The surprising honesty of politicians

JDN 2457509

The stereotype that politicians are dishonest is so strong that many people use “honest politician” as an example of an oxymoron. There is a sense that politicians never keep their campaign promises, so what they say is basically just meaningless noise.

This impression could scarcely be further from the truth. Politicians are quite honest, and they usually try to keep their campaign promises. On average, about 2/3 of campaign promises are kept. Most of those that aren’t are largely given up under heavy opposition, not simply ignored because they weren’t real objectives. Politicians are distrusted, while clergy are trusted—despite the fact that clergy quite literally make their entire career out of selling beliefs that are demonstrably false and in most cases outright absurd.

Along similar lines, most people seem to have an impression that democracy is largely a show, and powerful oligarchs make most of the real decisions behind the scenes—even Jimmy Carter has been saying this recently. While there is evidence that the rich have disproportionate power over politicians, this is largely only true of Republicans; and furthermore the theory that democracy is meaningless can’t explain two rather important facts:

1. Economic prosperity is strongly correlated with democracy—more strongly correlated than most economists believed until quite recently. Even the “Miracle of Chile” didn’t actually occur when Pinochet reformed the economy—it occurred in the 1990s, after Pinochet ceded power to a democratic government. Stronger democracy is also strongly linked to better education, though surprisingly has little correlation with inequality.

2. Democratic states almost never go to war with one another. Democracies go to war with non-democracies, and non-democracies go to war with one another; but with a few exceptions (and largely limited to young, unstable democracies), democracies do not go to war with other democracies.

If democracy meant nothing, and were all just a sideshow that the elites use to manipulate us, these results would simply be impossible. If voting did not actually shape policy in some fashion, policy outcomes for democracies and non-democracies would have to be identical. In fact they are wildly different, so different it’s actually kind of hard to explain. Apparently similar policies simply seem to work better when they are implemented by democracies—perhaps because in order to be passed in the first place they must have a certain amount of buy-in from the population.

In fact, politicians are more honest than we’d expect them to be based on the incentives provided by elections—they seem to either be acting out of genuine altruism or to advance their reputation in other ways.

Neoclassical economic theory actually has trouble explaining why politicians are so honest—which may have something to do with the fact that politicians who were trained as neoclassical economists are more likely to be corrupt. A similar effect holds for undergraduate students in experiments. Teaching people that human beings are infinite identical psychopaths seems to make them behave a bit more like psychopaths! (Though some of this may also be selection bias: Psychopaths may find economics appealing either because the ideology justifies their behavior or because it’s a pretty lucrative field.)

Part of this false impression clearly comes from the media, and from politicians slandering each other. Hillary Clinton has an almost impeccable fact-check rating—comparable to or arguably even better than Bernie Sanders and John Kasich, both of whom have majority “Mostly True” or “True” ratings. All three are miles ahead of Donald Trump and Ted Cruz, both of whom are over 60% “Mostly False”, “False”, or “Pants on Fire” (the latter is 18% of what Donald Trump says). And yet, Hillary Clinton is widely perceived as dishonest and Donald Trump is widely perceived as “speaking his mind”. Maybe people think Trump is honest because he keeps saying he is. Or maybe it’s because he’s honest about his horrible motivations, even though he gets most of the facts wrong.

These facts should give us hope! Our votes are not meaningless, and our voices do make a difference. We are right to be obsessed with keeping our politicians honest—but it’s time we recognize that it’s working. We are doing something right. If we can figure out what it is, maybe we can do even better.The last thing we want to do right now is throw up our hands and give up.

What really happened in Greece

JDN 2457506

I said I’d get back to this issue, so here goes.

Let’s start with what is uncontroversial: Greece is in trouble.

Their per-capita GDP PPP has fallen from a peak of over $32,000 in 2007 to a trough of just over $24,000 in 2013, and only just began to recover over the last 2 years. That’s a fall of 29 log points. Put another way, the average person in Greece has about the same real income now that they had in the year 2000—a decade and a half of economic growth disappeared.

Their unemployment rate surged from about 7% in 2007 to almost 28% in 2013. It remains over 24%. That is, almost one quarter of all adults in Greece are seeking jobs and not finding them. The US has not seen an unemployment rate that high since the Great Depression.

Most shocking of all, over 40% of the population in Greece is now below the national poverty line. They define poverty as 60% of the inflation-adjusted average income in 2009, which works out to 665 Euros per person ($756 at current exchange rates) per month, or about $9000 per year. They also have an absolute poverty line, which 14% of Greeks now fall below, but only 2% did before the crash.

So now, let’s talk about why.

There’s a standard narrative you’ve probably heard many times, which goes something like this:

The Greek government spent too profligately, heaping social services on the population without the tax base to support them. Unemployment insurance was too generous; pensions were too large; it was too hard to fire workers or cut wages. Thus, work incentives were too weak, and there was no way to sustain a high GDP. But they refused to cut back on these social services, and as a result went further and further into debt until it finally became unsustainable. Now they are cutting spending and raising taxes like they needed to, and it will eventually allow them to repay their debt.

Here’s a fellow of the Cato Institute spreading this narrative on the BBC. Here’s ABC with a five bullet-point list: Pension system, benefits, early retirement, “high unemployment and work culture issues” (yes, seriously), and tax evasion. Here the Telegraph says that Greece “went on a spending spree” and “stopped paying taxes”.

That story is almost completely wrong. Almost nothing about it is true. Cato and the Telegraph got basically everything wrong. The only one ABC got right was tax evasion.

Here’s someone else arguing that Greece has a problem with corruption and failed governance; there is something to be said for this, as Greece is fairly corrupt by European standards—though hardly by world standards. For being only a generation removed from an authoritarian military junta, they’re doing quite well actually. They’re about as corrupt as a typical upper-middle income country like Libya or Botswana; and Botswana is widely regarded as the shining city on a hill of transparency as far as Sub-Saharan Africa is concerned. So corruption may have made things worse, but it can’t be the whole story.

First of all, social services in Greece were not particularly extensive compared to the rest of Europe.

Before the crisis, Greece’s government spending was about 44% of GDP.

That was about the same as Germany. It was slightly more than the UK. It was less than Denmark and France, both of which have government spending of about 50% of GDP.

Greece even tried to cut spending to pay down their debt—it didn’t work, because they simply ended up worsening the economic collapse and undermining the tax base they needed to do that.

Europe has fairly extensive social services by world standards—but that’s a major part of why it’s the First World. Even the US, despite spending far less than Europe on social services, still spends a great deal more than most countries—about 36% of GDP.

Second, if work incentives were a problem, you would not have high unemployment. People don’t seem to grasp what the word unemployment actually means, which is part of why I can’t stand it when news outlets just arbitrarily substitute “jobless” to save a couple of syllables. Unemployment does not mean simply that you don’t have a job. It means that you don’t have a job and are trying to get one.

The word you’re looking for to describe simply not having a job is nonemployment, and that’s such a rarely used term my spell-checker complains about it. Yet economists rarely use this term precisely because it doesn’t matter; a high nonemployment rate is not a symptom of a failing economy but a result of high productivity moving us toward the post-scarcity future (kicking and screaming, evidently). If the problem with Greece were that they were too lazy and they retire too early (which is basically what ABC was saying in slightly more polite language), there would be high nonemployment, but there would not be high unemployment. “High unemployment and work culture issues” is actually a contradiction.

Before the crisis, Greece had an employment-to-population ratio of 49%, meaning a nonemployment rate of 51%. If that sounds ludicrously high, you’re not accustomed to nonemployment figures. During the same time, the United States had an employment-to-population ratio of 52% and thus a nonemployment rate of 48%. So the number of people in Greece who were voluntarily choosing to drop out of work before the crisis was just slightly larger than the number in the US—and actually when you adjust for the fact that the US is full of young immigrants and Greece is full of old people (their median age is 10 years older than ours), it begins to look like it’s we Americans who are lazy. (Actually, it’s that we are studious—the US has an extremely high rate of college enrollment and the best colleges in the world. Full-time students are nonemployed, but they are certainly not unemployed.)

But Greece does have an enormously high debt, right? Yes—but it was actually not as bad before the crisis. Their government debt surged from 105% of GDP to almost 180% today. 105% of GDP is about what we have right now in the US; it’s less than what we had right after WW2. This is a little high, but really nothing to worry about, especially if you’ve incurred the debt for the right reasons. (The famous paper by Rogart and Reinhoff arguing that 90% of GDP is a horrible point of no return was literally based on math errors.)

Moreover, Ireland and Spain suffered much the same fate as Greece, despite running primary budget surpluses.

So… what did happen? If it wasn’t their profligate spending that put them in this mess, what was it?

Well, first of all, there was the Second Depression, a worldwide phenomenon triggered by the collapse of derivatives markets in the United States. (You want unsustainable debt? Try 20 to 1 leveraged CDO-squareds and one quadrillion dollars in notional value. Notional value isn’t everything, but it’s a lot.) So it’s mainly our fault, or rather the fault of our largest banks. As far as us voters, it’s “our fault” in the way that if your car gets stolen it’s “your fault” for not locking the doors and installing a LoJack. We could have regulated against this and enforced those regulations, but we didn’t. (Fortunately, Dodd-Frank looks like it might be working.)

Greece was hit particularly hard because they are highly dependent on trade, particularly in services like tourism that are highly sensitive to the business cycle. Before the crash they imported 36% of GDP and exported 23% of GDP. Now they import 35% of GDP and export 33% of GDP—but it’s a much smaller GDP. Their exports have only slightly increased while their imports have plummeted. (This has reduced their “trade deficit”, but that has always been a silly concept. I guess it’s less silly if you don’t control your own currency, but it’s still silly.)

Once the crash happened, the US had sovereign monetary policy and the wherewithal to actually use that monetary policy effectively, so we weathered the crash fairly well, all things considered. Our unemployment rate barely went over 10%. But Greece did not have sovereign monetary policy—they are tied to the Euro—and that severely limited their options for expanding the money supply as a result of the crisis. Raising spending and cutting taxes was the best thing they could do.

But the bank(st?)ers and their derivatives schemes caused the Greek debt crisis a good deal more directly than just that. Part of the condition of joining the Euro was that countries must limit their fiscal deficit to no more than 3% of GDP (which is a totally arbitrary figure with no economic basis in case you were wondering). Greece was unwilling or unable to do so, but wanted to look like they were following the rules—so they called up Goldman Sachs and got them to make some special derivatives that Greece could use to continue borrowing without looking like they were borrowing. The bank could have refused; they could have even reported it to the European Central Bank. But of course they didn’t; they got their brokerage fee, and they knew they’d sell it off to some other bank long before they had to worry about whether Greece could ever actually repay it. And then (as I said I’d get back to in a previous post) they paid off the credit rating agencies to get them to rate these newfangled securities as low-risk.

In other words, Greece is not broke; they are being robbed.

Like homeowners in the US, Greece was offered loans they couldn’t afford to pay, but the banks told them they could, because the banks had lost all incentive to actually bother with the question of whether loans can be repaid. They had “moved on”; their “financial innovation” of securitization and collateralized debt obligations meant that they could collect origination fees and brokerage fees on loans that could never possibly be repaid, then sell them off to some Greater Fool down the line who would end up actually bearing the default. As long as the system was complex enough and opaque enough, the buyers would never realize the garbage they were getting until it was too late. The entire concept of loans was thereby broken: The basic assumption that you only loan money you expect to be repaid no longer held.

And it worked, for awhile, until finally the unpayable loans tried to create more money than there was in the world, and people started demanding repayment that simply wasn’t possible. Then the whole scheme fell apart, and banks began to go under—but of course we saved them, because you’ve got to save the banks, how can you not save the banks?

Honestly I don’t even disagree with saving the banks, actually. It was probably necessary. What bothers me is that we did nothing to save everyone else. We did nothing to keep people in their homes, nothing to stop businesses from collapsing and workers losing their jobs. Precisely because of the absurd over-leveraging of the financial system, the cost to simply refinance every mortgage in America would have been less than the amount we loaned out in bank bailouts. The banks probably would have done fine anyway, but if they didn’t, so what? The banks exist to serve the people—not the other way around.

We can stop this from happening again—here in the US, in Greece, in the rest of Europe, everywhere. But in order to do that we must first understand what actually happened; we must stop blaming the victims and start blaming the perpetrators.

The Expanse gets the science right—including the economics

JDN 2457502

Despite constantly working on half a dozen projects at once (literally—preparing to start my PhD, writing this blog, working at my day job, editing a novel, preparing to submit a nonfiction book, writing another nonfiction book with three of my friends as co-authors, and creating a card game—that’s seven actually), I do occasionally find time to do things for fun. One I’ve been doing lately is catching up on The Expanse on DVR (I’m about halfway through the first season so far).

If you’re not familiar with The Expanse, it has been fairly aptly described as Battlestar Galactica meets Game of Thrones, though I think that particular comparison misrepresents the tone and attitudes of the series, because both BG and GoT are so dark and cynical (“It’s a nice day… for a… red wedding!”). I think “Star Trek meets Game of Thrones” might be better actually—the extreme idealism of Star Trek would cancel out the extreme cynicism of Game of Thrones, with the result being a complex mix of idealism and cynicism that more accurately reflects the real world (a world where Mahatma Gandhi and Adolf Hitler lived at the same time). That complex, nuanced world (or should I say worlds?) is where The Expanse takes place. ST is also more geopolitical than BG and The Expanse is nothing if not geopolitical.

But The Expanse is not just psychologically realistic—it is also scientifically and economically realistic. It may in fact be the hardest science fiction I have ever encountered, and is definitely the hardest science fiction I’ve seen in a television show. (There are a few books that might be slightly harder, as well as some movies based on them.)

The only major scientific inaccuracy I’ve been able to find so far is the use of sound effects in space, and actually even these can be interpreted as reflecting an omniscient narrator perspective that would hear any sounds that anyone would hear, regardless of what planet or ship they might be on. The sounds the audience hears all seem to be sounds that someone would hear—there’s simply no particular person who would hear all of them. When people are actually thrown into hard vacuum, we don’t hear them make any noise.

Like Firefly (and for once I think The Expanse might actually be good enough to deserve that comparison), there is no FTL, no aliens, no superhuman AI. Human beings are bound within our own solar system, and travel between planets takes weeks or months depending on your energy budget. They actually show holograms projecting the trajectory of various spacecraft and the trajectories actually make good sense in terms of orbital mechanics. Finally screenwriters had the courage to give us the terrifying suspense and inevitability of an incoming nuclear missile rounding a nearby asteroid and intercepting your trajectory, where you have minutes to think about it but not nearly enough delta-v to get out of its blast radius. That is what space combat will be like, if we ever have space combat (as awesome as it is to watch, I strongly hope that we will not ever actually do it). Unlike what Star Trek would have you believe, space is not a 19th century ocean.

They do have stealth in space—but it requires technology that even to them is highly advanced. Moreover it appears to only work for relatively short periods and seems most effective against civilian vessels that would likely lack state-of-the-art sensors, both of which make it a lot more plausible.

Computers are more advanced in the 2200s then they were in the 2000s, but not radically so, at most a million times faster, about what we gained since the 1980s. I’m guessing a smartphone in The Expanse runs at a few petaflops. Essentially they’re banking on Moore’s Law finally dying sometime in the mid 21st century, but then, so am I. Perhaps a bit harder to swallow is that no one has figured out good enough heuristics to match human cognition; but then, human cognition is very tightly optimized.

Spacecraft don’t have artificial gravity except for the thrust of their engines, and people float around as they should when ships are freefalling. They actually deal with the fact that Mars and Ceres have lower gravity than Earth, and the kinds of health problems that result from this. (One thing I do wish they’d done is had the Martian cruiser set a cruising acceleration of Mars-g—about 38% Earth-g—that would feel awkward and dizzying to their Earther captives. Instead they basically seem to assume that Martians still like to use Earth-g for space transit, but that does make some sense in terms of both human health and simply transit time.) It doesn’t seem like people move around quite awkwardly enough in the very low gravity of Ceres—which should be only about 3% Earth-g—but they do establish that electromagnetic boots are ubiquitous and that could account for most of this.

They fight primarily with nuclear missiles and kinetic weapons, and the damage done by nuclear missiles is appropriately reduced by the fact that vacuum doesn’t transmit shockwaves. (Nuclear missiles would still be quite damaging in space by releasing large amounts of wide-spectrum radiation; but they wouldn’t cause the total devastation they do within atmosphere.) Oddly they decided not to go with laser weapons as far as I can tell, which actually seems to me like they’ve underestimated advancement; laser weapons have a number of advantages that would be particularly useful in space, once we can actually make them affordable and reliable enough for widespread deployment. There could also be a three-tier system, where missiles are used at long range, railguns at medium range, and lasers at short range. (Yes, short range—the increased speed of lasers would be only slight compared to a good railgun, and would be more than offset by the effect of diffraction. At orbital distances, a laser is a shotgun.) Then again, it could well work out that railguns are just better—depending on how vessels are structured, puncturing their hulls with kinetic rounds could well be more useful than burning them up with infrared lasers.

But I think what really struck me about the realism of The Expanse is how it even makes the society realistic (in a way that, say, Firefly really doesn’t—we wanted a Western and we got a Western!).

The only major offworld colonies are Mars and Ceres, both of which seem to be fairly well-established, probably originally colonized as much as a century ago. Different societies have formed on each world; Earth has largely united under the United Nations (one of the lead characters is an undersecretary for the UN), but meanwhile Mars has split off into its own independent nation (“Martian” is now an ethnicity like “German” rather than meaning “extraterrestrial”), and the asteroid belt colonists, while formally still under Earth’s government, think of themselves as a different culture (“Belters”) and are seeking independence. There are some fairly obvious—but deftly managed rather than heavy-handed—parallels between the Belter independence movement and real-world independence movements, particularly Palestine (it’s hard not to think of the PLO when they talk about the OPA). Both Mars and the Belt have their own languages, while Earth’s languages have largely coalesced around English as the language of politics and commerce. (If the latter seems implausible, I remind you that the majority of the Internet and all international air traffic control are in English.) English is the world’s lingua franca (which is a really bizarre turn of phrase because it’s the Latin for French).

There is some of the conniving and murdering of Game of Thrones, but it is at a much more subdued level, and all of the major factions display both merits and flaws. There is no clear hero and no clear villain, just conflict and misunderstanding between a variety of human beings each with their own good and bad qualities. There does seem to be a sense that the most idealistic characters suffer for their idealism much as the Starks often do, but unlike the Starks they usually survive and learn from the experience. Indeed, some of the most cynical also seem to suffer for their cynicism—in the episode I just finished, the grizzled UN Colonel assumed the worst of his adversary and ended up branded “the butcher of Anderson Station”.

Cost of living on Ceres is extraordinarily high because of the limited living space (the apartments look a lot like the tiny studios of New York or San Francisco), and above all the need to constantly import air and water from Earth. A central plot point in the first episode is that a ship carrying comet ice—i.e., water—to Ceres is lost in a surprise attack by unknown adversaries with advanced technology, and the result is a deepening of an already dire water shortage, exacerbating the Belter’s craving for rebellion.

Air and water are recyclable, so it wouldn’t be that literally every drink and every breath needs to be supplied from outside—indeed that would clearly be cost-prohibitive. But recycling is never perfect, and Ceres also appears to have a growing population, both of which would require a constant input of new resources to sustain. It makes perfect sense that the most powerful people on Ceres are billionaire tycoons who own water and air transport corporations.

The police on Ceres (of which another lead character is a detective) are well-intentioned but understaffed, underfunded and moderately corrupt, similar to what we seem to find in large inner-city police departments like the NYPD and LAPD. It felt completely right when they responded to an attempt to kill a police officer with absolutely overwhelming force and little regard for due process and procedure—for this is what real-world police departments almost always do.

But why colonize the asteroid belt at all? Mars is a whole planet, there is plenty there—and in The Expanse they are undergoing terraforming at a very plausible rate (there’s a moving scene where a Martian says to an Earther, “We’re trying to finish building our garden before you finish paving over yours.”). Mars has as much land as Earth, and it has water, abundant metals, and CO2 you could use to make air.Even just the frontier ambition could be enough to bring us to Mars.

But why go to Ceres? The explanation The Expanse offers is a very sensible one: Mining, particularly so-called “rare earth metals”. Gold and platinum might have been profitable to mine at first, but once they became plentiful the market would probably collapse or at least drop off to a level where they aren’t particularly expensive or interesting—because they aren’t useful for very much. But neodymium, scandium, and prometheum are all going to be in extremely high demand in a high-tech future based on nuclear-powered spacecraft, and given that we’re already running out of easily accessible deposits on Earth, by the 2200s there will probably be basically none left. The asteroid belt, however, will have plenty for centuries to come.

As a result Ceres is organized like a mining town, or perhaps an extractive petrostate (metallostate?); but due to lightspeed interplanetary communication—very important in the series—and some modicum of free speech it doesn’t appear to have attained more than a moderate level of corruption. This also seems realistic; the “end-of-history” thesis is often overstated, but the basic idea that some form of democracy and welfare-state capitalism is fast becoming the only viable model of governance does seem to be true, and that is almost certainly the model of governance we would export to other planets. In such a system corruption can only get so bad before it is shown on the mass media and people won’t take it anymore.

The show doesn’t deal much with absolute dollar (or whatever currency) numbers, which is probably wise; but nominal incomes on Ceres are likely extremely high even though the standard of living is quite poor, because the tiny living space and need to import air and water would make prices (literally?) astronomical. Most people on Ceres seem to have grown up there, but the initial attraction could have been something like the California Gold Rush, where rumors of spectacularly high incomes clashed with similarly spectacular expenses incurred upon arrival. “Become a millionaire!” “Oh, by the way, your utility bill this month is $112,000.”

Indeed, even the poor on Ceres don’t seem that poor, which is a very nice turn toward realism that a lot of other science fiction shows seem unprepared to make. In Firefly, the poor are poor—they can barely afford food and clothing, and have no modern conveniences whatsoever. (“Jaynestown”, perhaps my favorite episode, depicts this vividly.) But even the poor in the US today are rarely that poor; our minimalistic and half-hearted welfare state has a number of cracks one can fall through, but as long as you get the benefits you’re supposed to get you should be able to avoid starvation and homelessness. Similarly I find it hard to believe that any society with high enough productivity to routinely build interstellar spacecraft the way we build container ships would not have at least the kind of welfare state that provides for the most basic needs. Chronic dehydration is probably still a problem for Belters, because water would be too expensive to subsidize in this way; but they all seem to have fairly nice clothes, home appliances, and smartphones, and that seems right to me. At one point a character loses his arm, and the “cheap” solution is a cybernetic prosthetic—the “expensive” one would be to grow him a new arm. As today but perhaps even more so, poverty in The Expanse is really about inequality—the enormous power granted to those who have millions of times as much as others. (Another show that does this quite well, though is considerably softer as far as the physics, is Continuum. If I recall correctly, Alec Sadler in 2079 is literally a trillionaire.)

Mars also appears to be a democracy, and actually quite a thriving one. In many ways Mars appears to be surpassing Earth economically and technologically. This suggests that Mars was colonized with our best and brightest, but not necessarily; Australians have done quite well for themselves despite being founded as a penal colony. Mars colonization would also have a way of justifying their frontier idealism that no previous frontiers have granted: No indigenous people to displace, no local ecology to despoil, and no gifts from the surrounding environment. You really are working entirely out of your own hard work and know-how (and technology and funding from Earth of course) to establish a truly new world on the open and unspoiled frontier. You’re not naive or a hypocrite, it’s the real truth. That kind of realistic idealism could make the Martian Dream a success in ways even the American Dream never quite was.

In all it is a very compelling series, and should appeal to people like me who crave geopolitical nuance in fiction. But it also has its moments of huge space battles with exploding star cruisers, so there’s that.

The credit rating agencies to be worried about aren’t the ones you think

JDN 2457499

John Oliver is probably the best investigative journalist in America today, despite being neither American nor officially a journalist; last week he took on the subject of credit rating agencies, a classic example of his mantra “If you want to do something evil, put it inside something boring.” (note that it’s on HBO, so there is foul language):

As ever, his analysis of the subject is quite good—it’s absurd how much power these agencies have over our lives, and how little accountability they have for even assuring accuracy.

But I couldn’t help but feel that he was kind of missing the point. The credit rating agencies to really be worried about aren’t Equifax, Experian, and Transunion, the ones that assess credit ratings on individuals. They are Standard & Poor’s, Moody’s, and Fitch (which would have been even easier to skewer the way John Oliver did—perhaps we can get them confused with Standardly Poor, Moody, and Filch), the agencies which assess credit ratings on institutions.

These credit rating agencies have almost unimaginable power over our society. They are responsible for rating the risk of corporate bonds, certificates of deposit, stocks, derivatives such as mortgage-backed securities and collateralized debt obligations, and even municipal and government bonds.

S&P, Moody’s, and Fitch don’t just rate the creditworthiness of Goldman Sachs and J.P. Morgan Chase; they rate the creditworthiness of Detroit and Greece. (Indeed, they played an important role in the debt crisis of Greece, which I’ll talk about more in a later post.)

Moreover, they are proven corrupt. It’s a matter of public record.

Standard and Poor’s is the worst; they have been successfully sued for fraud by small banks in Pennsylvania and by the State of New Jersey; they have also settled fraud cases with the Securities and Exchange Commission and the Department of Justice.

Moody’s has also been sued for fraud by the Department of Justice, and all three have been prosecuted for fraud by the State of New York.

But in fact this underestimates the corruption, because the worst conflicts of interest aren’t even illegal, or weren’t until Dodd-Frank was passed in 2010. The basic structure of this credit rating system is fundamentally broken; the agencies are private, for-profit corporations, and they get their revenue entirely from the banks that pay them to assess their risk. If they rate a bank’s asset as too risky, the bank stops paying them, and instead goes to another agency that will offer a higher rating—and simply the threat of doing so keeps them in line. As a result their ratings are basically uncorrelated with real risk—they failed to predict the collapse of Lehman Brothers or the failure of mortgage-backed CDOs, and they didn’t “predict” the European debt crisis so much as cause it by their panic.

Then of course there’s the fact that they are obviously an oligopoly, and furthermore one that is explicitly protected under US law. But then it dawns upon you: Wait… US law? US law decides the structure of credit rating agencies that set the bond rates of entire nations? Yes, that’s right. You’d think that such ratings would be set by the World Bank or something, but they’re not; in fact here’s a paper published by the World Bank in 2004 about how rather than reform our credit rating system, we should instead tell poor countries to reform themselves so they can better impress the private credit rating agencies.

In fact the whole concept of “sovereign debt risk” is fundamentally defective; a country that borrows in its own currency should never have to default on debt under any circumstances. National debt is almost nothing like personal or corporate debt. Their fears should be inflation and unemployment—their monetary policy should be set to minimize the harm of these two basic macroeconomic problems, understanding that policies which mitigate one may enflame the other. There is such a thing as bad fiscal policy, but it has nothing to do with “running out of money to pay your debt” unless you are forced to borrow in a currency you can’t control (as Greece is, because they are on the Euro—their debt is less like the US national debt and more like the debt of Puerto Rico, which is suffering an ongoing debt crisis you may not have heard about). If you borrow in your own currency, you should be worried about excessive borrowing creating inflation and devaluing your currency—but not about suddenly being unable to repay your creditors. The whole concept of giving a sovereign nation a credit rating makes no sense. You will be repaid on time and in full, in nominal terms; if inflation or currency exchange has devalued the currency you are repaid in, that’s sort of like a partial default, but it’s a fundamentally different kind of “default” than simply not paying back the money—and credit ratings have no way of capturing that difference.

In particular, it makes no sense for interest rates on government bonds to go up when a country is suffering some kind of macroeconomic problem.

The basic argument for why interest rates go up when risk is higher is that lenders expect to be paid more by those who do pay to compensate for what they lose from those who don’t pay. This is already much more problematic than most economists appreciate; I’ve been meaning to write a paper on how this system creates self-fulfilling prophecies of default and moral hazard from people who pay their debts being forced to subsidize those who don’t. But it at least makes some sense.

But if a country is a “high risk” in the sense of macroeconomic instability undermining the real value of their debt, we want to ensure that they can restore macroeconomic stability. But we know that when there is a surge in interest rates on government bonds, instability gets worse, not better. Fiscal policy is suddenly shifted away from real production into higher debt payments, and this creates unemployment and makes the economic crisis worse. As Paul Krugman writes about frequently, these policies of “austerity” cause enormous damage to national economies and ultimately benefit no one because they destroy the source of wealth that would have been used to repay the debt.

By letting credit rating agencies decide the rates at which governments must borrow, we are effectively treating national governments as a special case of corporations. But corporations, by design, act for profit and can go bankrupt. National governments are supposed to act for the public good and persist indefinitely. We can’t simply let Greece fail as we might let a bank fail (and of course we’ve seen that there are serious downsides even to that). We have to restructure the sovereign debt system so that it benefits the development of nations rather than detracting from it. The first step is removing the power of private for-profit corporations in the US to decide the “creditworthiness” of entire countries. If we need to assess such risks at all, they should be done by international institutions like the UN or the World Bank.

But right now people are so stuck in the idea that national debt is basically the same as personal or corporate debt that they can’t even understand the problem. For after all, one must repay one’s debts.

Whose tax plan makes the most sense?

JDN 2457496

The election for the President of the United States has now come down to four candidates; the most likely winner is Hillary Clinton, but despite claims to the contrary Bernie Sanders could still win the Democratic nomination. On the Republican side Donald Trump holds a small lead over Ted Cruz, and then there’s a small chance that Kasich could win or a new candidate could emerge if neither can win a majority and they go to a brokered convention (I’ve heard Romney and Ryan suggested, and either of them would be far better).

There are a lot of differences between the various candidates, and while it feels partisan to say so I really think it’s pretty obvious that Clinton and Sanders are superior candidates to Trump and Cruz. Trump is a plutocratic crypto-fascist blowhard with no actual qualifications, and Cruz seems to extrude sleaze from his every pore—such that basically nobody who knows him well actually likes him.

In general I’ve preferred Sanders, though when he started talking about trade policy the other day it actually got me pretty worried that he doesn’t appreciate the benefits of free trade. So while I think a lot of Clinton’s plans are kind of lukewarm, I wouldn’t mind if she won, if only because her trade policy is clearly better.

But today I’m going to compare all four candidates in a somewhat wonkier way: Let’s talk about taxes.

Specifically, federal income tax. There are a lot of other types of taxes of course, but federal income tax is the chief source of revenue for the US federal government, as well as the chief mechanism by which the United States engages in redistribution of wealth. I’ll also briefly discuss payroll taxes, which are the second-largest source of federal revenue.
So, I’ve looked up the income tax plans of Hillary Clinton, Bernie Sanders, Donald Trump, and Ted Cruz respectively, and they are summarized below. The first column gives the minimum income threshold for that marginal tax rate (since they vary slightly I’ll be rounding to the nearest thousand). For comparison I’ve included the current income tax system as well. I’m using the rates for an individual filing singly with no deductions for simplicity.

Current system Hillary Clinton Bernie Sanders Donald Trump Ted Cruz
0 10% 10% 10% 0% 0%
9,000 15% 15% 15% 0% 0%
25,000 15% 15% 15% 10% 0%
36,000 25% 25% 25% 10% 10%
37,000 25% 25% 25% 10% 10%
50,000 25% 25% 25% 20% 10%
91,000 28% 28% 28% 20% 10%
150,000 28% 28% 28% 25% 10%
190,000 33% 33% 33% 25% 10%
250,000 33% 33% 37% 25% 10%
412,000 35% 35% 37% 25% 10%
413,000 39.6% 35% 37% 25% 10%
415,000 39.6% 39.6% 37% 25% 10%
500,000 39.6% 39.6% 43% 25% 10%
2,000,000 39.6% 39.6% 48% 25% 10%
5,000,000 39.6% 43.6% 48% 25% 10%
10,000,000 39.6% 43.6% 52% 25% 10%

As you can see, Hillary Clinton’s plan is basically our current system, with some minor adjustments and a slight increase in progressivity.In addition to these slight changes in the income tax code, she also proposes to close some loopholes in corporate taxes, but she basically doesn’t change the payroll tax system at all. Her plan would not change a whole lot, but we know it would work, because our current tax system does work.

Despite calling himself a social democrat and being accused of being a far more extreme sort of socialist, Bernie Sanders offers a tax plan that isn’t very radical either; he makes our income tax system a bit more progressive, especially at very high incomes; but it’s nothing out of the ordinary by historical standards. Sanders’ top rate of 52% is about what Reagan set in his first tax cut plan in 1982, and substantially lower than the about 90% top rates we had from 1942 to 1964 and the about 70% top rates we had from 1965 to 1981. Sanders would also lift the income cap on payroll taxes (which it makes no sense not to do—why would we want payroll taxes to be regressive?) and eliminate the payroll tax deduction for fringe benefits (which is something a lot of economists have been clamoring for).

No, it’s the Republicans who have really radical tax plans. Donald Trump’s plan involves a substantial cut across the board, to rates close to the lowest they’ve ever been in US history, which was during the Roaring Twenties—the top tax rate was 25% from 1925 to 1931. Trump also proposes to cut the corporate tax in half (which I actually like), and eliminate the payroll tax completely—which would only make sense if you absorbed it into income taxes, which he does not.

Ted Cruz’s plan is even more extreme, removing essentially all progressivity from the US tax code and going to a completely flat tax at the nonsensically low rate of 10%. We haven’t had a rate that low since 1915—so these would be literally the lowest income tax rates we’ve had in a century. Ted Cruz also wants to cut the corporate tax rate in half and eliminate payroll taxes, which is even crazier in his case because of how much he would be cutting income tax rates.

To see why this is so bonkers, take a look at federal spending as a portion of GDP over the last century. We spent only about 10% of GDP in 1915; We currently take in $3.25 trillion per year, 17.4% of GDP, and spend $3.70 trillion per year, 19.8% of GDP. So Ted Cruz’s plan was designed for an era in which the federal government spent about half what it does right now. I don’t even see how we could cut spending that far that fast; it would require essentially eliminating Social Security and Medicare, or else huge cuts in just about everything else. Either that, or we’d have to run the largest budget deficit we have since WW2, and not just for the war spending but indefinitely.

Donald Trump’s plan is not quite as ridiculous, but fact-checkers have skewered him for claiming it will be revenue-neutral. No, it would cut revenue by about $1 trillion per year, which would mean either large deficits (and concomitant risk of inflation and interest rate spikes—this kind of deficit would have been good in 2009, but it’s not so great indefinitely) or very large reductions in spending.

To be fair, both Republicans do claim they intend to cut a lot of spending. But they never quite get around to explaining what spending they’ll be cutting. Are you gutting Social Security? Ending Medicare? Cutting the military in half? These are the kinds of things you’d need to do in order to save this much money.

It’s kind of a shame that Cruz set the rate so low, because if he’d proposed a flat tax of say 25% or 30% that might actually make sense. Applied to consumption instead of income, this would be the Fair Tax, which is 23% if calculated like an income tax or 30% if calculated like a sales tax—either way it’s 26 log points. The Fair Tax could actually provide sufficient revenue to support most existing federal spending,

I still oppose it because I want taxes to be progressive (for reasons I’ve explained previously), and the Fair Tax, by applying only to consumption it would be very regressive (poor people often spend more than 100% of their incomes on consumption—financing it on debt—while rich people generally spend about 50%, and the very rich spend even less). It would exacerbate inequality quite dramatically, especially in capital income, which would be completely untaxed. Even a flat income tax like Cruz’s would still hit the poor harder than the rich in real terms.

But I really do like the idea of a very simple, straightforward tax code that has very few deductions so that everyone knows how much they are going to pay and doesn’t have to deal with hours of paperwork to do it. If this lack of deductions is enshrined in law, it would also remove most of the incentives to lobby for loopholes and tax expenditures, making our tax system much fairer and more efficient.

No doubt about it, flat taxes absolutely are hands-down the easiest to compute. Most people would probably have trouble figuring out a formula like r = I^{-p}, though computers have no such problem (my logarithmic tax plan is easier on computers than the present system); but even fifth-graders can multiply something by 25%. There is something very appealing about everyone knowing at all times that they pay in taxes one-fourth of what they get in income. Adding a simple standard deduction for low incomes makes it slightly more complicated, but also makes it a little bit progressive and is totally worth the tradeoff.

His notion of “eliminating the IRS” is ridiculous (we still need the IRS to audit people to make sure they are honest about their incomes!), and I think the downsides of having no power to redistribute wealth via taxes outweigh the benefits of a flat tax, but the benefits are very real. The biggest problem is that Cruz chose a rate that simply makes no sense; there’s no way to make the numbers work out if the rate is only 10%, especially since you’re excluding half the population from being taxed at all.

Hopefully you see how this supports my contention that Clinton and Sanders are the serious candidates while Trump and Cruz are awful; Clinton wants to keep our current tax system, and Sanders wants to make it a bit more progressive, while Trump and Cruz prize cutting taxes and making taxes simple so highly that they forgot to make sure the numbers actually make any sense—or worse, didn’t care.

Is Equal Unfair?

JDN 2457492

Much as you are officially a professional when people start paying you for what you do, I think you are officially a book reviewer when people start sending you books for free asking you to review them for publicity. This has now happened to me, with the book Equal Is Unfair by Don Watkins and Yaron Brook. This post is longer than usual, but in order to be fair to the book’s virtues as well as its flaws, I felt a need to explain quite thoroughly.

It’s a very frustrating book, because at times I find myself agreeing quite strongly with the first part of a paragraph, and then reaching the end of that same paragraph and wanting to press my forehead firmly into the desk in front of me. It makes some really good points, and for the most part uses economic statistics reasonably accurately—but then it rides gleefully down a slippery slope fallacy like a waterslide. But I guess that’s what I should have expected; it’s by leaders of the Ayn Rand Institute, and my experience with reading Ayn Rand is similar to that of Randall Monroe (I’m mainly referring to the alt-text, which uses slightly foul language).

As I kept being jostled between “That’s a very good point.”, “Hmm, that’s an interesting perspective.”, and “How can anyone as educated as you believe anything that stupid!?” I realized that there are actually three books here, interleaved:

1. A decent economics text on the downsides of taxation and regulation and the great success of technology and capitalism at raising the standard of living in the United States, which could have been written by just about any mainstream centrist neoclassical economist—I’d say it reads most like John Taylor or Ken Galbraith. My reactions to this book were things like “That’s a very good point.”, and “Sure, but any economist would agree with that.”

2. An interesting philosophical treatise on the meanings of “equality” and “opportunity” and their application to normative economic policy, as well as about the limitations of statistical data in making political and ethical judgments. It could have been written by Robert Nozick (actually I think much of it was based on Robert Nozick). Some of the arguments are convincing, others are not, and many of the conclusions are taken too far; but it’s well within the space of reasonable philosophical arguments. My reactions to this book were things like “Hmm, that’s an interesting perspective.” and “Your argument is valid, but I think I reject the second premise.”

3. A delusional rant of the sort that could only be penned by a True Believer in the One True Gospel of Ayn Rand, about how poor people are lazy moochers, billionaires are world-changing geniuses whose superior talent and great generosity we should all bow down before, and anyone who would dare suggest that perhaps Steve Jobs got lucky or owes something to the rest of society is an authoritarian Communist who hates all achievement and wants to destroy the American Dream. It was this book that gave me reactions like “How can anyone as educated as you believe anything that stupid!?” and “You clearly have no idea what poverty is like, do you?” and “[expletive] you, you narcissistic ingrate!”

Given that the two co-authors are Executive Director and a fellow of the Ayn Rand Institute, I suppose I should really be pleasantly surprised that books 1 and 2 exist, rather than disappointed by book 3.

As evidence of each of the three books interleaved, I offer the following quotations:

Book 1:

“All else being equal, taxes discourage production and prosperity.” (p. 30)

No reasonable economist would disagree. The key is all else being equal—it rarely is.

“For most of human history, our most pressing problem was getting enough food. Now food is abundant and affordable.” (p.84)

Correct! And worth pointing out, especially to anyone who thinks that economic progress is an illusion or we should go back to pre-industrial farming practices—and such people do exist.

“Wealth creation is first and foremost knowledge creation. And this is why you can add to the list of people who have created the modern world, great thinkers: people such as Euclid, Aristotle, Galileo, Newton, Darwin, Einstein, and a relative handful of others.” (p.90, emph. in orig.)

Absolutely right, though as I’ll get to below there’s something rather notable about that list.

“To be sure, there is competition in an economy, but it’s not a zero-sum game in which some have to lose so that others can win—not in the big picture.” (p. 97)

Yes! Precisely! I wish I could explain to more people—on both the Left and the Right, by the way—that economics is nonzero-sum, and that in the long run competitive markets improve the standard of living of society as a whole, not just the people who win that competition.

Book 2:

“Even opportunities that may come to us without effort on our part—affluent parents, valuable personal connections, a good education—require enormous effort to capitalize on.” (p. 66)

This is sometimes true, but clearly doesn’t apply to things like the Waltons’ inherited billions, for which all they had to do was be born in the right family and not waste their money too extravagantly.

“But life is not a game, and achieving equality of initial chances means forcing people to play by different rules.” (p. 79)

This is an interesting point, and one that I think we should acknowledge; we must treat those born rich differently from those born poor, because their unequal starting positions mean that treating them equally from this point forward would lead to a wildly unfair outcome. If my grandfather stole your grandfather’s wealth and passed it on to me, the fair thing to do is not to treat you and I equally from this point forward—it’s to force me to return what was stolen, insofar as that is possible. And even if we suppose that my grandfather earned far vaster wealth than yours, I think a more limited redistribution remains justified simply to put you and I on a level playing field and ensure fair competition and economic efficiency.

“The key error in this argument is that it totally mischaracterizes what it means to earn something. For the egalitarians, the results of our actions don’t merely have to be under our control, but entirely of our own making. […] But there is nothing like that in reality, and so what the egalitarians are ultimately doing is wiping out the very possibility of earning something.” (p. 193)

The way they use “egalitarian” as an insult is a bit grating, but there clearly are some actual egalitarian philosophers whose views are this extreme, such as G.A. Cohen, James Kwak and Peter Singer. I strongly agree that we need to make a principled distinction between gains that are earned and gains that are unearned, such that both sets are nonempty. Yet while Cohen would seem to make “earned” an empty set, Watkins and Brook very nearly make “unearned” empty—you get what you get, and you deserve it. The only exceptions they seem willing to make are outright theft and, what they consider equivalent, taxation. They have no concept of exploitation, excessive market power, or arbitrage—and while they claim they oppose fraud, they seem to think that only government is capable of it.

Book 3:

“What about government handouts (usually referred to as ‘transfer payments’)?” (p. 23)

Because Social Security is totally just a handout—it’s not like you pay into it your whole life or anything.

“No one cares whether the person who fixes his car or performs his brain surgery or applies for a job at his company is male or female, Indian or Pakistani—he wants to know whether they are competent.” (p.61)

Yes they do. We have direct experimental evidence of this.

“The notion that ‘spending drives the economy’ and that rich people spend less than others isn’t a view seriously entertained by economists,[…]” (p. 110)

The New Synthesis is Keynesian! This is what Milton Friedman was talking about when he said, “We’re all Keynesians now.”

“Because mobility statistics don’t distinguish between those who don’t rise and those who can’t, they are useless when it comes to assessing how healthy mobility is.” (p. 119)

So, if Black people have much lower odds of achieving high incomes even controlling for education, we can’t assume that they are disadvantaged or discriminated against; maybe Black people are just lazy or stupid? Is that what you’re saying here? (I think it might be.)

“Payroll taxes alone amount to 15.3 percent of your income; money that is taken from you and handed out to the elderly. This means that you have to spend more than a month and a half each year working without pay in order to fund other people’s retirement and medical care.” (p. 127)

That is not even close to how taxes work. Taxes are not “taken” from money you’d otherwise get—taxation changes prices and the monetary system depends upon taxation.

“People are poor, in the end, because they have not created enough wealth to make themselves prosperous.” (p. 144)

This sentence was so awful that when I showed it to my boyfriend, he assumed it must be out of context. When I showed him the context, he started swearing the most I’ve heard him swear in a long time, because the context was even worse than it sounds. Yes, this book is literally arguing that the reason people are poor is that they’re just too lazy and stupid to work their way out of poverty.

“No society has fully implemented the egalitarian doctrine, but one came as close as any society can come: Cambodia’s Khmer Rouge.” (p. 207)

Because obviously the problem with the Khmer Rouge was their capital gains taxes. They were just too darn fair, and if they’d been more selfish they would never have committed genocide. (The authors literally appear to believe this.)

 

So there are my extensive quotations, to show that this really is what the book is saying. Now, a little more summary of the good, the bad, and the ugly.

One good thing is that the authors really do seem to understand fairly well the arguments of their opponents. They quote their opponents extensively, and only a few times did it feel meaningfully out of context. Their use of economic statistics is also fairly good, though occasionally they present misleading numbers or compare two obviously incomparable measures.

One of the core points in Equal is Unfair is quite weak: They argue against the “shared-pie assumption”, which is that we create wealth as a society, and thus the rest of society is owed some portion of the fruits of our efforts. They maintain that this is fundamentally authoritarian and immoral; essentially they believe a totalizing false dichotomy between either absolute laissez-faire or Stalinist Communism.

But the “shared-pie assumption” is not false; we do create wealth as a society. Human cognition is fundamentally social cognition; they said themselves that we depend upon the discoveries of people like Newton and Einstein for our way of life. But it should be obvious we can never pay Einstein back; so instead we must pay forward, to help some child born in the ghetto to rise to become the next Einstein. I agree that we must build a society where opportunity is maximized—and that means, necessarily, redistributing wealth from its current state of absurd and immoral inequality.

I do however agree with another core point, which is that most discussions of inequality rely upon a tacit assumption which is false: They call it the “fixed-pie assumption”.

When you talk about the share of income going to different groups in a population, you have to be careful about the fact that there is not a fixed amount of wealth in a society to be distributed—not a “fixed pie” that we are cutting up and giving around. If it were really true that the rising income share of the top 1% were necessary to maximize the absolute benefits of the bottom 99%, we probably should tolerate that, because the alternative means harming everyone. (In arguing this they quote John Rawls several times with disapprobation, which is baffling because that is exactly what Rawls says.)

Even if that’s true, there is still a case to be made against inequality, because too much wealth in the hands of a few people will give them more power—and unequal power can be dangerous even if wealth is earned, exchanges are uncoerced, and the distribution is optimally efficient. (Watkins and Brook dismiss this contention out of hand, essentially defining beneficent exploitation out of existence.)

Of course, in the real world, there’s no reason to think that the ballooning income share of the top 0.01% in the US is actually associated with improved standard of living for everyone else.

I’ve shown these graphs before, but they bear repeating:

Income shares for the top 1% and especially the top 0.1% and 0.01% have risen dramatically in the last 30 years.

top_income_shares_adjusted

But real median income has only slightly increased during the same period.

US_median_household_income

Thus, mean income has risen much faster than median income.

median_mean

While theoretically it could be that the nature of our productivity technology has shifted in such a way that it suddenly became necessary to heap more and more wealth on the top 1% in order to continue increasing national output, there is actually very little evidence of this. On the contrary, as Joseph Stiglitz (Nobel Laureate, you may recall) has documented, the leading cause of our rising inequality appears to be a dramatic increase in rent-seeking, which is to say corruption, exploitation, and monopoly power. (This probably has something to do with why I found in my master’s thesis that rising top income shares correlate quite strongly with rising levels of corruption.)

Now to be fair, the authors of Equal is Unfair do say that they are opposed to rent-seeking, and would like to see it removed. But they have a very odd concept of what rent-seeking entails, and it basically seems to amount to saying that whatever the government does is rent-seeking, whatever corporations do is fair free-market competition. On page 38 they warn us not to assume that government is good and corporations are bad—but actually it’s much more that they assume that government is bad and corporations are good. (The mainstream opinion appears to be actually that both are bad, and we should replace them both with… er… something.)

They do make some other good points I wish more leftists would appreciate, such as the point that while colonialism and imperialism can damage countries that suffer them and make them poorer, they generally do not benefit the countries that commit them and make them richer. The notion that Europe is rich because of imperialism is simply wrong; Europe is rich because of education, technology, and good governance. Indeed, the greatest surge in Europe’s economic growth occurred as the period of imperialism was winding down—when Europeans realized that they would be better off trying to actually invent and produce things rather than stealing them from others.

Likewise, they rightfully demolish notions of primitivism and anti-globalization that I often see bouncing around from folks like Naomi Klein. But these are book 1 messages; any economist would agree that primitivism is a terrible idea, and very few are opposed to globalization per se.

The end of Equal is Unfair gives a five-part plan for unleashing opportunity in America:

1. Abolish all forms of corporate welfare so that no business can gain unfair advantage.

2. Abolish government barriers to work so that every individual can enjoy the dignity of earned success.

3. Phase out the welfare state so that America can once again become the land of self-reliance.

4. Unleash the power of innovation in education by ending the government monopoly on schooling.

5. Liberate innovators from the regulatory shackles that are strangling them.

Number 1 is hard to disagree with, except that they include literally everything the government does that benefits a corporation as corporate welfare, including things like subsidies for solar power that the world desperately needs (or millions of people will die).

Number 2 sounds really great until you realize that they are including all labor standards, environmental standards and safety regulations as “barriers to work”; because it’s such a barrier for children to not be able to work in a factory where your arm can get cut off, and such a barrier that we’ve eliminated lead from gasoline emissions and thereby cut crime in half.

Number 3 could mean a lot of things; if it means replacing the existing system with a basic income I’m all for it. But in fact it seems to mean removing all social insurance whatsoever. Indeed, Watkins and Brook do not appear to believe in social insurance at all. The whole concept of “less fortunate”, “there but for the grace of God go I” seems to elude them. They have no sense that being fortunate in their own lives gives them some duty to help others who were not; they feel no pang of moral obligation whatsoever to help anyone else who needs help. Indeed, they literally mock the idea that human beings are “all in this together”.

They also don’t even seem to believe in public goods, or somehow imagine that rational self-interest could lead people to pay for public goods without any enforcement whatsoever despite the overwhelming incentives to free-ride. (What if you allow people to freely enter a contract that provides such enforcement mechanisms? Oh, you mean like social democracy?)

Regarding number 4, I’d first like to point out that private schools exist. Moreover, so do charter schools in most states, and in states without charter schools there are usually vouchers parents can use to offset the cost of private schools. So while the government has a monopoly in the market share sense—the vast majority of education in the US is public—it does not actually appear to be enforcing a monopoly in the anti-competitive sense—you can go to private school, it’s just too expensive or not as good. Why, it’s almost as if education is a public good or a natural monopoly.

Number 5 also sounds all right, until you see that they actually seem most opposed to antitrust laws of all things. Why would antitrust laws be the ones that bother you? They are designed to increase competition and lower barriers, and largely succeed in doing so (when they are actually enforced, which is rare of late). If you really want to end barriers to innovation and government-granted monopolies, why is it not patents that draw your ire?

They also seem to have trouble with the difference between handicapping and redistribution—they seem to think that the only way to make outcomes more equal is to bring the top down and leave the bottom where it is, and they often use ridiculous examples like “Should we ban reading to your children, because some people don’t?” But of course no serious egalitarian would suggest such a thing. Education isn’t fungible, so it can’t be redistributed. You can take it away (and sometimes you can add it, e.g. public education, which Watkins and Brooks adamantly oppose); but you can’t simply transfer it from one person to another. Money on the other hand, is by definition fungible—that’s kind of what makes it money, really. So when we take a dollar from a rich person and give it to a poor person, the poor person now has an extra dollar. We’ve not simply lowered; we’ve also raised. (In practice it’s a bit more complicated than that, as redistribution can introduce inefficiencies. So realistically maybe we take $1.00 and give $0.90; that’s still worth doing in a lot of cases.)

If attributes like intelligence were fungible, I think we’d have a very serious moral question on our hands! It is not obvious to me that the world is better off with its current range of intelligence, compared to a world where geniuses had their excess IQ somehow sucked out and transferred to mentally disabled people. Or if you think that the marginal utility of intelligence is increasing, then maybe we should redistribute IQ upward—take it from some mentally disabled children who aren’t really using it for much and add it onto some geniuses to make them super-geniuses. Of course, the whole notion is ridiculous; you can’t do that. But whereas Watkins and Brook seem to think it’s obvious that we shouldn’t even if we could, I don’t find that obvious at all. You didn’t earn your IQ (for the most part); you don’t seem to deserve it in any deep sense; so why should you get to keep it, if the world would be much better off if you didn’t? Why should other people barely be able to feed themselves so I can be good at calculus? At best, maybe I’m free to keep it—but given the stakes, I’m not even sure that would be justifiable. Peter Singer is right about one thing: You’re not free to let a child drown in a lake just to keep your suit from getting wet.

Ultimately, if you really want to understand what’s going on with Equal is Unfair, consider the following sentence, which I find deeply revealing as to the true objectives of these Objectivists:

“Today, meanwhile, although we have far more liberty than our feudal ancestors, there are countless ways in which the government restricts our freedom to produce and trade including minimum wage laws, rent control, occupational licensing laws, tariffs, union shop laws, antitrust laws, government monopolies such as those granted to the post office and education system, subsidies for industries such as agriculture or wind and solar power, eminent domain laws, wealth redistribution via the welfare state, and the progressive income tax.” (p. 114)

Some of these are things no serious economist would disagree with: We should stop subsidizing agriculture and tariffs should be reduced or removed. Many occupational licenses are clearly unnecessary (though this has a very small impact on inequality in real terms—licensing may stop you from becoming a barber, but it’s not what stops you from becoming a CEO). Others are legitimately controversial: Economists are currently quite divided over whether minimum wage is beneficial or harmful (I lean toward beneficial, but I’d prefer a better solution), as well as how to properly regulate unions so that they give workers much-needed bargaining power without giving unions too much power. But a couple of these are totally backward, exactly contrary to what any mainstream economist would say: Antitrust laws need to be enforced more, not eliminated (don’t take it from me; take it from that well-known Marxist rag The Economist). Subsidies for wind and solar power make the economy more efficient, not less—and suspiciously Watkins and Brook omitted the competing subsidies that actually are harmful, namely those to coal and oil.

Moreover, I think it’s very revealing that they included the word progressive when talking about taxation. In what sense does making a tax progressive undermine our freedom? None, so far as I can tell. The presence of a tax undermines freedom—your freedom to spend that money some other way. Making the tax higher undermines freedom—it’s more money you lose control over. But making the tax progressive increases freedom for some and decreases it for others—and since rich people have lower marginal utility of wealth and are generally more free in substantive terms in general, it really makes the most sense that, holding revenue constant, making a tax progressive generally makes your people more free.

But there’s one thing that making taxes progressive does do: It benefits poor people and hurts rich people. And thus the true agenda of Equal is Unfair becomes clear: They aren’t actually interested in maximizing freedom—if they were, they wouldn’t be complaining about occupational licensing and progressive taxation, they’d be outraged by forced labor, mass incarceration, indefinite detention, and the very real loss of substantive freedom that comes from being born into poverty. They wouldn’t want less redistribution, they’d want more efficient and transparent redistribution—a shift from the current hodgepodge welfare state to a basic income system. They would be less concerned about the “freedom” to pollute the air and water with impunity, and more concerned about the freedom to breathe clean air and drink clean water.

No, what they really believe is rich people are better. They believe that billionaires attained their status not by luck or circumstance, not by corruption or ruthlessness, but by the sheer force of their genius. (This is essentially the entire subject of chapter 6, “The Money-Makers and the Money-Appropriators”, and it’s nauseating.) They describe our financial industry as “fundamentally moral and productive” (p.156)—the industry that you may recall stole millions of homes and laundered money for terrorists. They assert that no sane person could believe that Steve Wozniack got lucky—I maintain no sane person could think otherwise. Yes, he was brilliant; yes, he invented good things. But he had to be at the right place at the right time, in a society that supported and educated him and provided him with customers and employees. You didn’t build that.

Indeed, perhaps most baffling is that they themselves seem to admit that the really great innovators, such as Newton, Einstein, and Darwin, were scientists—but scientists are almost never billionaires. Even the common counterexample, Thomas Edison, is largely false; he mainly plagiarized from Nikola Tesla and appropriated the ideas of his employees. Newton, Einstein and Darwin were all at least upper-middle class (as was Tesla, by the way—he did not die poor as is sometimes portrayed), but they weren’t spectacularly mind-bogglingly rich the way that Steve Jobs and Andrew Carnegie were and Bill Gates and Jeff Bezos are.

Some people clearly have more talent than others, and some people clearly work harder than others, and some people clearly produce more than others. But I just can’t wrap my head around the idea that a single man can work so hard, be so talented, produce so much that he can deserve to have as much wealth as a nation of millions of people produces in a year. Yet, Mark Zuckerberg has that much wealth. Remind me again what he did? Did he cure a disease that was killing millions? Did he colonize another planet? Did he discover a fundamental law of nature? Oh yes, he made a piece of software that’s particularly convenient for talking to your friends. Clearly that is worth the GDP of Latvia. Not that silly Darwin fellow, who only uncovered the fundamental laws of life itself.

In the grand tradition of reducing complex systems to simple numerical values, I give book 1 a 7/10, book 2 a 5/10, and book 3 a 2/10. Equal is Unfair is about 25% book 1, 25% book 2, and 50% book 3, so altogether their final score is, drumroll please: 4/10. Maybe read the first half, I guess? That’s where most of the good stuff is.

So what can we actually do about sweatshops?

JDN 2457489

(The topic of this post was chosen by a vote of my Patreons.) There seem to be two major camps on most political issues: One camp says “This is not a problem, stop worrying about it.” The other says “This is a huge problem, it must be fixed right away, and here’s the easy solution.” Typically neither of these things is true, and the correct answer is actually “This is a huge problem, well worth fixing—but we need to do a lot of work to figure out exactly how.”

Sweatshop labor is a very good example of this phenomenon.

Camp A is represented here by the American Enterprise Institute, which even goes as far as to defend child labor on the grounds that “we used to do it before”. (Note that we also used to do slavery before. Also protectionism, but of course AEI doesn’t think that was good. Who needs logical consistency when you have ideological purity?) The College Conservative uses ECON 101 to defend sweatshops, perhaps not realizing that economics courses continue past ECON 101.

Camp B is represented here by Buycott, telling us to buy “made in the USA” products and boycott all companies that use sweatshops. Other commonly listed strategies include buying used clothes (I mean, there may be some ecological benefits to this, but clearly not all clothes can be used clothes) and “buy union-made” which is next to impossible for most products. Also in this camp is LaborVoices, a Silicon Valley tech company that seems convinced they can somehow solve the problem of sweatshops by means of smartphone apps, because apparently Silicon Valley people believe that smartphones are magical and not, say, one type of product that performs services similar to many other pre-existing products but somewhat more efficiently. (This would also explain how Uber can say with a straight face that they are “revolutionary” when all they actually do is mediate unlicensed taxi services, and Airbnb is “innovative” because it makes it slightly more convenient to rent out rooms in your home.)

Of course I am in that third camp, people who realize that sweatshops—and exploitative labor practices in general—are a serious problem, but a very complex and challenging one that does not have any easy, obvious solutions.

One thing we absolutely cannot do is return to protectionism or get American consumers to only buy from American companies (a sort of “soft protectionism” by social construction). This would not only be inefficient for us—it would be devastating for people in Third World countries. Sweatshops typically provide substantially better living conditions than the alternatives available to their workers.

Yet this does not mean that sweatshops are morally acceptable or should simply be left alone, contrary to the assertions of many economists—most famously Benjamin Powell. Anyone who doubts this must immediately read “Wrongful Beneficence” by Chris Meyers; the mere fact that an act benefits someone –or even everyone—does not prove that the act was morally acceptable. If someone is starving to death and you offer them bread in exchange for doing whatever you want them to do for the next year, you are benefiting them, surely—but what you are doing is morally wrong. And this is basically what sweatshops are; they provide survival in exchange for exploitation.

It can be remarkably difficult to even tell which companies are using sweatshops—and this is by design. While in response to public pressure corporations often try to create the image of improving their labor standards, they seem quite averse to actually improving labor standards, and even more averse to establishing systems of enforcement to make those labor standards followed consistently. Almost no sweatshops are directly owned by the retailers whose products they make; instead there is a chain of outsourced vendors and distributors, a chain that creates diffusion of responsibility and plausible deniability. When international labor organizations do get the chance to investigate the labor conditions of factories operated by multinational corporations, they invariably find that regulations are more honored in the breach than the observance.

So, what would a long-run solution to sweatshops look like? In a word: Development. The only sustainable solution to oppressive labor conditions is a world where everyone is healthy enough, educated enough, and provided with enough resources that their productivity is at a First World level; furthermore it is a world where workers have enough bargaining power that they are actually paid according to that productivity. (The US has lately been finding out what happens if you do the former but not the latter—the result is that you generate an enormous amount of wealth, but it all ends up in the hands of the top 0.1%. Yet it is quite possible to do the latter, as Denmark has figured out, #ScandinaviaIsBetter.)

To achieve this, we need more factories in Third World countries, not fewer—more investment, not less. We need to buy more of China’s exports, hire more factory workers in Bangladesh.

But it’s not enough to provide incentives to build factories—we must also provide incentives to give workers at those factories more bargaining power.

To see how we can pull this off, I offer a case study of a (qualified) success: Nike.

In the 1990s, Nike’s subcontractors had some of the worst labor conditions in the shoe industry. Today, they actually have some of the best. How did that happen?

It began with people noticing a problem—activists and investigative journalists documented the abuses in Nike’s factories. They drew public attention, which undermined Nike’s efforts at mass advertising (which was basically their entire business model—their shoes aren’t actually especially good). They tried to clean up their image with obviously biased reports, which triggered a backlash. Finally Nike decides to actually do something about the problem, and actually becomes a founding member of the Fair Labor Association. They establish new labor standards, and they audit regularly to ensure that those standards are being complied with. Today they publish an annual corporate social responsibility report that actually appears to be quite transparent and accurate, showing both the substantial improvements that have been made and the remaining problems. Activist campaigns turned Nike around almost completely.

In short, consumer pressure led to private regulation. Many development economists are increasingly convinced that this is what we need—we must put pressure on corporations to regulate themselves.

The pressure is a key part of this process; Willem Buiter wasn’t wrong when he quipped that “self-regulation stands in relation to regulation the way self-importance stands in relation to importance and self-righteousness to righteousness.” For any regulation to work, it must have an enforcement mechanism; for private regulation to work, that enforcement mechanism comes from the consumers.

Yet even this is not enough, because there are too many incentives for corporations to lie and cheat if they only have to be responsive to consumers. It’s unreasonable to expect every consumer to take the time—let alone have the expertise—to perform extensive research on the supply chain of every corporation they buy a product from. I also think it’s unreasonable to expect most people to engage in community organizing or shareholder activism as Green America suggests, though it certainly wouldn’t hurt if some did. But there are just too many corporations to keep track of! Like it or not, we live in a globalized capitalist economy where you almost certainly buy from a hundred different corporations over the course of a year.

Instead we need governments to step up—and the obvious choice is the government of the United States, which remains the world’s economic and military hegemon. We should be pressuring our legislators to make new regulations on international trade that will raise labor standards around the globe.

Note that this undermines the most basic argument corporations use against improving their labor standards: “If we raise wages, we won’t be able to compete.” Not if we force everyone to raise wages, around the globe. “If it’s cheaper to build a factory in Indonesia, why shouldn’t we?” It won’t be cheaper, unless Indonesia actually has a real comparative advantage in producing that product. You won’t be able to artificially hold down your expenses by exploiting your workers—you’ll have to actually be more efficient in order to be more profitable, which is how capitalism is supposed to work.

There’s another argument we often hear that is more legitimate, which is that raising wages would also force corporations to raise prices. But as I discussed in a previous post on this subject, the amount by which prices would need to rise is remarkably small, and nowhere near large enough to justify panic about dangerous global inflation. Paying 10% or even 20% more for our products is well worth it to reduce the corruption and exploitation that abuses millions of people—a remarkable number of them children—around the globe. Also, it doesn’t take a mathematical savant to realize that if increasing wages by a factor of 10 only increases prices by 20%, workers will in fact be better off.

Where would all that extra money come from? Now we come to the real reason why corporations don’t want to raise their labor standards: It would come from profits. Right now profits are extraordinarily large, much larger than they have any right to be in a fair market. It was recently estimated that 74% of billionaire wealth comes from economic rent—that is to say, from deception, exploitation, and market manipulation, rather than actual productivity. (There’s a lot of uncertainty in this estimate; the true figure is probably somewhere between 50% and 90%—it’s almost certainly a majority, and could be the vast majority.) In fact, I really shouldn’t say “money”, which we can just print; what we really want to know is where the extra wealth would come from to give that money value. But by paying workers more, improving their standard of living, and creating more consumer demand, we would in fact dramatically increase the amount of real wealth in the world.

So, we need regulations to improve global labor standards. But we must first be clear: What should these regulations say?

First, we must rule out protectionist regulations that would give unfair advantages to companies that produce locally. These would only result in economic inefficiency at best, and trade wars throwing millions back into poverty at worst. (Some advantage makes sense to internalize the externalities of shipping, but really that should be created by a carbon tax, not by trade tariffs. It’s a lot more expensive and carbon-intensive to ship from Detroit to LA than from Detroit to Windsor, but the latter is the “international” trade.)

Second, we should not naively assume that every country should have the same minimum wage. (I am similarly skeptical of Hillary Clinton’s proposal to include people with severe mental or physical disabilities in the US federal minimum wage; I too am concerned about people with disabilities being exploited, but the fact is many people with severe disabilities really aren’t as productive, and it makes sense for wages to reflect that.) If we’re going to have minimum wages at all—basic income and wage subsidies both make a good deal more sense than a hard price floor; see also my earlier post on minimum wage—they should reflect the productivity and prices of the region. I applaud California and New York for adopting $15 minimum wages, but I’d be a bit skeptical of doing the same in Mississippi, and adamantly opposed to doing so in Bangladesh.

It may not even be reasonable to expect all countries to have the same safety standards; workers who are less skilled and in more dire poverty may rationally be willing to accept more risk to remain employed, rather than laid off because their employer could not afford to meet safety standards and still pay them a sufficient wage. For some safety standards this is ridiculous; making sufficiently many exits with doors that swing outward and maintaining smoke detectors are not expensive things to do. (And yet factories in Bangladesh often fail to meet such basic requirements, which kills hundreds of workers each year.) But other safety standards may be justifiably relaxed; OSHA compliance in the US costs about $70 billion per year, about $200 per person, which many countries simply couldn’t afford. (On the other hand, OSHA saves thousands of lives, does not increase unemployment, and may actually benefit employers when compared with the high cost of private injury lawsuits.) We should have expert economists perform careful cost-benefit analyses of proposed safety regulations to determine which ones are cost-effective at protecting workers and which ones are too expensive to be viable.

While we’re at it, these regulations should include environmental standards, or a global carbon tax that’s used to fund climate change mitigation efforts around the world. Here there isn’t much excuse for not being strict; pollution and environmental degradation harms the poor the most. Yes, we do need to consider the benefits of production that is polluting; but we have plenty of profit incentives for that already. Right now the balance is clearly tipped far too much in favor of more pollution than the optimum rather than less. Even relatively heavy-handed policies like total bans on offshore drilling and mountaintop removal might be in order; in general I’d prefer to tax rather than ban, but these activities are so enormously damaging that if the choice is between a ban and doing nothing, I’ll take the ban. (I’m less convinced of this with regard to fracking; yes, earthquakes and polluted groundwater are bad—but are they Saudi Arabia bad? Because buying more oil from Saudi Arabia is our leading alternative.)

It should go without saying (but unfortunately it doesn’t seem to) that our regulations must include an absolute zero-tolerance policy for forced labor. If we find out that a company is employing forced labor, they should have to not only free every single enslaved worker, but pay each one a million dollars (PPP 2005 chained CPI of course). If they can’t do that and they go bankrupt, good riddance; remind me to play them the world’s saddest song on the world’s tiniest violin. Of course, first we need to find out, which brings me to the most important point.

Above all, these regulations must be enforced. We could start with enforceable multilateral trade agreements, where tariff reductions are tied to human rights and labor standards. This is something the President of the United States could do, right now, as an addendum to the Trans-Pacific Partnership. (What he should have done is made the TPP contingent on this, but it’s too late for that.) Future trade agreements should include these as a matter of course.If countries want to reap the benefits of free trade, they must be held accountable for sharing those benefits equitably with their people.

But ultimately we should not depend upon multilateral agreements between nations—we need truly international standards with global enforcement. We should empower the International Labor Organization to enact sanctions and inspections (right now it mostly enacts suggestions which are promptly and dutifully ignored), and possibly even to arrest executives for trial at the International Criminal Court. We should double if not triple or quadruple their funding—and if member nations will not pay this voluntarily, we should make them—the United Nations should be empowered to collect taxes in support of global development, which should be progressive with per-capita GDP. Coercion, you say? National sovereignty, you say? Millions of starving little girls is my reply.

Right now, the ability of multinational corporations to move between countries to find the ones that let them pay the least have created a race to the floor; it’s time for us to raise that floor.

What can you yourself do, assuming you’re not a head of state? (If you are, I’m honored. Also, any openings on your staff?) Well, you can vote—and you can use that vote to put pressure on your legislators to support these kinds of polices. There are also some other direct actions you can take that I discussed in a previous post; but mainly what we need is policy. Consumer pressure and philanthropy are good, and by all means, don’t stop; but to really achieve global justice we will need nothing short of global governance.