrival” in the Senate. A Republican congressman from Virginia, Ben Cline, called it a “socialist wish list.” So, assuming the U.S. is not looking at a universal basic income any time soon, what will help keep the pandemic-induced job apocalypse from turning into another Great Depression?

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We recently spoke with Abigail Wozniak, a research economist at the Federal Reserve Bank of Minneapolis. Wozniak sees a tension within the rapid-fire policy moves Washington made to fight the massive job losses from Covid-19.

WOZNIAK: I think if you were trying to pull out two-word summaries around the labor and employer policy conversation, you could pull out two sets of two-word phrases.

The first one?

WOZNIAK: The first one is “don’t target.” And there was a lot of conversation about just get aid out the door. Don’t be picky about who is getting it and don’t try to evaluate need or fine-tune quantities.

This is the same sentiment Andrew Yang was endorsing for a universal basic income. And this is how, under the CARES Act, most Americans under a certain income level were sent checks for $1,200, with no conditions, along with cash payments for their children.

WONZIAK: And then the second two-word summary would be “everybody, freeze.” The idea was, let’s try to preserve what’s here and somehow get money out that is going to allow whatever exists now in the economy, at the middle of March, to still be there in July or whenever we thought this was going to resume.

The freezing was meant to slow the spread of the coronavirus itself. One incentive in that direction? A benefit that came to be called “unemployment insurance on steroids” — additional $600 weekly unemployment payments for employees who were separated from their employer.

WOZNIAK: Even though you think you’re not targeting, you’re generating perhaps an incentive for people to change what they were doing. But that conflicts with the “everybody, freeze” instinct because you’ve just encouraged people to change what they’re doing. The concern is that potentially that “don’t target” impetus led to payments that are so generous that, in fact, they encourage separations.

In other words, unemployment payments may be exacerbating unemployment because they are conditional on not being employed.

WOZNIAK: Once you give a large amount of money to folks, it potentially changes their behavior.

For instance, an employee who was laid off and who got the unconditional $1,200 benefit and is also receiving unemployment on steroids, may not be so eager to go back to work, especially with the active threat of Covid-19.

WOZNIAK: Economists really hold it as a truism that people respond to incentives. And we’re not necessarily saying that folks are bad for wanting to receive benefits that they are promised under law that are very generous. We may wish that we hadn’t offered that, but that’s a different scenario. And so if you are strongly incentivizing them to do one thing, it’s going to take a special person to kind of leave that money on the table.

And that is where the tension lies — between the “don’t target” and “everybody, freeze.”

WOZNIAK: And so we probably need to try to understand what the right balance is between preserving matches that we have and making sure that businesses can recover as quickly as possible. But at the same time, we’re facing potentially a fundamental shift in what our economy — what we will want it to look like.

What the economy will look like is, of course, impossible to say, prediction being largely a fool’s game. But it’s a good bet we will see a substantial reallocation of jobs — some sectors have been seriously damaged, while others have gotten a boost. It’s also a good bet we won’t return to full employment any time soon. So are there any ideas to at least spread the pain? Here’s the economist Betsey Stevenson.

STEVENSON: We still have time for good public-policy choices that will reduce the amount of permanent job loss, that will help workers stay attached to their jobs, that will help businesses stay afloat.

Stevenson teaches at the University of Michigan and she’s a former chief economist at the U.S. Department of Labor.

STEVENSON: There are some programs out there that have not been widely promoted, but are there, like work-sharing. If more employers filed for work-sharing support, they could bring back more workers at part-time hours and part-time pay, and let the federal government chip in some of the rest of their pay through unemployment insurance. So if an employer decides to bring back 100 percent of their workers at 60-percent hours and 60-percent pay, they can all get 40 percent of their unemployment-insurance check plus 100 percent of that $600 pandemic relief check.

The hope would be that the demand that business faces from their customers will grow. As it grows, they’ll be able to bring their workers from 60-percent hours up and eventually reaching 100 percent of hours. That’s the fastest way to re-employ people, is to take them back to their old jobs.

And that’s because the reallocation of workers is full of friction. Think about someone who used to work in the airline industry or the live-entertainment industry — both of which are in terrible shape at the moment — think of them trying to switch into marketing or logistics. Abigail Wozniak again:

WOZNIAK: I would say a couple of years ago at least, you would often hear as a refrain the idea that people who thought they were going to go into manufacturing should really just change their minds and they should go into medical work. And in particular, they should become R.N.’s.

Wozniak, in fact, has written a paper about the influx of men into nursing over the past few decades — it’s been a tenfold rise since 1960.

WOZNIAK: And I would say the post-Great Recession version of that refrain was “learn to code.” But both of them were just like these rules of thumb for: here’s a growing sector; we anticipate that it’s going to keep growing. And that’s probably true. And why aren’t more folks who seem connected to sectors that are likely to shrink making the switch over to these growing sectors? By looking at folks going into R.N. work, and in particular, men moving into R.N. work, I thought it would be a useful case study of what factors lead to this either nontraditional or less anticipated or new choice of work.

Unfortunately, what I can’t point to is a bunch of ready solutions. So, what I mean by that is we found that proximity to two- and four-year colleges is something that leads to higher rates of men going into R.N. work. That’s potentially a recipe we could apply. It won’t be without its challenges, but it’s a policy lever we might pull. Unfortunately, another really big factor we found was that really, it’s good times that are strongly predictive of the rates of folks switching into these new sectors. And what I mean by that is that in boom times, we saw men going into R.N. work in greater numbers. People make big changes when times are good, when there’s a safety net to fall into in that you could go back to your old job and everything will be fine. You do not tend to make these big shifts when the sky is falling.

But the sky has been falling, with millions of workers unsure what comes next. And it’s more than that: there’s also the feeling that no one is looking out for them. This is one downside of how the U.S. job market is set up. It is a particularly dynamic system. Firms grow fast, shrink when they need to, pivot to another sector if they have to.

That’s one thing that distinguishes American capitalism from the more regulated and moderated capitalism you see in much of Europe and in Canada. And those countries have responded to pandemic job loss differently. They try to preserve the link between employer and employee by disbursing financial aid through firms rather than through the unemployment system. These governments have been paying idled employees 60 to 90 percent of their wages through their employer. Some Americans think this might work well here. Abigail Wozniak does not.

WOZNIAK: I think that I’m probably ready to be done making the U.S.-Europe comparisons. I’m not sure that it’s helpful to moving policy forward in the U.S. In an emergency, you have to work with what you have. And the reason Europe and other countries are able to do things differently — whether it’s in the labor market institutions side or it’s in the test-and-trace side — the reason they can do things differently is that they have a different set of institutions in place right now today that they’re working with. And might those institutions provide better long-run outcomes? Maybe. But we don’t have those institutions and we’re not going to build them in the next week.

Daron ACEMOGLU: Well, the way I look at it, this crisis has been a confirmation of the critical role of institutions and how much U.S. institutions have suffered over the last few years.

That’s Daron Acemoglu, an economist at M.I.T. and co-author of Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

ACEMOGLU: We have completely failed in dealing with this crisis. And this is nothing but a colossal failure of our institutions.

Acemoglu points to South Korea, Taiwan and Germany as countries that have used their institutions well on both the public-health and economic fronts. The German unemployment rate, for instance, is still below 6 percent. In his book Why Nations Fail, Acemoglu writes of another pandemic, the Black Death — 14^th-century plague estimated to have wiped out more than half the population of Europe. It was, Acemoglu writes, “a critical juncture” in European history. In some countries, it disrupted “the existing economic” and “political balance in society,” and as he puts it, it broke “the cycle of extractive institutions” while enabling “more inclusive ones to emerge,” at least in some places. Covid-19, Acemoglu makes clear, is nothing like the Black Death as far as human suffering:

ACEMOGLU: But it is a critical juncture because it has really disrupted the existing system — both the global order, national economies, infrastructure, public services — and it has created an environment in which different countries are going to go in different directions.

He sees four directions the U.S. could go in.

ACEMOGLU: The first one is essentially doubling down on what we have. There will not be a renewal in our efforts to strengthen the healthcare system. It’s not going to strengthen autonomous agencies such as C.D.C., the Fed, E.P.A. and so on. And this scenario will not solve any of our existing problems.

So, option one is status-quoism, and not very encouraging.

ACEMOGLU: The second scenario is no less dangerous. We could learn the wrong lessons from the current crisis and we can say, “Look, the countries that have been successful, like China, are the ones that are authoritarian. So we have to become more authoritarian. It’s the democracy that are the shackles on our effectiveness.” But what enabled those successes is exactly the depth of capacity and expertise in Chinese bureaucracy, which has a history of going back 2,500 years, so to speak. If we went with the strategy in the United States, we would be doing not China, but China-lite.

In other words, we’d get the worst of both worlds: authoritarianism minus the efficiency.

ACEMOGLU: There’s a third path, which I think is no better, which is that we could learn yet another wrong lesson. We could learn that the state has continued to fail and is ineffective, and instead of the state, we have to turn to corporations.

An America run by Google and Facebook and Amazon and Microsoft? It may seem that’s already the case — especially since all these firms have actually done well during the pandemic.

ACEMOGLU: And I think that’s not a good future either, because big companies that are dominating the economy are ultimately responsible for part of the increase in inequality, part of the lessened democratic nature of the system.

So three of the four scenarios Acemoglu envisions are bad ones. But he does see one better option. It’s essentially a repeat of how the U.S. responded to the Great Depression.

ACEMOGLU: The lessons that politicians and experts learned during that period was that in a more dynamic, modern and globalizing economy, not having a strong social safety net, not having the right type of regulation, monetary policy, fiscal policy, all of those were very dangerous and they opened the door to big crises, to inequality, to poverty, and ultimately to fascism, in the case of Germany and Italy, for instance.

Again, it’s important to stress that predicting the future is essentially impossible, especially on issues as complex as these. Especially when there’s so much volatility and uncertainty. But of course, we are all driven to predict the future, at least our own futures. If you work in a hard-hit industry and you’re in your forties or fifties, what’s your job future? Is an Amazon fulfillment center the best you can hope for? What if you just graduated college? This wasn’t the job market you thought you’d come into just a few months ago. And what if you just spent a couple years in prison, maybe for some minor, non-violent offense — but still, you’re coming out of prison, in this job market.

On last week’s show, the Texas A&M economist Jennifer Doleac told us how one policy, called “Ban the Box,” was designed to help former prisoners get jobs and not return to prison. There used to be a box to check on job applications if you had a criminal record. In many states, that box was removed because it was thought to be discriminatory. Now employers were left to guess which applicants had a record. And this, Doleac found, led to a different sort of discrimination, as employers hired fewer young black and Hispanic men overall, including those without a criminal record.

Jennifer DOLEAC: They can just say, “Well, I’m just not going to interview any black men, because they might have a criminal record.”

Doleac also found this effect was more pronounced in a down economy.

DOLEAC: We were able to use the 2008 recession as a bit of a natural experiment to look at to what extent the detrimental impacts of “Ban the Box” varied depending on the national unemployment rate. And the idea there is that if employers have 100 job applications for every one spot they have open, they have a lot of power to discriminate.

So according to Doleac, “Ban the Box” is a policy with good intentions and poor outcomes. When she looked at other policies designed to help former prisoners stay out of prison, she saw they often failed too — including job re-entry programs and even just placing ex-prisoners in jobs. So, has Doleac seen anything that does reduce recidivism?

DOLEAC: One type of program that I have become particularly interested in is programs or policies that just increase financial assistance for people coming out of prison. So just giving them money. It turns out there are a variety of different policies that in some form or another just give people money with no job attached. And a variety of studies have shown really beneficial impacts of that sort of financial assistance. And none of this is a slam dunk, but it’s really promising.

DUBNER: How much money is a proper or useful or maybe even optimal amount? And how long does this money need to keep coming?

DOLEAC: Those are both excellent questions that we don’t have great answers to yet. The studies that I think are most relevant to this — one was a sort of experiment in Chicago where you could call into Homelessness Prevention Center and you could apply for emergency financial assistance. And I think that it was up to about $1,000, we’re not talking tens of thousands of dollars.

DUBNER: Let’s say I’m feeling a little skeptical and maybe even cynical. And I say, “Well, wait a minute. That’s nice that it works for them. But why should I reward or pay you for having committed a crime?”

DOLEAC: My response as an economist would be that the short-run cost of giving someone $1,000 when they get out of prison, to get on their feet, is much lower than the long-term cost of having them cycle back through the prison system in a year or two. And so it could still be a very good investment.

DUBNER: And have there been any programs where there’s a long-term cash payment?

DOLEAC: There were a couple of experiments in the 1970s where people coming out of prison were given unemployment benefits. The evidence for those is a little bit mixed. But that was also a really long time ago in a very different context. I think of this as being an area where the current evidence is super promising, but we need a lot more research on this, and it’s something I’m actually currently working on. So I might have some answers for you sometime.

DUBNER: It sounds like you would probably support something like a U.B.I. or some kind of extended benefits that are available to all?

DOLEAC: I would be supportive of a program that particularly targeted resources to people who are coming out of jail and prison. Which might not be that politically popular with non-economists. I would probably be a little bit more skeptical of a U.B.I.-type program. But I don’t know. Anything’s possible in the current moment.

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Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison Craiglow, Greg Rippin, Matt Hickey, Corinne Wallace, Mary Diduch and Daphne Chen. Our intern is Emma Tyrrell. We had help this week from James Foster. 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, Stitcher, or wherever you get your podcasts.