market failure

The housing affordability crisis in one graph

PNRJ critique of neoclassical economics, current events, inequality, macroeconomics, market failure, public policy, statistics , , , ,

The housing affordability crisis in one graph

Mar 8 JDN 2461108

The graph below, constructed from FRED data, provides a simple measure of housing affordability: How many years of median earnings does it take to afford the median home?

From a low of 4.4 in 1982, this rose to about 5.5 and was relatively stable in the 1990s. Then in the 2000s, it began to rise, peaked at 7.2 just before the housing crisis, and then rapidly dropped to back to 5.5 again.

Then in the 2010s it began to rise again, peaked even higher at 7.6 in 2017, and then dropped down to 6.0 in 2020 before beginning to rise anew. In 2023 it reached a yet higher peak of 8.0, and then has been slowly declining ever since—but is still about 6.5, well above its 1990s level.

I honestly expected worse than this, but I think part of what’s happening is that new homes have gotten a bit smaller in the past few years: median square footage of homes sold has fallen from a peak of 1997 in 2019 to 1788 today. (Unfortunately, FRED doesn’t have this data series going back any earlier than 2016.)

If we adjust for that, the price a typical 2019 home today would be about 7.2 years of median earnings, which is about what it was at the peak of the housing crisis in 2007.

Note of course this isn’t actually how many years you need to save up to buy a house. You clearly can’t save your entire earnings, but you also don’t need to come up with the full price, only the down payment. And what you can afford also depends upon interest rates and such. But still, it’s a pretty clear sign that housing is radically more expensive now than it was in the 1980s or even 1990s.

In my view, this is the affordability crisis.

Gas prices really aren’t that important. Car prices are relatively stable. Food prices are volatile but don’t have a bad long-term trend. We do still have serious problems with affordability in education and healthcare, but we have obvious solutions available (that several other countries are already doing successfully); we’re just not doing them because Republicans don’t like them. But housing? We have no clear solutions on the table, certainly not anything that would be politically viable. Fundamentally, we need to build more housing in places people want to live—a lot more housing—and force the price of housing down.

And with our society structured the way it is, when you price people out of housing, you price them out of adulthood. Millennials are not having kids at anywhere near the rate of previous generations, because raising kids requires living space. Especially with immigration collapsing after Trump, this housing affordability crisis is going to turn into a population crisis.

I guess what I’m hoping for at the moment is just consciousness-raising, making people see that this is actually a problem. For some reason, everyone agrees that rising prices of goods are a bad thing, except when it comes to housing.

Inflation in food? An urgent crisis that must be immediately resolved.

Inflation in gas prices? So terrible it’s worth invading other countries over.

Inflation in housing? No, somehow that’s good actually, because it makes homeowners feel richer (even though they actually owe more in property taxes). We treat housing like an asset instead of a good, which is something we should absolutely never, ever do with a good that people need to live.

How could we make job search less of a nightmare?

PNRJ core principles, market failure, personal, public policy , , , , , , , , , , ,

Mar 1 JDN 2461101

This has been my “career” for the last two years:

I search through thousands of job postings, which, despite various filters and tags on my searches, almost none of which are actually good fits for me—in part because the search engines simply do not contain a great deal of information that would be vital, like “LGBT friendly”, “supportive of neurodivergent employees”, or “good at accommodating disabilities”. Instead it’s all sorted by “job title”, which at this point is clearly an arms race of search-engine optimization, because I keep getting listings called “tutor” which are actually some sort of interactive training of yet another large language model nobody actually needs. (Actual tutoring of actual human students often is a good fit for me—though it pays much better if you’re freelance than if you work for a company, because the companies take a huge cut of what the customers pay.)

But, after an hour or two of searching, I find a few that seem like they might be worth applying to. They’re never a perfect fit, but beggars can’t be choosers, so I decide I’ll go ahead and apply to them.

They ask for a resume. No problem. Perfectly sensible, I have one handy; maybe I’ll tweak it a bit, but if it’s an industry I often apply to, I may already have a tweaked version ready to go.

They ask for a cover letter. Okay, I guess. There usually isn’t much I can really say there that isn’t already in my resume, but occasionally there’s something worth adding, and it’s only maybe half an hour of work to update an existing cover letter for a new application.

Then, they ask me to input my work history in their proprietary format on their website. WHAT!? WHY!? I just gave you a resume! You aren’t even willing to read it? You want to be able to automate the reading of my resume, so I have to enter into your proprietary database? But okay, fine; beggars can’t be choosers, I remind myself. So I enter everything that’s in my resume again.

Then, they ask me what salary I want. I know this game. You’re trying to make me reveal my preference in this bargaining game so you can gain bargaining power. So I look up what kind of salaries companies like them usually offer for jobs like this, and then I hike it up a bit as the opening bid in a negotiation.

Then, they ask me to fill out some questions that are supposed to assess… something. Some kind of personality test, or “culture fit”, or something similarly fuzzy. I try to interpolate my answers between my genuine feelings and the kind of hyper-obedient corporate drone they’re probably looking for, because I’m not an idiot who would answer honestly (I’m not that autistic), butI wouldn’t actually want to work for anyone who required the very topmost corporate-drone answers.

And then, what happens?

Absolutely nothing.

No response. Weeks pass. At some point, I have to assume that they’ve filled the position or closed it, or maybe that the vacancy was never real at all and they posted it for some other reason—likely to give some sense of searching when they in fact already have someone in mind. (Apparently over a third of online job postings are fake.)

I have done this process over two hundred times.

And in doing so, I have chipped off pieces of my soul. I feel like a shell of the person I was. And I have absolutely nothing to show for it all.

I am not even unusual in this regard: Recruiters often complain that they are swamped because they get 200 applicants per posting—but that means, mathematically, that an average job-seeker must apply to 200 postings before they can expect to get hired. (And which is more work, do you think: Writing a cover letter, or reading one?)

How could we make this better?

There are a lot of problems to fix here, but I have one very simple intervention that would only slightly inconvenience recruiters, while making life dramatically better for applicants. Here goes:

Require them to show you the resume of the person they actually hired.

There should be a time window: Maybe 30 days after you applied; or if it’s a position like in academia where they don’t do interviews for a long time after the application deadline, within 7 days of them starting interviews.

Anonymize the resume appropriately, of course; no photos, no names, no contact information. We don’t want the new hire to get harassed by their competitors. (And this takes, what, 5 minutes to do?)

But having to send that resume solves several problems simultaneously:

  1. It means they have to actually respond—they cannot ghost you. It can be a two-line form letter email with a one-page attachment that’s the same for all 200 applicants—but they have to send you something.
  2. It means they have to actually hire someone—the posting cannot be completely fake. If they are for some reason unable to fill the vacancy and have to close it, they should have to tell you that, and give a reason—and that reason should be legally binding such that if you ever find out it’s not true, you can sue them.
  3. It means that person had to actually apply—they couldn’t have been someone’s nephew who was automatically given the job and the posting was only made to make it look like there was a hiring process. At the very least, said nephew had to actually cough up a resume like the rest of us.
  4. It allows you to compare qualifications—you can see how you stack up against the new hire. If they are genuinely far more qualified? Well, fair enough; perhaps this job was a stretch for you, or it’s a very rough market. If they are about as qualified, or better in some ways, worse in others? Well, you surely were to apply, but you can’t win ’em all. But if they are far less qualified? You now have the basis for a lawsuit, because that looks like nepotism at best and discrimination at worst—and they had to give you that evidence, in writing, in a timely fashion.

The penalty for failing to comply with this regulation could be a small fine, perhaps $100—per applicant. The more people you ghost, the more you have to pay up.

This is clearly a very small amount of extra effort for the recruiters. They already have the resume—hopefully—and all they need to do is anonymize it, grab a standard form letter rejection email, BCC all the applicants to this position (which are—again, hopefully—already stored in one place in the company’s database), attach the anonymized resume, and click Send. We’re talking 15 minutes of work here, regardless of the number of applicants. In fact, it could probably be automated so as to require almost zero marginal effort for each new job: Just check the box next to the name of the person who was hired in the applicant tracking system, and it does the rest. (And if the person you hired wasn’t in the applicant tracking system? That sounds like a you problem, because you’re clearly not treating the other applicants fairly.)

What if we just banned banks?

PNRJ critique of neoclassical economics, ethics, financial fraud, inequality, market failure, public policy , , , , , , , , , ,

Feb 22 JDN 2461094

I got a mailer from Wells Fargo today offering me a new credit card. The offer seemed decent, but the first thing that came to my mind was: Why is this company still allowed to exist?

In case you didn’t know, Wells Fargo was caught in 2016 creating millions of fraudulent accounts. They paid a fine of $185 million—which likely was less than the revenue they earned via this massive fraud scheme. How am I supposed to trust them ever again? How is anyone?

It’s hardly just them, of course. Almost every major bank has been implicated in some heinous crime.

JP Morgan Chase helped Jeffrey Epstein conceal assets, rigged municipal bonds transactions, and of course misrepresented thousands of mortgages in a way that directly contributed to the 2008 crisis.

Bank of America also committed mass fraud that contributed to the 2008 crisis.

A case against Citi is currently being tried for failing to protect its customers against fraud.

Capital One is being sued for failing to pay the interest rates it promised on savings accounts.

And let’s not forget HSBC, which laundered money for terrorists.

If these were individuals committing these crimes, they would be in prison, probably for the rest of their lives. But because they are corporations, they get slapped with a fine, or pay a settlement—typically less than what they made in the criminal activity—and then they get to go right back to work as if nothing had happened.

I think it’s time to do something much more radical.

Let’s ban banks.

This might sound crazy at first: Don’t we need banks? Doesn’t our whole financial system rest upon them?

But in fact, we do not need banks at all. We need loans, we need deposits, we need mortgages. But we already have a fully-functional alternative system for providing those services which is not implicated in crime after crime after heinous crime:

They are called credit unions.

Credit unions already provide almost all the services currently provided by banks—and most of the ones they don’t provide, we probably didn’t actually need anyway. There are already nearly 5,000 credit unions in the US with over 130 million customers.

Credit unions almost always fare better in financial crises, because they don’t overleverage themselves. They are far less likely to be involved in fraud. They don’t get involved in high-risk speculation. They offer higher yields on savings and lower rates on loans and credit cards. Basically they are better than banks in every way.

Why are credit unions so much better-behaved?

Because they are co-ops instead of for-profit corporations.

Customers of credit unions are also owners of credit unions, so there are no extra profits being siphoned off somewhere to greedy shareholders whose only goal in life is number go up.

Free markets are genuinely more efficient than centrally-planned systems. But there’s nothing about free markets that requires the owners of capital to be their own class of people who aren’t workers or customers and make their money by buying, selling, and owning things. That’s what’s wrong with capitalism—not too little central planning, but too concentrated ownership.

As I’ve written about before, co-ops are just as efficient as corporations, and produce much lower inequality.

For many industries, transitioning to co-ops would be a major change, and require lots of new organization that isn’t there. But for banking, the co-ops already exist. All we need to do is ban the alternative and force everyone to use the better, safer system. Come up with some way to transfer all the accounts fairly to credit unions, and—very intentionally—leave the shareholders of these criminal enterprises with absolutely nothing.

In fact, since credit unions are more likely to support other co-ops, forcing the financial system to transition to credit unions might actually make the process of transitioning our entire economy to co-ops easier.

It may seem extreme, but please, take a look again at all those crimes that all these major, highly-successful, market-dominating banks have committed. They’ve had their chance to prove that they can be honest and law-abiding, and they have failed.

Get rid of them.

Productivity by itself does not eliminate poverty

PNRJ core principles, development economics, ethics, inequality, market failure , , , , , , ,

Jan 25 JDN 2461066

Scott Alexander has a techno-utopian vision:

Between the vast ocean of total annihilation and the vast continent of infinite post-scarcity, there is, I admit, a tiny shoreline of possibilities that end in oligarch capture. Even if you end up there, you’ll be fine. Dario Amodei has taken the Giving What We Can Pledge (#43 here) to give 10% of his wealth to the less fortunate; your worst-case scenario is owning a terraformed moon in one of his galaxies. Now you can stop worrying about the permanent underclass and focus on more important things.

I agree that total annihilation is a very serious risk, though fortunately I believe it is not the most likely outcome. But it seems pretty weird to me to posit that the most likely outcome is “infinite post-scarcity” when oligarch capture is what we already have.

(Regarding Alexander’s specific example: Dario Amidei has $3.7 billion. If he were to give away 10% of that, it would be $370 million, which would be good, but hardly usher in a radical utopia. The assumption seems to be that he would be one of the prevailing trillionaire oligarchs, and I don’t see how we can know that would be the case. Even if AI succeeds in general, that doesn’t mean that every company that makes AI succeeds. (Video games succeeded, but who buys Atari anymore?) Also, it seems especially wide-eyed to imagine that one man would ever own entire galaxies. We probably won’t even ever be able to reach other galaxies!)

People with this sort of utopian vision seem to imagine that all we need to do is make more stuff, and then magically it will all be distributed in such a way that everyone gets to have enough.

If Alexander were writing 200 years ago, I could even understand why he’d think that; there genuinely wasn’t enough stuff to go around, and it would have made sense to think that all we needed to do was solve that problem, and then the other problems would be easy.

But we no longer live in that world.

There is enough stuff to go around—at the very least this is true of all highly-developed countries, and it’s honestly pretty much true of the world as a whole. The problem is very much that it isn’t going around.

Elon Musk’s net wealth is now estimated at over $780 billion. Seven hundred and eighty billion dollars. He could give $90 to every person in the world (all 8.3 billion of us). He could buy a home (median price $400,000—way higher than it was just a few years ago) for every homeless person in America (about 750,000 people) and still have half his wealth left over. He could give $900 to every single person of the 831 million people who live below the world extreme poverty threshold—thus eliminating extreme poverty in the world for a year. (And quite possibly longer, as all those people are likely to be more productive now that they are well-fed.) He has chosen to do none of these things, because he wants to see number go up.

That’s just one man. If you add up all the wealth of all the world’s billionaires—just billionaires, so we’re not even counting people with $50 million or $100 million or $500 million—it totals over $16 trillion. This is enough to not simply end extreme poverty for a year, but to establish a fund that would end it forever.

And don’t tell me that they can’t really do this because it’s all tied up in stocks and not liquid. UNICEF happily accepts donations in stock. Giving UNICEF $10 trillion in stocks absolutely would permanently end extreme poverty worldwide. And they could donate those stocks today. They are choosing not to.

I still think that AI is a bubble that’s going to burst and trigger a financial crisis. But there is some chance that AI actually does become a revolutionary new technology that radically increases productivity. (In fact, I think this will happen, eventually. I just think we’re a paradigm or two away from that, and LLMs are largely a dead end.)

But even if that happens, unless we have had radical changes in our economy and society, it will not usher in a new utopian era of plenty for all.

How do I know this? Because if that were what the powers that be wanted to happen, they would have already started doing it. The super-rich are now so absurdly wealthy that they could easily effect great reductions in poverty at home and abroad while costing themselves basically nothing in terms of real standard of living, but they are choosing not to do that. And our governments could be taxing them more and using those funds to help people, and they are by and large choosing not to do that either.

The notion seems to be similar to “trickle-down economics”: Once the rich get rich enough, they’ll finally realize that money can’t buy happiness and start giving away their vast wealth to help people. But if that didn’t happen at $100 million, or $1 billion, or $10 billion, or $100 billion, I see no reason to think that it will happen at $1 trillion or $10 trillion or even $100 trillion.

Why are so many famous people so awful?

PNRJ ethics, inequality, market failure , , , , , , , , , , , , , , , , , , , , , , , , , ,

Oct 12 JDN 2460961

J.K. Rowling is a transphobic bigot. H.P. Lovecraft was an overt racist. Orson Scott Card is homophobic, and so was Frank Herbert. Robert Heinlein was a misogynist. Isaac Asimov was a serial groper and sexual harasser. Neil Gaiman has been credibly accused of multiple sexual assaults.

That’s just among sci-fi and fantasy authors whose work I admire. I could easily go on with lots of other famous people and lots of other serious allegations. (I suppose Bill Cosby and Roman Polanski seem like particularly apt examples.)

Some of these are worse than others; since they don’t seem to be guilty of any actual crimes, we might even cut some slack to Lovecraft, Herbert and Heinlein for being products of their times. (It seems very hard to make that defense for Asimov and Gaiman, with Rowling and Card somewhere in between because they aren’t criminals, but ‘their time’ is now.)

There are of course exceptions: Among sci-fi authors, for instance, Ursula Le Guin, Becky Chambers, Alistair Reynolds and Andy Weir all seem to be ethically unimpeachable. (As far as I know? To be honest, I still feel blind-sided by Neil Gaiman.)

But there really does seem to be pattern here:

Famous people are often bad people.

I guess I’m not quite sure what the baseline rate of being racist, sexist, or homophobic is (and frankly maybe it’s pretty high); but the baseline rate of committing multiple sexual assaults is definitely lower than the rate at which famous men get credibly accused of such.

Lord Acton famously remarked similarly:

Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency of the certainty of corruption by authority.

I think this account is wrong, however. Abraham Lincoln, Mahatma Gandhi, and Nelson Mandela were certainly powerful—and certainly flawed—but they do not seem corrupt to me. I don’t think that Gandhi beat his wife because he led the Indian National Congress, and Mandela supported terrorists precisely during the period when he had the least power and the fewest options. (It’s almost tautologically true that Lincoln couldn’t have suspended habeas corpusif he weren’t extremely powerful—but that doesn’t mean that it was the power that shaped his character.)

I don’t think the problem is that power corrupts. I think the problem is that the corrupt seek power, and are very good at obtaining it.

In fact, I think the reason that so many famous people are such awful people is that our society rewards being awful. People will flock to you if you are overconfident and good at self-promoting, and as long as they like your work, they don’t seem to mind who you hurt along the way; this makes a perfect recipe for rewarding narcissists and psychopaths with fame, fortune, and power.

If you doubt that this is the case:

How else do you explain Donald Trump?

The man has absolutely no redeeming qualities. He is incompetent, willfully ignorant, deeply incurious, arrogant, manipulative, and a pathological liar. He’s also a racist, misogynist, and admitted sexual assaulter. He has been doing everything in his power to prevent the release of the Epstein Files, which strongly suggests he has in fact sexually assaulted teenagers. He’s also a fascist, and now that he has consolidated power, he is rapidly pushing the United States toward becoming a fascist state—complete with masked men with guns who break into your home and carry you away without warrants or trials.

Yet tens of millions of Americans voted for him to become President of the United States—twice.

Basically, it seems to be that Trump said he was great, and they believed him. Simply projecting confidence—however utterly unearned that confidence might be—was good enough.

When it comes to the authors I started this post with, one might ask whether their writing talents were what brought them fame, independently or in spite of their moral flaws. To some extent that is probably true. But we also don’t really know how good they are, compared to all the other writers whose work never got published or never got read. Especially during times—all too recently—when writers who were women, queer, or people of color simply couldn’t get their work published, who knows what genius we might have missed out on? Dune the first book is a masterpiece, but by the time we get to Heretics of Dune the books have definitely lost their luster; maybe there were some other authors with better books that could have been published, but never were because Herbert had the clout and the privilege and those authors didn’t.

I do think genuine merit has some correlation with success. But I think the correlation is much weaker than is commonly supposed. A lot of very obviously terrible and/or incompetent people are extremely successful in life. Many of them were born with advantages—certainly true of Elon Musk and Donald Trump—but not all of them.

Indeed, there are so many awful successful people that I am led to conclude that moral behavior has almost nothing to do with success. I don’t think people actively go out of their way to support authors, musicians, actors, business owners or politicians who are morally terrible; but it’s difficult for me to reject the hypothesis that they literally don’t care. Indeed, when evidence emerges that someone powerful is terrible, usually their supporters will desperately search for reasons why the allegations can’t be true, rather than seriously considering no longer supporting them.

I don’t know what to do about this.

I don’t know how to get people to believe allegations more, or care about them more; and that honestly seems easier than changing the fundamental structure of our society in a way that narcissists and psychopaths are no longer rewarded with power. The basic ways that we decide who gets jobs, who gets published, and who gets elected seem to be deeply, fundamentally broken; they are selecting all the wrong people, and our whole civilization is suffering the consequences.


We are so far from a just world that I honestly can’t see how to get there from here, or even how to move substantially closer.

But I think we still have to try.

Taylor Swift and the means of production

PNRJ development economics, futurism, inequality, market failure, politics , , , , , , , , , , , ,

Oct 5 JDN 2460954

This post is one I’ve been meaning to write for awhile, but current events keep taking precedence.

In 2023, Taylor Swift did something very interesting from an economic perspective, which turns out to have profound implications for our economic future.

She re-recorded an entire album and released it through a different record company.

The album was called 1989 (Taylor’s Version), and she created it because for the last four years she had been fighting with Big Machine Records over the rights to her previous work, including the original album 1989.

A Marxist might well say she seized the means of production! (How rich does she have to get before she becomes bourgeoisie, I wonder? Is she already there, even though she’s one of a handful of billionaires who can truly say they were self-made?)

But really she did something even more interesting than that. It was more like she said:

“Seize the means of production? I am the means of production.”

Singing and songwriting are what is known as a human-capital-intensive industry. That is, the most important factor of production is not land, or natural resources, or physical capital (yes, you need musical instruments, amplifiers, recording equipment and the like—but these are a small fraction of what it costs to get Talor Swift for a concert), or even labor in the ordinary sense. It’s one where so-called (honestly poorly named) “human capital” is the most important factor of production.

A labor-intensive industry is one where you just need a lot of work to be done, but you can get essentially anyone to do it: Cleaning floors is labor-intensive. A lot of construction work is labor-intensive (though excavators and the like also make it capital-intensive).

No, for a human-capital-intensive industry, what you need is expertise or talent. You don’t need a lot of people doing back-breaking work; you need a few people who are very good at doing the specific thing you need to get done.

Taylor Swift was able to re-record and re-release her songs because the one factor of production that couldn’t be easily substituted was herself. Big Machine Records overplayed their hand; they thought they could control her because they owned the rights to her recordings. But she didn’t need her recordings; she could just sing the songs again.

But now I’m sure you’re wondering: So what?

Well, Taylor Swift’s story is, in large part, the story of us all.

For most of the 18th, 19th, and 20th centuries, human beings in developed countries saw a rapid increase in their standard of living.

Yes, a lot of countries got left behind until quite recently.

Yes, this process seems to have stalled in the 21st century, with “real GDP” continuing to rise but inequality and cost of living rising fast enough that most people don’t feel any richer (and I’ll get to why that may be the case in a moment).

But for millions of people, the gains were real, and substantial. What was it that brought about this change?

The story we are usually told is that it was capital; that as industries transitioned from labor-intensive to capital-intensive, worker productivity greatly increased, and this allowed us to increase our standard of living.

That’s part of the story. But it can’t be the whole thing.

Why not, you ask?

Because very few people actually own the capital.

When capital ownership is so heavily concentrated, any increases in productivity due to capital-intensive production can simply be captured by the rich people who own the capital. Competition was supposed to fix this, compelling them to raise wages to match productivity, but we often haven’t actually had competitive markets; we’ve had oligopolies that consolidate market power in a handful of corporations. We had Standard Oil before, and we have Microsoft now. (Did you know that Microsoft not only owns more than half the consumer operating system industry, but after acquiring Activision Blizzard, is now the largest video game company in the world?) In the presence of an oligopoly, the owners of the capital will reap the gains from capital-intensive productivity.

But standards of living did rise. So what happened?

The answer is that production didn’t just become capital-intensive. It became human-capital-intensive.

More and more jobs required skills that an average person didn’t have. This created incentives for expanding public education, making workers not just more productive, but also more aware of how things work and in a stronger bargaining position.

Today, it’s very clear that the jobs which are most human-capital-intensive—like doctors, lawyers, researchers, and software developers—are the ones with the highest pay and the greatest social esteem. (I’m still not 100% sure why stock traders are so well-paid; it really isn’t that hard to be a stock trader. I could write you an algorithm in 50 lines of Python that would beat the average trader (mostly by buying ETFs). But they pretend to be human-capital-intensive by hiring Harvard grads, and they certainly pay as if they are.)

The most capital-intensive industries—like factory work—are reasonably well-paid, but not that well-paid, and actually seem to be rapidly disappearing as the capital simply replaces the workers. Factory worker productivity is now staggeringly high thanks to all this automation, but the workers themselves have gained only a small fraction of this increase in higher wages; by far the bigger effect has been increased profits for the capital owners and reduced employment in manufacturing.

And of course the real money is all in capital ownership. Elon Musk doesn’t have $400 billion because he’s a great engineer who works very hard. He has $400 billion because he owns a corporation that is extremely highly valued (indeed, clearly overvalued) in the stock market. Maybe being a great engineer or working very hard helped him get there, but it was neither necessary nor sufficient (and I’m sure that his dad’s emerald mine also helped).

Indeed, this is why I’m so worried about artificial intelligence.

Most forms of automation replace labor, in the conventional labor-intensive sense: Because you have factory robots, you need fewer factory workers; because you have mountaintop removal, you need fewer coal miners. It takes fewer people to do the same amount of work. But you still need people to plan and direct the process, and in fact those people need to be skilled experts in order to be effective—so there’s a complementarity between automation and human capital.

But AI doesn’t work like that. AI substitutes for human capital. It doesn’t just replace labor; it replaces expertise.

So far, AI is currently too unreliable to replace any but entry-level workers in human-capital-intensive industries (though there is some evidence it’s already doing that). But it will most likely get more reliable over time, if not via the current LLM paradigm, than through the next one that comes after. At some point, AI will come to replace experienced software developers, and then veteran doctors—and I don’t think we’ll be ready.

The long-term pattern here seems to be transitioning away from human-capital-intensive production to purely capital-intensive production. And if we don’t change the fact that capital ownership is heavily concentrated and so many of our markets are oligopolies—which we absolutely do not seem poised to do anything about; Democrats do next to nothing and Republicans actively and purposefully make it worse—then this transition will be a recipe for even more staggering inequality than before, where the rich will get even more spectacularly mind-bogglingly rich while the rest of us stagnate or even see our real standard of living fall.

The tech bros promise us that AI will bring about a utopian future, but that would only work if capital ownership were equally shared. If they continue to own all the AIs, they may get a utopia—but we sure won’t.

We can’t all be Taylor Swift. (And if AI music catches on, she may not be able to much longer either.)

The AI bubble is going to crash hard

PNRJ critique of neoclassical economics, current events, futurism, market failure, public policy , , , , , , , , , , , , , ,

Sep 7 JDN 2460926

Based on the fact that it only sort of works and yet corps immediately put it in everything, I had long suspected that the current wave of AI was a bubble. But after reading Ed Zitron’s epic takedowns of the entire industry, I am not only convinced it’s a bubble; I’m convinced it is probably the worst bubble we’ve had in a very long time. This isn’t the dot-com crash; it’s worse.

The similarity to the dot-com crash is clear, however: This a huge amount of hype over a new technology that genuinely could be a game-changer (the Internet certainly was!), but won’t be in the time horizon on which the most optimistic investors have assumed it will be. The gap between “it sort of works” and “it radically changes our economy” is… pretty large, actually. It’s not something you close in a few years.


The headline figure here is that based on current projections, US corporations will have spent $560 billion on capital expenditure, for anticipated revenue of only $35 billion.

They won’t pay it off for 16 years!? That kind of payoff rate would make sense for large-scale physical infrastructure, like a hydroelectric dam. It absolutely does not make sense in an industry that is dependent upon cutting-edge technology that wears out fast and becomes obsolete even faster. They must think that revenue is going to increase to something much higher, very soon.

The corps seem to be banking on the most optimistic view of AI: That it will soon—very soon—bring about a radical increase in productivity that brings GDP surging to new heights, or even a true Singularity where AI fundamentally changes the nature of human existence.

Given the kind of errors I’ve seen LLMs make when I tried to use them to find research papers or help me with tedious coding, this is definitely not what’s going to happen. Claude gives an impressive interview, and (with significant guidance and error-correction) it also managed pretty well at making some simple text-based games; but it often recommended papers to me that didn’t exist, and through further experimentation, I discovered that it could not write me a functional C++ GUI if its existence depended on it. Somewhere on the Internet I heard someone describe LLMs as answering not the question you asked directly, but the question, “What would a good answer to this question look like?” and that seems very accurate. It always gives an answer that looks valid—but not necessarily one that is valid.

AI will find some usefulness in certain industries, I’m sure; and maybe the next paradigm (or the one after that) will really, truly, effect a radical change on our society. (Right now the best thing to use LLMs for seems to be cheating at school—and it also seems to be the most common use. Not exactly the great breakthrough we were hoping for.) But LLMs are just not reliable enough to actually use for anything important, and sooner or later, most of the people using them are going to figure that out.

Of course, by the Efficient Roulette Hypothesis, it’s extremely difficult to predict exactly when a bubble will burst, and it could well be that NVIDIA stock will continue to grow at astronomical rates for several years yet—or it could be that the bubble bursts tomorrow and NVIDIA stock collapses, if not to worthless, then to far below its current price.

Krugman has an idea of what might be the point that bursts the bubble: Energy costs. There is a clear mismatch between the anticipated energy needs of these ever-growing data centers and the actual energy production we’ve been installing—especially now that Trump and his ilk have gutted subsidies for solar and wind power. That’s definitely something to watch out for.

But the really scary thing is that the AI bubble actually seems to be the only thing holding the US economy above water right now. It’s the reason why Trump’s terrible policies haven’t been as disastrous as economists predicted they would; our economy is being sustained by this enormous amount of capital investment.

US GDP is about $30 trillion right now, but $500 billion of that is just AI investment. That’s over 1.6%, and last quarter our annualized GDP growth rate was 3.3%—so roughly half of our GDP growth was just due to building more data centers that probably won’t even be profitable.

Between that, the tariffs, the loss of immigrants, and rising energy costs, a crashing AI bubble could bring down the whole stock market with it.

So I guess what I’m saying is: Don’t believe the AI hype, and you might want to sell some stocks.

Solving the student debt problem

PNRJ education, inequality, market failure, politics, public policy, science and academia , , , , , , , ,

Aug 24 JDN 2460912

A lot of people speak about student debt as a “crisis”, which makes it sound like the problem is urgent and will have severe consequences if we don’t soon intervene. I don’t think that’s right. While it’s miserable to be unable to pay your student loans, student loans don’t seem to be driving people to bankruptcy or homelessness the way that medical bills do.

Instead I think what we have here is a long-term problem, something that’s been building for a long time and will slowly but surely continue getting worse if we don’t change course. (I guess you can still call it a “crisis” if you want; climate change is also like this, and arguably a crisis.)

But there is a problem here: Student loan balances are rising much faster than other kinds of debt, and the burden falls the worst on Black women and students who went to for-profit schools. A big part of the problem seems to be predatory schools that charge high prices and make big promises but offer poor results.

Making all this worse is the fact that some of the most important income-based repayment plans were overturned by a federal court, forcing everyone who was on them into forebearance. Income-based repayment was a big reason why student loans actually weren’t as bad a burden as their high loan balances might suggest; unlike a personal loan or a mortgage, if you didn’t have enough income to repay your student loans at the full amount, you could get on a plan that would let you make smaller payments, and if you paid on that plan for long enough—even if it didn’t add up to the full balance—your loans would be forgiven.

Now the forebearance is ending for a lot of borrowers, and so they are going into default; and most of that loan forgiveness has been ruled illegal. (Supposedly this is because Congress didn’t approve it. I’ll believe that was the reason when the courts overrule Trump’s tariffs, which clearly have just as thin a legal justification and will cause far more harm to us and the rest of the world.)

In theory, student loans don’t really seem like a bad idea.

College is expensive, because it requires highly-trained professors, who demand high salaries. (The tuition money also goes other places, of course….)

College is valuable, because it provides you with knowledge and skills that can improve your life and also increase your long-term earnings. It’s a big difference: Median salary for someone with a college degree is about $60k, while median salary for someone with only a high school diploma is about $34k.

Most people don’t have enough liquidity to pay for college.

So, we provide loans, so that people can pay for college, and then when they make more money after graduating, they can pay the loans back.

That’s the theory, anyway.

The problem is that average or even median salaries obscure a lot of variation. Some college graduates become doctors, lawyers, or stockbrokers and make huge salaries. Others can’t find jobs at all. In the absence of income-based repayment plans, all students have to pay back their loans in full, regardless of their actual income after graduation.

There is inherent risk in trying to build a career. Our loan system—especially with the recent changes—puts most of this risk on the student. We treat it as their fault they can’t get a good job, and then punish them with loans they can’t afford to repay.

In fact, right now the job market is pretty badfor recent graduates—while usually unemployment for recent college grads is lower than that of the general population, since about 2018 it has actually been higher. (It’s no longer sky-high like it was during COVID; 4.8% is not bad in the scheme of things.)

Actually the job market may even be worse than it looks, because new hires are actually the lowest rate they’ve been since 2020. Our relatively low unemployment currently seems to reflect a lack of layoffs, not a healthy churn of people entering and leaving jobs. People seem to be locked into their jobs, and if they do leave them, finding another is quite difficult.

What I think we need is a system that makes the government take on more of the risk, instead of the students.

There are lots of ways to do this. Actually, the income-based repayment systems we used to have weren’t too bad.

But there is actually a way to do it without student loans at all. College could be free, paid for by taxes.


Now, I know what you’re thinking: Isn’t this unfair to people who didn’t go to college? Why should they have to pay?

Who said they were paying?

There could simply be a portion of the income tax that you only pay if you have a bachelor’s degree. Then you would only pay this tax if you both graduated from college and make a lot of money.

I don’t think this would create a strong incentive not to get a bachelor’s degree; the benefits of doing so remain quite large, even if your taxes were a bit higher as a result.

It might create incentives to major in subjects that aren’t as closely linked to higher earnings—liberal arts instead of engineering, medicine, law, or business. But this I see as fundamentally a public good: The world needs people with liberal arts education. If the market fails to provide for them, the government should step in.

This plan is not as progressive as Elizabeth Warren’s proposal to use wealth taxes to fund free college; but it might be more politically feasible. The argument that people who didn’t go to college shouldn’t have to pay for people who did actually seems reasonable to me; but this system would ensure that in fact they don’t.

The transfer of wealth here would be from people who went to college and make a lot of money to people who went to college and don’t make a lot of money. It would be the government bearing some of the financial risk of taking on a career in an uncertain world.

I can’t not talk about tariffs right now

PNRJ current events, market failure, politics, public policy , , , , , , , , , ,

Apr 13 JDN 2460779

On the one hand, I’m sure every economics blog on the Internet is already talking about this, including Paul Krugman who knows the subject way better than I ever will (and literally won a Nobel Prize for his work on it). And I have other things I’d rather be writing about, like the Index of Necessary Expenditure. But on the other hand, when something this big happens in economics, it just feels like there’s really no alternative: I have to talk about tariffs right now.

What is a tariff, anyway?

This feels like a really basic question, but it also seems like a lot of people don’t really understand tariffs, or didn’t when they voted for Trump.

A tariff, quite simply, is an import tax. It’s a tax that you impose on imported goods (either a particular kind, or from a particular country, or just across the board). On paper, it is generally paid by the company importing the goods, but as I wrote about in my sequence on tax incidence, that doesn’t matter. What matters is how prices change in response to the tax, and this means that in real terms, prices will go up.

In fact, in some sense that’s the goal of a protectionist tariff, because you’re trying to fix the fact that local producers can’t compete on the global market. So you compensate by making international firms pay higher taxes, so that the local producers can charge higher prices and still compete. So anyone who is saying that tariffs won’t raise prices is either ignorant or lying: Raising prices is what tariffs do.

Why are people so surprised?

The thing that surprises me about all this, (a bit ironically) is how surprised people seem to be. Trump ran his whole campaign promising two things: Deport all the immigrants, and massive tariffs on all trade. Most of his messaging was bizarre and incoherent, but on those two topics he was very consistent. So why in the world are people—including stock traders, who are supposedly savvy on these things—so utterly shocked that he has actually done precisely what he promised he would do?

What did people think Trump meant when he said these things? Did they assume he was bluffing? Did they think cooler heads in his administration would prevail (if so, whose?)?

But I will admit that even I am surprised at just how big the tariffs are. I knew they would be big, but I did not expect them to be this big.

How big?

Well, take a look at this graph:

The average tariff rate on US imports will now be higher than it was at the peak in 1930 with the Smoot-Hawley Act. Moreover, Smoot-Hawley was passed during a time when protectionist tariffs were already in place, while Trump’s tariffs come at a time when tariffs had previously been near zero—so the change is dramatically more sudden.

This is worse than Smoot-Hawley.

For the uninitiated, Smoot-Hawley was a disaster. Several countries retaliated with their own tariffs, and the resulting trade war clearly exacerbated the Great Depression, not only in the US but around the world. World trade dropped by an astonishing 66% over the next few years. It’s still debated as to how much of the depression was caused by the tariffs; most economists believe that the gold standard was the bigger culprit. But it definitely made it worse.

Politically, the aftermath cost the Republicans (including Smoot and Hawley themselves) several seats in Congress. (I guess maybe the silver lining here is we can hope this will do the same?)

And I would now like to remind you that these tariffs are bigger than Smoot-Hawley’s and were implemented more suddenly.

Unlike in 1930, we are not currently in a depression—though nor is our economy as hunky-dory as a lot of pundits seem to think, once we consider things like the Index of Necessary Expenditure. But stock markets do seem to be crashing, and if trade drops as much as it did in the 1930s—and why wouldn’t it?—we may very well end up in another depression.

And it’s not as if we didn’t warn you all. Economists across the political spectrum have been speaking out against Trump’s tariffs from the beginning, and nobody listened to us.

So basically the mood of all economists right now is:

A new theoretical model of co-ops

PNRJ critique of neoclassical economics, inequality, market failure, mathematical models, public policy , , , , , , , , ,

Mar 30 JDN 2460765

A lot of economists seem puzzled by the fact that co-ops are just as efficient as corporate firms, since they have this idea that profit-sharing inevitably results in lower efficiency due to perverse incentives.

I think they’ve been modeling co-ops wrong. Here I present a new model, a very simple one, with linear supply and demand curves. Of course one could make a more sophisticated model, but this should be enough to make the point (and this is just a blog post, not a research paper, after all).

Demand curve is p = a – b q

Marginal cost is f q

There are n workers, who would hold equal shares of the co-op.

Competitive market

First, let’s start with the traditional corporate firm in a competitive market.

Since the market is competitive, price would equal marginal cost would equal wage:

a – b q = d q

q = a/(b+f)

w = d (a/(b+f)) = (a d)/(b+f)

Total profit will be

(p – w)q = 0.

Monopoly firm

In a monopoly, marginal revenue would equal marginal cost:
d[pq]/dq = a – 2 b q

If they are also a monopsonist in the labor market, this marginal cost would be marginal cost of labor, not wage:

d[d q2]/dq = 2 f q

a – 2 b q = 2 f q

q = a/(2b + 2f)

p = a – b q = a (1 – b/(2b + 2f)) = (a (b + 2f))/(2b + 2f)

w = d q = (a f)/(2b + 2f)

Total profit will be

(p – w) q = ((a (b + 2f))/(2b + 2f) – (a f)/(2b + 2f))a/(2b + 2f) = a2/(4b + 2f)

Now consider the co-op.

First, suppose that instead of working for a wage, I work for profit sharing.

If our product market is competitive, we’ll be price-takers, and we will produce until price equals marginal cost:

p = f q

a – b q = f q

q = a/(a+b)

But will we, really? I only get 1/n share of the profits. So let’s see here. My marginal cost of production is still f q, but the marginal benefit I get from more sales may only be p/n.

In that case I would work until:

p/n = f q

(a – b q)/n = fq

a – b q = n f q

q = (a/(b+nf))

Thus I would under-produce. This is the usual argument against co-ops and similar shared ownership.

Co-ops with wages

But that’s not actually how co-ops work. They pay wages. Why do they do that? Well, consider what happens if I am offered a wage as a worker-owner of the co-op.

Is there any reason for the co-op to vote on a wage that is less than the competitive market? No, because owners are workers, so any additional profit from a lower wage would simply be taken from their own wages.

If there any reason for the co-op to vote on a wage that is more than the competitive market? No, because workers are owners, and any surplus lost by paying higher wages would simply be taken from their own profits.

So if the product market is competitive, the co-op will produce the same amount and charge the same price as a firm in perfect competition, even if they have market power over their own wages.

Monopoly co-ops

The argument above doesn’t assume that the co-op has no market power in the labor market. Thus if they are a monopoly in the product market and a monopsony in the labor market, they still pay a competitive wage.

Thus they would set marginal revenue equal to marginal cost:

a – 2 b q = f q

q = a/(2b + f)

The co-op will produce more than the monopoly firm..

This is the new price:

p = a – b q = a(1 – b/(2b+f)) = a(b+f)/(2b + f)

It’s not obvious that this is lower than the price charged by the monopoly firm, but it is.

(a (b + 2f))/(2b + 2f) – a(b+f)/(2b + f) = (a (2b + f)(b + 2f) – 2 a(b+f)2)/(2(b+f)(2b+f))

This is proportional to:

(2b + f)(b + 2f) – 2(b+f)2

2b2 + 5bf + 2f2 – (2b2 + 4bf + 2f2) = bf

So it’s not a large difference, but it’s there. In the presence of market power in the labor market, the co-op is better for consumers, because they get more goods and pay a lower price.

Thus, there is actually no lost efficiency from being a co-op. There is simply much lower inequality, and potentially higher efficiency.

But that’s just in theory.

What do we see in practice?

Exactly that.

Co-ops have the same productivity and efficiency as corporate firms, but they pay higher wages, provide better benefits, and offer collateral benefits to their communities. In fact, they are sometimes more efficient than corporate firms.

Since they’re just as efficient—if not more so—and produce much lower inequality, switching more firms over to co-ops would clearly be a good thing.

Why, then, aren’t co-ops more common?

Because the people who have the money don’t like them.

The biggest barrier facing co-ops is their inability to get financing, because they don’t pay shareholders (so no IPOs) and banks don’t like to lend to them. They tend to make less profit than corporate firms, which offers investors a lower return—instead that money goes to the worker-owners. This lower return isn’t due to inefficiency; it’s just a different distribution of income, more to labor and less to capital.

We will need new financial institutions to support co-ops, such as the Cooperative Fund of New England. And general redistribution of wealth would also help, because if middle class people had more wealth they could afford to finance co-ops. (It would also be good for many other reasons, of course.)