The International Ballroom is beyond packed to capacity, and it certainly isn't for the cold-poached chicken breast with Thai-flavored slaw for lunch.

The Lunch Panel of Nobel Laureates in Economics discusses a few of the hot buttons in as many of the seven conference tracks they can fit into 90 minutes: Climate, Education, Finance, Health, Industry, Media, and Regions.

Opening Remarks: Michael Klowden, President and CEO, Milken Institute

Panelists: 
Gary Becker, Nobel Laureate, Economic Sciences, 1992; University Professor of Economics and Sociology, University of Chicago; FasterCures Board Member

Daniel Kahneman, Nobel Laureate, Economic Sciences, 2002; Eugene Higgins Professor of Psychology, Professor of Public Affairs, Woodrow Wilson School of Public and International Affairs, Princeton University

Myron Scholes, Nobel Laureate, Economic Sciences, 1997; Chairman, Oak Hill Platinum Partners; Frank E. Buck Professor of Finance Emeritus, Stanford University Graduate School of Business 

Moderator: Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions.

Introductory video focuses on the Milken Institute's Think Tank and their mission.

Mike Klowden opens the panel with the theme of the conference is "Building a Prosperous Future," obligingly thanks a very long list of sponsors, and gives out a few conference statistics. There are 2700 registrants from 50 countries, and 47 US states. Eighty percent of the 390 speakers and panelists are new to global conference.

The panelists take turns introducing each other.

Mike Klowden introduces Myron Scholes, who used to be a professor at the Univeristy of Chicago before settling on the West Coast at Stanford. Myron is a pioneer in financial theory as a contributor to the Black-Scholes model in Options Theory. Options Theory has been a major force in the modern revolution in finance with respect to how to price out options. Myron also applies his theories in real-life, running his own hedge funds.

Myron introduces Daniel Kahneman, who received a Nobel prize in economics as a psychologist, not an economist. Danny applies psychology to Prospect Theory - individuals value gain much less than they value loss, and act accordingly. His work was the birth of behavioral economics, behavioral finance and the concept of individual decision-making, i.e. how individuals' comparison of incentives to costs is crucial to human behavior.

Danny introduces Gary Becker, both an economist and social scientist. His work, the Theory of Human Capital, is a way of thinking about rational decision making. For example, is smoking rational, particularly for young college students who have knowledge that there is no positive correlation between smoking and health?

** disclaimer: The following section paraphrases questions from the moderator and the Panelists' responses. This is not a transcript of the discussion. **

Al Gore has made presentations at the Milken Conference about the topic of the environment before. Carbon-based energy and importing oil are significant concerns. At one time, the significant concern was food. Projections were that the world would eventually starve itself to death, with the frightening statistic that it would require something like two people's energy to feed one person. Today, however, one person can feed 300 people, and though food distribution may be a problem, we are no longer concerned about the ability to feed people. Back then, along with those skewed projections on food, we also had projections on the price of energy. Today, the most disturbing projections are those concerning the destruction of living organisms on earth, especially because it is irreversible.

Question for the Panelists: Is this an issue, climate change in particular?

Myron Schole's thoughts: Finance uses statistical time series for projections and forecasts. However, the question is can current interventions cause processes to change? The most difficult problem we have is that though we have historical data it may not be sufficient to predict the future. We are part of the process, thus we affect the nature of the process. The activity of governments and other agencies can change the process.  

It is worth noting that global temperature hasn't really changed that much. However, it is CO₂ levels and other things that bring in different types of movement that should be of concern.

Danny Kahneman's thoughts: From a psychology perspective, climate looks like a very bad problem in the sense that the outcome is not immediate. Because it is very abstract, it is extremely difficult to mobilize public opinion. One has to question whether the social arrangements are adequate to handle the threats we face. If, for example, there were scientific consensus that would have an effect 10 years from now, it would take extraordinarily inspired leadership to overcome the doubters.  

Gary Becker's thoughts: It is very difficult to make forecasts. Scientist now have to work more like eocnomists, constructing models. Partly due to man-made activity.

With respect to CO₂ levels, look at the Kyoto Agreement, which is a very forward agreement that taxes CO₂ emissions. The US is not part of the agreement, but it includes 140 countries including much of western European, Russia, China, and Japan, so it sets up a strange incentive structure. These countries are trying to cut back CO₂, but the rest of the developing world is completely excluded. Is that good? No, it's bad. It is a sign of inability of governments to cope adequately with the problem.

There is another potential solution. If people can devise methods to draw CO₂ out of the air, the climate problem is not irreversible. Furthermore, not just reducing CO₂ in air, but reducing the stock would be extremely effective. For the biggest advocates of climate control, reduction in stock is ultimately the real solution to the problem. There is fear when faced wth problems, but technological progress has made the difference

Question for Myron: China is the largest consumer of energy, and might even surpass the US in use of CO₂. We have seen some financial incentives created, i.e. sulfur indexing. Myron, do you see this as a development in markets around the world, and compliance by companies in these activities?

Myron's response: There are externalities because of emissions. We want to make change in production facilities, but if we restrict emisisons and allow trading rights, as we reduce the overall amount that can be emitted, then it would be a financial incentive to solve the problem. But simply stop emissions today also injects governmental uncertainties. IN order for this to be efficient, we have to take into account old investments.

Question for Gary: Look at the cost of a barrel of oil. Carter, Nixon, and Bush have all called for independence from carbon-based fuels. If we try to estimate the true cost of a barrel of oil, it is difficult because we have to factor in military costs to protect shipping lines, etc. For example, cigarettes are, in effect, $7-$8 a pack for their social cost. If the barrel of oil costs more than a quoted dollar amount for it's selling for today, is it possible to bring these two in line? The US is spending more on defense and shipping lines than any other country.

Gary's response: Those are not related to oil, so a barrel price would be a much lower number. However, the principal is right. The question is, is the US doing it the right way? Maybe the US is undertaxing on gasoline. On the other hand, look at other ways we could be conserving energy. There is a lot of fear about nuclear energy here. But France gets70-75 % of their energy from nuclear energy. We need to build more nuclear plants and be able to re-use waste. By not doing so, we are blocking off a sector that could be used for electrical power. We need a more consistent energy policy without drastic changes with respect to gas prices, but we do also have to be more sensible about nuclear energy.

Health is the largest part of world's economy. It is 16% of the US economy, maybe 10% of other countries' economies. We don't seem to have been very successful on psychologically preparing people for health needs. Look at elementary school children picking teams for sports games. It has been shown that children will pick any minority classmate before they pick an overweight one. Not surprisingly, the US particularly has increased its weight10x in children!  The Milken Institute looked at the NFL. Fifteen years ago, not one single player weighed 300 lbs. This year, more than 300 players weigh 300 lbs or more. What are the panel's thoughts?

Danny's thoughts: A psychologist's persepective is pessimistic about inducing social change. Who is going to intervene? Are we going to tax children or parents for being overweight? Are we going to prohibit things? The mechanisms are not easily visible. We have been successful in educating people with respect to germ theory. For exmaple, developing a social policy against smoking has been successful. 

There was a study of 800 women in Columbus OH vs. France and how they spend their time. There are dramatic differences with respect to eating as a way of "speanding time." In the American sample, 10% of the time, eating was an activity. In France, eating is an activity 12%. What does this mean? People in the US don't consider "eating" as an acitivty and eat without thinking about it. Eating is not a social, conscious activity. When you eat without knowing that your'e eating, you eat more, which has been shown to correlate with BMI. The obesity problem would improve if people paid more attention to eating and less attention on eating as part of a multi-tasking.

Gary's thoughts: Weight gain in US and not only US but all over the world, has mostly occurred since 1980. Prior to that, there were slow improvements due to the change in nature of work, but the real explosion in weight in teenagers and adults has been since 1980. What has changed since 1980? There has to be something, perhaps a cultural change. We have to rule out the idea that the difference comes from consumption of significantly more calories. That isn't true. Perhaps there has been a change in occupation, but there really hasn't been a dramatic shift in occupation since 1980. A study by Fernando Wilson suggests that the variable that is responsible is the shift (in teenagers) in time used toward, not so much TV (as people are actually watching less now than in 1980), but toward video games, chat rooms, and other time allocations on the computer. 

The important question that people are asking themselves is: Will the health industry be able, in the next 40 years, to come up with things that will make the consequences of being overweight much less than they are now? Yes. That is what they are banking on. 

Danny's thoughts: There is a set point of weight. What causes the set point of shift? This is not well-understood. We need to come back to the cultural difference, e.g. study portion sizes in the US and France. What does it take to feed four? It takes 35% more food to feed four people in the US than it does in France. That is something in the culture. Also, serving and eating "second helpings" is cultural.

There are two majors trends: aging of the US population, and increased demand for health care. The demand for healthcare increases by age, e.g. it takes 4x the health expenditure for a 65 year-old person than someone who is 30-40 years old. In the developing world, China and India also demand more for healthcare as they move into middle age. What do we see on health care issues?

Gary's response: Health and healthcare should be high on the priority list for all social scientists and public policy people. Partly aging problem ,but more so, increased spending as at given ages. Healthspending is ging up,the value is there, the question is, what can we do to make the system more efficient? Two things. Offer tax savings on healthcare so that it's not tied with employment, and solve the problem of treating older people.

The US got into the habit of tying health expenditures to corporations. This habit grew out of WWII. The growth in the tax rate gave impetus to keep that system up. We want to reform that ideology. In principal, that can be reformed easy enough.

Additionally, older people use more expenses for health, but we don’t have to take them in the magnitude and form we are currently taking them. This should be corrected, but it’s hard to correct. The problem is that we would like to say we reach a certain age then simply cut off health care. Other countries are capable of doing this, e.g. Netherlands. However, we don’t want to do that, and we simply don't. Right now, we spend $20k/year average health exp for someone 85 years old.

So how do we deal with this? Drugs.

There are three classes of health care: drugs, hospitalization, and physicians.

Hospitalization and physicians are activities for which cost increases as the number of involved people increases. Drugs, on the other hand, have a great advantage in this respect. Drugs have a high fixed cost (research, development, etc.). Once a drug is made, it's very cheap to add on people. The solution is to provide drug coverage under Medicare, increase importance of drug coverage, and simply shift more toward drugs as healthcare. This takes care of the elderly, and makes it much cheaper.

Myron's thoughts: How do we cut off procedures to people who are getting older? Do we have suits against doctors for malpractice? This makes it hard to make economic decisions. The cost to the doctor to make a wrong decision is much higher than not making the decision at all.

A question to the Panelists: What about personal health care savings accounts? Some believe that this will exceed things like 401(k)s.

Myron's thoughts: We alway think of these things as separate, i.e. healthcare vs. retirement vs. annutiies. In the future, we will have complete packages. The idea of combining products into one total package, a "life savings package," will evolve.

Gary's thoughts: Health savings are most important as a new innovation in provision of health care. It's gradually catching on. This is different from health payment accounts. Health savings accounts can carry over into future, i.e. become a retirement savings. The idea relies on more power to the patient, which is the direction in which we are moving. Patients are becoming more informed, and are more involved in their health decision making. This is a way to greatly improve health efifciency.

Danny's thoughts: The rest of the world has different ways of dispensing health care. They are single-payor, which is not ideal, but certainly costs less, and is much more efficient. Maybe it's not sustainable over 50 years, but there are many things that aren’t sustainable over 50 years. We're not looking enough at the rest of the world as examples to follow.

Mike: The thing is, there are 14 countries that advertise medical tourism. You can wait two years for a hip replacement in Canada, or go to the US and get one now. Or go to India, see the Taj Mahal, and get a hip replacement as a bonus.

Subject change to finance. There are a series of countries around the world who have built up trememdous reserves relative to their size - UAE, Singapore, Norway, Taiwan. Many have not made the mistakes of Japan, i.e. deployed capital and caused massive price increase. As we look to Norway, which will have $225 billion by the end of 2006, and other countries, where is the money coming from? Is it balance of trade issue? Where is this capital going to be deployed?

Myron's thoughts: For countries with large surpluses, it pays to invest in bonds. When countries have surpluses, that is a deificit of consumption. So China, and other countries with surpluses, will spend over time in consumption or put it to work in investment. Over time, there will be a change in reserve mix, as we’ve seen historically.

Gary's thoughts: Factor the US into the picture, and you have international specialization – some saving a lot, like China, and other countries will be borrowing that money. That is an efficient arrangement all around. That is rational in terms of this international specialiazation, and the US has done well, having a trade deficit.

The final question to the panelists is what are their preliminary projections? (but time ran out).

Closing video: “Doing things the same way doesn't create breakthroughs”