Small deviations can have large consequences.

Jun 26 JDN 2459787

A common rejoinder that behavioral economists get from neoclassical economists is that most people are mostly rational most of the time, so what’s the big deal? If humans are 90% rational, why worry so much about the other 10%?

Well, it turns out that small deviations from rationality can have surprisingly large consequences. Let’s consider an example.

Suppose we have a market for some asset. Without even trying to veil my ulterior motive, let’s make that asset Bitcoin. Its fundamental value is of course $0; it’s not backed by anything (not even taxes or a central bank), it has no particular uses that aren’t already better served by existing methods, and it’s not even scalable.

Now, suppose that 99% of the population rationally recognizes that the fundamental value of the asset is indeed $0. But 1% of the population doesn’t; they irrationally believe that the asset is worth $20,000. What will the price of that asset be, in equilibrium?

If you assume that the majority will prevail, it should be $0. If you did some kind of weighted average, you’d think maybe its price will be something positive but relatively small, like $200. But is this actually the price it will take on?

Consider someone who currently owns 1 unit of the asset, and recognizes that it is fundamentally worthless. What should they do? Well, if they also know that there are people out there who believe it is worth $20,000, the answer is obvious: They should sell it to those people. Indeed, they should sell it for something quite close to $20,000 if they can.

Now, suppose they don’t already own the asset, but are considering whether or not to buy it. They know it’s worthless, but they also know that there are people who will buy it for close to $20,000. Here’s the kicker: This is a reason for them to buy it at anything meaningfully less than $20,000.

Suppose, for instance, they could buy it for $10,000. Spending $10,000 to buy something you know is worthless seems like a terribly irrational thing to do. But it isn’t irrational, if you also know that somewhere out there is someone who will pay $20,000 for that same asset and you have a reasonable chance of finding that person and selling it to them.

The equilibrium outcome, then, is that the price of the asset will be almost $20,000! Even though 99% of the population recognizes that this asset is worthless, the fact that 1% of people believe it’s worth as much as a car will result in it selling at that price. Thus, even a slight deviation from a perfectly-rational population can result in a market that is radically at odds with reality.

And it gets worse! Suppose that in fact everyone knows that the asset is worthless, but most people think that there is some small portion of the population who believes the asset has value. Then, it will still be priced at that value in equilibrium, as people trade it back and forth searching in vain for the person who really wants it! (This is called the Greater Fool theory.)

That is, the price of an asset in a free market—even in a market where most people are mostly rational most of the time—will in fact be determined by the highest price anyone believes that anyone else thinks it has. And this is true of essentially any asset market—any market where people are buying something, not to use it, but to sell it to someone else.

Of course, beliefs—and particularly beliefs about beliefs—can very easily change, so that equilibrium price could move in any direction basically without warning.

Suddenly, the cycle of bubble and crash, boom and bust, doesn’t seem so surprising does it? The wonder is that prices ever become stable at all.


Then again, do they? Last I checked, the only prices that were remotely stable were for goods like apples and cars and televisions, goods that are bought and sold to be consumed. (Or national currencies managed by competent central banks, whose entire job involves doing whatever it takes to keep those prices stable.) For pretty much everything else—and certainly any purely financial asset that isn’t a national currency—prices are indeed precisely as wildly unpredictable and utterly irrational as this model would predict.

So much for the Efficient Market Hypothesis? Sadly I doubt that the people who still believe this nonsense will be convinced.

If I had a trillion dollars…

May 29 JDN 2459729

(To the tune of “If I had a million dollars” by Barenaked Ladies; by the way, he does now)

[Inspired by the book How to Spend a Trillion Dollars]

If I had a trillion dollars… if I had a trillion dollars!

I’d buy everyone a house—and yes, I mean, every homeless American.

[500,000 homeless households * $300,000 median home price = $150 billion]

If I had a trillion dollars… if I had a trillion dollars!

I’d give to the extreme poor—and then there would be no extreme poor!

[Global poverty gap: $160 billion]

If I had a trillion dollars… if I had a trillion dollars!

I’d send people to Mars—hey, maybe we’d find some alien life!

[Estimated cost of manned Mars mission: $100 billion]

If I had a trillion dollars… if I had a trillion dollars!

I’d build us a Moon base—haven’t you always wanted a Moon base?

[Estimated cost of a permanent Lunar base: $35 billion. NASA is bad at forecasting cost, so let’s allow cost overruns to take us to $100 billion.]

If I had a trillion dollars… if I had a trillion dollars!

I’d build a new particle accelerator—let’s finally figure out dark matter!

[Cost of planned new accelerator at CERN: $24 billion. Let’s do 4 times bigger and make it $100 billion.]

If I had a trillion dollars… if I had a trillion dollars!

I’d save the Amazon—pay all the ranchers to do something else!

[Brazil, where 90% of Amazon cattle ranching is, produces about 10 million tons of beef per year, which at an average price of $5000 per ton is $50 billion. So I could pay all the farmers two years of revenue to protect the Amazon instead of destroying it for $100 billion.]

If I had a trillion dollars…

We wouldn’t have to drive anymore!

If I had a trillion dollars…

We’d build high-speed rail—it won’t cost more!

[Cost of proposed high-speed rail system: $240 billion]

If I had a trillion dollars… if I had trillion dollars!

Hey wait, I could get it from a carbon tax!

[Even a moderate carbon tax could raise $1 trillion in 10 years.]

If I had a trillion dollars… I’d save the world….

All of the above really could be done for under $1 trillion. (Some of them would need to be repeated, so we could call it $1 trillion per year.)

I, of course, do not, and will almost certainly never have, anything approaching $1 trillion.

But here’s the thing: There are people who do.

Elon Musk and Jeff Bezos together have a staggering $350 billion. That’s two people with enough money to end world hunger. And don’t give me that old excuse that it’s not in cash: UNICEF gladly accepts donations in stock. They could, right now, give their stocks to UNICEF and thereby end world hunger. They are choosing not to do that. In fact, the goodwill generated by giving, say, half their stocks to UNICEF might actually result in enough people buying into their companies that their stock prices would rise enough to make up the difference—thus costing them literally nothing.

The total net wealth of all the world’s billionaires is a mind-boggling $12.7 trillion. That’s more than half a year of US GDP. Held by just over 2600 people—a small town.

The US government spends $4 trillion in a normal year—and $5 trillion the last couple of years due to the pandemic. Nearly $1 trillion of that is military spending, which could be cut in half and still be the highest in the world. After seeing how pathetic Russia’s army actually is in battle (they paint Zs on their tanks because apparently their IFF system is useless!), are we really still scared of them? Do we really need eleven carrier battle groups?

Yes, the total cost of mitigating climate change is probably in the tens of trillions—but the cost of not mitigating climate change could be over $100 trillion. And it’s not as if the world can’t come up with tens of trillions; we already do. World GDP is now over $100 trillion per year; just 2% of that for 10 years is $20 trillion.

Do these sound like good ideas to you? Would you want to do them? I think most people would want most of them. So now the question becomes: Why aren’t we doing them?

The economic impact of chronic illness

Mar 27 JDN 2459666

This topic is quite personal for me, as someone who has suffered from chronic migraines since adolescence. Some days, weeks, and months are better than others. This past month has been the worst I have felt since 2019, when we moved into an apartment that turned out to be full of mold. This time, there is no clear trigger—which also means no easy escape.

The economic impact of chronic illness is enormous. 90% of US healthcare spending is on people with chronic illnesses, including mental illnesses—and the US has the most expensive healthcare system in the world by almost any measure. Over 55% of adult Medicaid beneficiaries have two or more chronic illnesses.

The total annual cost of all chronic illnesses is hard to estimate, but it’s definitely somewhere in the trillions of dollars per year. The World Economic Forum estimated that number at $47 trillion over the next 20 years, which I actually consider conservative. I think this is counting how much we actually spend and some notion of lost productivity, as well as the (fraught) concept of the value of a statistical life—but I don’t think it’s putting a sensible value on the actual suffering. This will effectively undervalue poor people who are suffering severely but can’t get treated—because they spend little and can’t put a large dollar value on their lives. In the US, where the data is the best, the total cost of chronic illness comes to nearly $4 trillion per year—20% of GDP. If other countries are as bad or worse (and I don’t see why they would be better), then we’re looking at something like $17 trillion in real cost every single year; so over the next 20 years that’s not $47 trillion—it’s over $340 trillion.

Over half of US adults have at least one of the following, and over a quarter have two or more: arthritis, cancer, chronic obstructive pulmonary disease, coronary heart disease, current asthma, diabetes, hepatitis, hypertension, stroke, or kidney disease. (Actually the former very nearly implies the latter, unless chronic conditions somehow prevented one another. Two statistically independent events with 50% probability will jointly occur 25% of the time: Flip two coins.)

Unsurprisingly, age is positively correlated with chronic illness. Income is negatively correlated, both because chronic illnesses reduce job opportunities and because poorer people have more trouble getting good treatment. I am the exception that proves the rule, the upper-middle-class professional with both a PhD and a severe chronic illness.

There seems to be a common perception that chronic illness is largely a “First World problem”, but in fact chronic illnesses are more common—and much less poorly treated—in countries with low and moderate levels of development than they are in the most highly-developed countries. Over 75% of all deaths by non-communicable disease are in low- and middle-income countries. The proportion of deaths that is caused by non-communicable diseases is higher in high-income countries—but that’s because other diseases have been basically eradicated from high-income countries. People in rich countries actually suffer less from chronic illness than people in poor countries (on average).

It’s always a good idea to be careful of the distinction between incidence and prevalence, but with chronic illness this is particularly important, because (almost by definition) chronic illnesses last longer and so can have very high prevalence even with low incidence. Indeed, the odds of someone getting their first migraine (incidence) are low precisely because the odds of being someone who gets migraines (prevalence) is so high.

Quite high in fact: About 10% of men and 20% of women get migraines at least occasionally—though only about 8% of these (so 1% of men and 2% of women) get chronic migraines. Indeed, because ti is both common and can be quite severe, migraine is the second-most disabling condition worldwide as measured by years lived with disability (YLD), after low back pain. Neurologists are particularly likely to get migraines; the paper I linked speculates that they are better at realizing they have migraines, but I think we also need to consider the possibility of self-selection bias where people with migraines may be more likely to become neurologists. (I considered it, and it seems at least as good a reason as becoming a dentist because your name is Denise.)

If you order causes by the number of disability-adjusted life years (DALYs) they cost, chronic conditions rank quite high: while cardiovascular disease and cancer rate by far the highest, diabetes and kidney disease, mental disorders, neurological disorders, and musculoskeletal disorders all rate higher than malaria, HIV, or any other infection except respiratory infections (read: tuberculosis, influenza, and, once these charts are updated for the next few years, COVID). Note also that at the very bottom is “conflict and terrorism”—that’s all organized violence in the world—and natural disasters. Mental disorders alone cost the world 20 times as many DALYs as all conflict and terrorism combined.

Cryptocurrency and its failures

Jan 30 JDN 2459620

It started out as a neat idea, though very much a solution in search of a problem. Using encryption, could we decentralize currency and eliminate the need for a central bank?

Well, it’s been a few years now, and we have now seen how well that went. Bitcoin recently crashed, but it has always been astonishingly volatile. As a speculative asset, such volatility is often tolerable—for many, even profitable. But as a currency, it is completely unbearable. People need to know that their money will be a store of value and a medium of exchange—and something that changes price one minute to the next is neither.

Some of cryptocurrency’s failures have been hilarious, like the ill-fated island called [yes, really] “Cryptoland”, which crashed and burned when they couldn’t find any investors to help them buy the island.

Others have been darkly comic, but tragic in their human consequences. Chief among these was the failed attempt by El Salvador to make Bitcoin an official currency.

At the time, President Bukele justified it by an economically baffling argument: Total value of all Bitcoin in the world is $680 billion, therefore if even 1% gets invested in El Salvador, GDP will increase by $6.8 billion, which is 25%!

First of all, that would only happen if 1% of all Bitcoin were invested in El Salvador each year—otherwise you’re looking at a one-time injection of money, not an increase in GDP.

But more importantly, this is like saying that the total US dollar supply is $6 trillion, (that’s physically cash; the actual money supply is considerably larger) so maybe by dollarizing your economy you can get 1% of that—$60 billion, baby! No, that’s not how any of this works. Dollarizing could still be a good idea (though it didn’t go all that well in El Salvador), but it won’t give you some kind of share in the US economy. You can’t collect dividends on US GDP.

It’s actually good how El Salvador’s experiment in bitcoin failed: Nobody bought into it in the first place. They couldn’t convince people to buy government assets that were backed by Bitcoin (perhaps because the assets were a strictly worse deal than just, er, buying Bitcoin). So the human cost of this idiotic experiment should be relatively minimal: It’s not like people are losing their homes over this.

That is, unless President Bukele doubles down, which he now appears to be doing. Even people who are big fans of cryptocurrency are unimpressed with El Salvador’s approach to it.

It would be one thing if there were some stable cryptocurrency that one could try pegging one’s national currency to, but there isn’t. Even so-called stablecoins are generally pegged to… regular currencies, typically the US dollar but also sometimes the Euro or a few other currencies. (I’ve seen the Australian Dollar and the Swiss Franc, but oddly enough, not the Pound Sterling.)

Or a country could try issuing its own cryptocurrency, as an all-digital currency instead of one that is partly paper. It’s not totally clear to me what advantages this would have over the current system (in which most of the money supply is bank deposits, i.e. already digital), but it would at least preserve the key advantage of having a central bank that can regulate your money supply.

But no, President Bukele decided to take an already-existing cryptocurrency, backed by nothing but the whims of the market, and make it legal tender. Somehow he missed the fact that a currency which rises and falls by 10% in a single day is generally considered bad.

Why? Is he just an idiot? I mean, maybe, though Bukele’s approval rating is astonishingly high. (And El Salvador is… mostly democratic. Unlike, say, Putin’s, I think these approval ratings are basically real.) But that’s not the only reason. My guess is that he was gripped by the same FOMO that has gripped everyone else who evangelizes for Bitcoin. The allure of easy money is often irresistible.

Consider President Bukele’s position. You’re governing a poor, war-torn country which has had economic problems of various types since its founding. When the national currency collapsed a generation ago, the country was put on the US dollar, but that didn’t solve the problem. So you’re looking for a better solution to the monetary doldrums your country has been in for decades.

You hear about a fancy new monetary technology, “cryptocurrency”, which has all the tech people really excited and seems to be making tons of money. You don’t understand a thing about it—hardly anyone seems to, in fact—but you know that people with a lot of insider knowledge of technology and finance are really invested in it, so it seems like there must be something good here. So, you decide to launch a program that will convert your country’s currency from the US dollar to one of these new cryptocurrencies—and you pick the most famous one, which is also extremely valuable, Bitcoin.

Could cryptocurrencies be the future of money, you wonder? Could this be the way to save your country’s economy?

Despite all the evidence that had already accumulated that cryptocurrency wasn’t working, I can understand why Bukele would be tempted by that dream. Just as we’d all like to get free money without having to work, he wanted to save his country’s economy without having to implement costly and unpopular reforms.

But there is no easy money. Not really. Some people get lucky; but they ultimately benefit from other people’s hard work.

The lesson here is deeper than cryptocurrency. Yes, clearly, it was a dumb idea to try to make Bitcoin a national currency, and it will get even dumber if Bukele really does double down on it. But more than that, we must all resist the lure of easy money. If it sounds too good to be true, it probably is.

Low-skill jobs

Dec 5 JDN 2459554

I’ve seen this claim going around social media for awhile now: “Low-skill jobs are a classist myth created to justify poverty wages.”

I can understand why people would say things like this. I even appreciate that many low-skill jobs are underpaid and unfairly stigmatized. But it’s going a bit too far to claim that there is no such thing as a low-skill job.

Suppose all the world’s physicists and all the world’s truckers suddenly had to trade jobs for a month. Who would have a harder time?

If a mathematician were asked to do the work of a janitor, they’d be annoyed. If a janitor were asked to do the work of a mathematician, they’d be completely nonplussed.

I could keep going: Compare robotics engineers to dockworkers or software developers to fruit pickers.

Higher pay does not automatically equate to higher skills: welders are clearly more skilled than stock traders. Give any welder a million-dollar account and a few days of training, and they could do just as well as the average stock trader (which is to say, worse than the S&P 500). Give any stock trader welding equipment and a similar amount of training, and they’d be lucky to not burn their fingers off, much less actually usefully weld anything.

This is not to say that any random person off the street could do just as well as a janitor or dockworker as someone who has years of experience at that job. It is simply to say that they could do better—and pick up the necessary skills faster—than a random person trying to work as a physicist or software developer.

Moreover, this does justify some difference in pay. If some jobs are easier than others, in the sense that more people are qualified to do them, then the harder jobs will need to pay more in order to attract good talent—if they didn’t, they’d risk their high-skill workers going and working at the low-skill jobs instead.

This is of course assuming all else equal, which is clearly not the case. No two jobs are the same, and there are plenty of other considerations that go into choosing someone’s wage: For one, not simply what skills are required, but also the effort and unpleasantness involved in doing the work. I’m entirely prepared to believe that being a dockworker is less fun than being a physicist, and this should reduce the differential in pay between them. Indeed, it may have: Dockworkers are paid relatively well as far as low-skill jobs go—though nowhere near what physicists are paid. Then again, productivity is also a vital consideration, and there is a general tendency that high-skill jobs tend to be objectively more productive: A handful of robotics engineers can do what was once the work of hundreds of factory laborers.

There are also ways for a worker to be profitable without being particularly productive—that is, to be very good at rent-seeking. This is arguably the case for lawyers and real estate agents, and undeniably the case for derivatives traders and stockbrokers. Corporate executives aren’t stupid; they wouldn’t pay these workers astronomical salaries if they weren’t making money doing so. But it’s quite possible to make lots of money without actually producing anything of particular value for human society.

But that doesn’t mean that wages are always fair. Indeed, I dare say they typically are not. One of the most important determinants of wages is bargaining power. Unions don’t increase skill and probably don’t increase productivity—but they certainly increase wages, because they increase bargaining power.

And this is also something that’s correlated with lower levels of skill, because the more people there are who know how to do what you do, the harder it is for you to make yourself irreplaceable. A mathematician who works on the frontiers of conformal geometry or Teichmueller theory may literally be one of ten people in the world who can do what they do (quite frankly, even the number of people who know what they do is considerably constrained, though probably still at least in the millions). A dockworker, even one who is particularly good at loading cargo skillfully and safely, is still competing with millions of other people with similar skills. The easier a worker is to replace, the less bargaining power they have—in much the same way that a monopoly has higher profits than an oligopoly, which has higher profits that a competitive market.

This is why I support unions. I’m also a fan of co-ops, and an ardent supporter of progressive taxation and safety regulations. So don’t get me wrong: Plenty of low-skill workers are mistreated and underpaid, and they deserve better.

But that doesn’t change the fact that it’s a lot easier to be a janitor than a physicist.

Are unions collusion?

Oct 31 JDN 2459519

The standard argument from center-right economists against labor unions is that they are a form of collusion: Producers are coordinating and intentionally holding back from what would be in their individual self-interest in order to gain a collective advantage. And this is basically true: In the broadest sense of the term, labor unions are are form of collusion. Since collusion is generally regarded as bad, therefore (this argument goes), unions are bad.

What this argument misses out on is why collusion is generally regarded as bad. The typical case for collusion is between large corporations, each of which already controls a large share of the market—collusion then allows them to act as if they control an even larger share, potentially even acting as a monopoly.

Labor unions are not like this. Literally no individual laborer controls a large segment of the market. (Some very specialized laborers, like professional athletes, or, say, economists, might control a not completely trivial segment of their particular job market—but we’re still talking something like 1% at most. Even Tiger Woods or Paul Krugman is not literally irreplaceable.) Moreover, even the largest unions can rarely achieve anything like a monopoly over a particular labor market.

Thus whereas typical collusion involves going from a large market share to an even larger—often even dominant—market share, labor unions involve going from a tiny market share to a moderate—and usually not dominant—market share.

But that, by itself, wouldn’t be enough to justify unions. While small family businesses banding together in collusion is surely less harmful than large corporations doing the same, it would probably still be a bad thing, insofar as it would raise prices and reduce the quantity or quality of products sold. It would just be less bad.

Yet unions differ from even this milder collusion in another important respect: They do not exist to increase bargaining power versus consumers. They exist to increase bargaining power versus corporations.

And corporations, it turns out, already have a great deal of bargaining power. While a labor union acts as something like a monopoly (or at least oligopoly), corporations act like the opposite: oligopsony or even monopsony.

While monopoly or monopsony on its own is highly unfair and inefficient, the combination of the two—bilateral monopolyis actually relatively fair and efficient. Bilateral monopoly is probably not as good as a truly competitive market, but it is definitely better than either a monopoly or monopsony alone. Whereas a monopoly has too much bargaining power for the seller (resulting in prices that are too high), and a monopsony has too much bargaining power for the buyer (resulting in prices that are too low), a bilateral monopoly has relatively balanced bargaining power, and thus gets an outcome that’s not too much different from fair competition in a free market.

Thus, unions really exist as a correction mechanism for the excessive bargaining power of corporations. Most unions are between workers in large industries who work for a relatively small number of employers, such as miners, truckers, and factory workers. (Teachers are also an interesting example, because they work for the government, which effectively has a monopsony on public education services.) In isolation they may seem inefficient; but in context they really exist to compensate for other, worse inefficiencies.


We could imagine a world where this was not so: Say there is a market with many independent buyers who are unwilling or unable to reliably collude, and they are served by a small number of powerful unions that use their bargaining power to raise prices and reduce output.


We have some markets that already look a bit like that: Consider the licensing systems for doctors and lawyers. These are basically guilds, which are collusive in the same way as labor unions.

Note that unlike, say, miners, truckers, or factory workers, doctors and lawyers are not a large segment of the population; they are bargaining against consumers just as much as corporations; and they are extremely well-paid and very likely undersupplied. (Doctors are definitely undersupplied; with lawyers it’s a bit more complicated, but given how often corporations get away with terrible things and don’t get sued for it, I think it’s fair to say that in the current system, lawyers are undersupplied.) So I think it is fair to be concerned that the guild systems for doctors and lawyers are too powerful. We want some system for certifying the quality of doctors and lawyers, but the existing standards are so demanding that they result in a shortage of much-needed labor.

One way to tell that unions aren’t inefficient is to look at how unionization relates to unemployment. If unions were acting as a harmful monopoly on labor, unemployment should be higher in places with greater unionization rates. The empirical data suggests that if there is any such effect, it’s a small one. There are far more important determinants of unemployment than unionization. (Wages, on the other hand, show a strong positive link with unionization.) Much like the standard prediction that raising minimum wage would reduce employment, the prediction that unions raise unemployment has largely not been borne out by the data. And for much the same reason: We had ignored the bargaining power of employers, which minimum wage and unions both reduce.

Thus, the justifiability of unions isn’t something that we could infer a priori without looking at the actual structure of the labor market. Unions aren’t always or inherently good—but they are usually good in the system as it stands. (Actually there’s one particular class of unions that do not seem to be good, and that’s police unions: But this is a topic for another time.)

My ultimate conclusion? Yes, unions are a form of collusion. But to infer from that they must be bad is to commit a Noncentral Fallacy. Unions are the good kind of collusion.

Labor history in the making

Oct 24 JDN 2459512

To say that these are not ordinary times would be a grave understatement. I don’t need to tell you all the ways that this interminable pandemic has changed the lives of people all around the world.

But one in particular is of notice to economists: Labor in the United States is fighting back.

Quit rates are at historic highs. Over 100,000 workers in a variety of industries are simultaneously on strike, ranging from farmworkers to nurses and freelance writers to university lecturers.

After decades of quiescence to ever-worsening working conditions, it seems that finally American workers are mad as hell and not gonna take it anymore.

It’s about time, frankly. The real question is why it took this long. Working conditions in the US have been systematically worse than the rest of the First World since at least the 1980s. It was substantially easier to get the leave I needed to attend my own wedding—in the US—after starting work in the UK than it would have been at the same kind of job in the US, because UK law requires employers to grant leave from the day they start work, while US federal law and the law in many states doesn’t require leave at all for anyone—not even people who are sick or recently gave birth.

So, why did it happen now? What changed? The pandemic threw our lives into turmoil, that much is true. But it didn’t fundamentally change the power imbalance between workers and employers. Why was that enough?

I think I know why. The shock from the pandemic didn’t have to be enough to actually change people’s minds about striking—it merely had to be enough to convince people that others would show up. It wasn’t the first-order intention “I want to strike” that changed; it was the second-order belief “Other people want to strike too”.

For a labor strike is a coordination game par excellence. If 1 person strikes, they get fired and replaced. If 2 or 3 or 10 strike, most likely the same thing. But if 10,000 strike? If 100,000 strike? Suddenly corporations have no choice but to give in.

The most important question on your mind when you are deciding whether or not to strike is not, “Do I hate my job?” but “Will my co-workers have my back?”.

Coordination games exhibit a very fascinating—and still not well-understood—phenomenon known as Schelling points. People will typically latch onto certain seemingly-arbitrary features of their choices, and do so well enough that simply having such a focal point can radically increase the level of successful coordination.

I believe that the pandemic shock was just such a Schelling point. It didn’t change most people’s working conditions all that much: though I can see why nurses in particular would be upset, it’s not clear to me that being a university lecturer is much worse now than it was a year ago. But what the pandemic did do was change everyone’s working conditions, all at once. It was a sudden shock toward work dissatisfaction that applied to almost the entire workforce.

Thus, many people who were previously on the fence about striking were driven over the edge—and then this in turn made others willing to take the leap as well, suddenly confident that they would not be acting alone.

Another important feature of the pandemic shock was that it took away a lot of what people had left to lose. Consider the two following games.

Game A: You and 100 other people each separately, without communicating, decide to choose X or Y. If you all choose X, you each get $20. But if even one of you chooses Y, then everyone who chooses Y gets $1 but everyone who chooses X gets nothing.

Game B: Same as the above, except that if anyone chooses Y, everyone who chooses Y also gets nothing.

Game A is tricky, isn’t it? You want to choose X, and you’d be best off if everyone did. But can you really trust 100 other people to all choose X? Maybe you should take the safe bet and choose Y—but then, they’re thinking the same way.


Game B, on the other hand, is painfully easy: Choose X. Obviously choose X. There’s no downside, and potentially a big upside.

In terms of game theory, both games have the same two Nash equilibria: All-X and All-Y. But in the second game, I made all-X also a weak dominant strategy equilibrium, and that made all the difference.

We could run these games in the lab, and I’m pretty sure I know what we’d find: In game A, most people choose X, but some people don’t, and if you repeat the game more and more people choose Y. But in game B, almost everyone chooses X and keeps on choosing X. Maybe they don’t get unanimity every time, but they probably do get it most of the time—because why wouldn’t you choose X? (These are testable hypotheses! I could in fact run this experiment! Maybe I should?)

It’s hard to say at this point how effective these strikes will be. Surely there will be some concessions won—there are far too many workers striking for them all to get absolutely nothing. But it remains uncertain whether the concessions will be small, token changes just to break up the strikes, or serious, substantive restructuring of how work is done in the United States.

If the latter sounds overly optimistic, consider that this is basically what happened in the New Deal. Those massive—and massively successful—reforms were not generated out of nowhere; they were the result of the economic crisis of the Great Depression and substantial pressure by organized labor. We may yet see a second New Deal (a Green New Deal?) in the 2020s if labor organizations can continue putting the pressure on.

The most important thing in making such a grand effort possible is believing that it’s possible—only if enough people believe it can happen will enough people take the risk and put in the effort to make it happen. Apathy and cynicism are the most powerful weapons of the status quo.


We are witnessing history in the making. Let’s make it in the right direction.

Unending nightmares

Sep 19 JDN 2459477

We are living in a time of unending nightmares.

As I write this, we have just passed the 20th anniversary of 9/11. Yet only in the past month were US troops finally withdrawn from Afghanistan—and that withdrawal was immediately followed by a total collapse of the Afghan government and a reinstatement of the Taliban. The United States had been at war for nearly 20 years, spending trillions of dollars and causing thousands of deaths—and seems to have accomplished precisely nothing.

Some left-wing circles have been saying that the Taliban offered surrender all the way back in 2001; this is not accurate. Alternet even refers to it as an “unconditional surrender” which is utter nonsense. No one in their right mind—not even the most die-hard imperialist—would ever refuse an unconditional surrender, and the US most certainly did nothing of the sort.)

The Taliban did offer a peace deal in 2001, which would have involved giving the US control of Kandahar and turning Osama bin Laden over to a neutral country (not to the US or any US ally). It would also have granted amnesty to a number of high-level Taliban leaders, which was a major sticking point for the US. In hindsight, should they have taken the deal? Obviously. But I don’t think that was nearly so clear at the time—nor would it have been particularly palatable to most of the American public to leave Osama bin Laden under house arrest in some neutral country (which they never specified by the way; somewhere without US extradition, presumably?) and grant amnesty to the top leaders of the Taliban.

Thus, even after the 20-year nightmare of the war that refused to end, we are still back to the nightmare we were in before—Afghanistan ruled by fanatics who will oppress millions.

Yet somehow this isn’t even the worst unending nightmare, for after a year and a half we are still in the throes of a global pandemic which has now caused over 4.6 million deaths. We are still wearing masks wherever we go—at least, those of us who are complying with the rules. We have gotten vaccinated already, but likely will need booster shots—at least, those of us who believe in vaccines.

The most disturbing part of it all is how many people still aren’t willing to follow the most basic demands of public health agencies.

In case you thought this was just an American phenomenon: Just a few days ago I looked out the window of my apartment to see a protest in front of the Scottish Parliament complaining about vaccine and mask mandates, with signs declaring it all a hoax. (Yes, my current temporary apartment overlooks the Scottish Parliament.)

Some of those signs displayed a perplexing innumeracy. One sign claimed that the vaccines must be stopped because they had killed 1,400 people in the UK. This is not actually true; while there have been 1,400 people in the UK who died after receiving a vaccine, 48 million people in the UK have gotten the vaccine, and many of them were old and/or sick, so, purely by statistics, we’d expect some of them to die shortly afterward. Less than 100 of these deaths are in any way attributable to the vaccine. But suppose for a moment that we took the figure at face value, and assumed, quite implausibly, that everyone who died shortly after getting the vaccine was in fact killed by the vaccine. This 1,400 figure needs to be compared against the 156,000 UK deaths attributable to COVID itself. Since 7 million people in the UK have tested positive for the virus, this is a fatality rate of over 2%. Even if we suppose that literally everyone in the UK who hasn’t been vaccinated in fact had the virus, that would still only be 20 million (the UK population of 68 million – the 48 million vaccinated) people, so the death rate for COVID itself would still be at least 0.8%—a staggeringly high fatality rate for a pandemic airborne virus. Meanwhile, even on this ridiculous overestimate of the deaths caused by the vaccine, the fatality rate for vaccination would be at most 0.003%. Thus, even by the anti-vaxers’ own claims, the vaccine is nearly 300 times safer than catching the virus. If we use the official estimates of a 1.9% COVID fatality rate and 100 deaths caused by the vaccines, the vaccines are in fact over 9000 times safer.

Yet it does seem to be worse in the United States, as while 22% of Americans described themselves as opposed to vaccination in general, only about 2% of Britons said the same.

But this did not translate to such a large difference in actual vaccination: While 70% of people in the UK have received the vaccine, 64% of people in the US have. Both of these figures are tantalizingly close to, yet clearly below, the at least 84% necessary to achieve herd immunity. (Actually some early estimates thought 60-70% might be enough—but epidemiologists no longer believe this, and some think that even 90% wouldn’t be enough.)

Indeed, the predominant tone I get from trying to keep up on the current news in epidemiology is fatalism: It’s too late, we’ve already failed to contain the virus, we won’t reach herd immunity, we won’t ever eradicate it. At this point they now all seem to think that COVID is going to become the new influenza, always with us, a major cause of death that somehow recedes into the background and seems normal to us—but COVID, unlike influenza, may stick around all year long. The one glimmer of hope is that influenza itself was severely hampered by the anti-pandemic procedures, and influenza cases and deaths are indeed down in both the US and UK (though not zero, nor as drastically reduced as many have reported).

The contrast between terrorism and pandemics is a sobering one, as pandemics kill far more people, yet somehow don’t provoke anywhere near as committed a response.

9/11 was a massive outlier in terrorism, at 3,000 deaths on a single day; otherwise the average annual death rate by terrorism is about 20,000 worldwide, mostly committed by Islamist groups. Yet the threat is not actually to Americans in particular; annual deaths due to terrorism in the US are less than 100—and most of these by right-wing domestic terrorists, not international Islamists.

Meanwhile, in an ordinary year, influenza would kill 50,000 Americans and somewhere between 300,000 and 700,000 people worldwide. COVID in the past year and a half has killed over 650,000 Americans and 4.6 million people worldwide—annualize that and it would be 400,000 per year in the US and 3 million per year worldwide.

Yet in response to terrorism we as a country were prepared to spend $2.3 trillion dollars, lose nearly 4,000 US and allied troops, and kill nearly 50,000 civilians—not even counting the over 60,000 enemy soldiers killed. It’s not even clear that this accomplished anything as far as reducing terrorism—by some estimates it actually made it worse.

Were we prepared to respond so aggressively to pandemics? Certainly not to influenza; we somehow treat all those deaths are normal or inevitable. In response to COVID we did spend a great deal of money, even more than the wars in fact—a total of nearly $6 trillion. This was a very pleasant surprise to me (it’s the first time in my lifetime I’ve witnessed a serious, not watered-down Keynesian fiscal stimulus in the United States). And we imposed lockdowns—but these were all-too quickly removed, despite the pleading of public health officials. It seems to be that our governments tried to impose an aggressive response, but then too many of the citizens pushed back against it, unwilling to give up their “freedom” (read: convenience) in the name of public safety.

For the wars, all most of us had to do was pay some taxes and sit back and watch; but for the pandemic we were actually expected to stay home, wear masks, and get shots? Forget it.

Politics was clearly a very big factor here: In the US, the COVID death rate map and the 2020 election map look almost equivalent: By and large, people who voted for Biden have been wearing masks and getting vaccinated, while people who voted for Trump have not.

But pandemic response is precisely the sort of thing you can’t do halfway. If one area is containing a virus and another isn’t, the virus will still remain uncontained. (As some have remarked, it’s rather like having a “peeing section” of a swimming pool. Much worse, actually, as urine contains relatively few bacteria—but not zero—and is quickly diluted by the huge quantities of water in a swimming pool.)

Indeed, that seems to be what has happened, and why we can’t seem to return to normal life despite months of isolation. Since enough people are refusing to make any effort to contain the virus, the virus remains uncontained, and the only way to protect ourselves from it is to continue keeping restrictions in place indefinitely.

Had we simply kept the original lockdowns in place awhile longer and then made sure everyone got the vaccine—preferably by paying them for doing it, rather than punishing them for not—we might have been able to actually contain the virus and then bring things back to normal.

But as it is, this is what I think is going to happen: At some point, we’re just going to give up. We’ll see that the virus isn’t getting any more contained than it ever was, and we’ll be so tired of living in isolation that we’ll finally just give up on doing it anymore and take our chances. Some of us will continue to get our annual vaccines, but some won’t. Some of us will continue to wear masks, but most won’t. The virus will become a part of our lives, just as influenza did, and we’ll convince ourselves that millions of deaths is no big deal.

And then the nightmare will truly never end.

An unusual recession, a rapid recovery

Jul 11 JDN 2459407

It seems like an egregious understatement to say that the last couple of years have been unusual. The COVID-19 pandemic was historic, comparable in threat—though not in outcome—to the 1918 influenza pandemic.

At this point it looks like we may not be able to fully eradicate COVID. And there are still many places around the world where variants of the virus continue to spread. I personally am a bit worried about the recent surge in the UK; it might add some obstacles (as if I needed any more) to my move to Edinburgh. Yet even in hard-hit places like India and Brazil things are starting to get better. Overall, it seems like the worst is over.

This pandemic disrupted our society in so many ways, great and small, and we are still figuring out what the long-term consequences will be.

But as an economist, one of the things I found most unusual is that this recession fit Real Business Cycle theory.

Real Business Cycle theory (henceforth RBC) posits that recessions are caused by negative technology shocks which result in a sudden drop in labor supply, reducing employment and output. This is generally combined with sophisticated mathematical modeling (DSGE or GTFO), and it typically leads to the conclusion that the recession is optimal and we should do nothing to correct it (which was after all the original motivation of the entire theory—they didn’t like the interventionist policy conclusions of Keynesian models). Alternatively it could suggest that, if we can, we should try to intervene to produce a positive technology shock (but nobody’s really sure how to do that).

For a typical recession, this is utter nonsense. It is obvious to anyone who cares to look that major recessions like the Great Depression and the Great Recession were caused by a lack of labor demand, not supply. There is no apparent technology shock to cause either recession. Instead, they seem to be preciptiated by a financial crisis, which then causes a crisis of liquidity which leads to a downward spiral of layoffs reducing spending and causing more layoffs. Millions of people lose their jobs and become desperate to find new ones, with hundreds of people applying to each opening. RBC predicts a shortage of labor where there is instead a glut. RBC predicts that wages should go up in recessions—but they almost always go down.

But for the COVID-19 recession, RBC actually had some truth to it. We had something very much like a negative technology shock—namely the pandemic. COVID-19 greatly increased the cost of working and the cost of shopping. This led to a reduction in labor demand as usual, but also a reduction in labor supply for once. And while we did go through a phase in which hundreds of people applied to each new opening, we then followed it up with a labor shortage and rising wages. A fall in labor supply should create inflation, and we now have the highest inflation we’ve had in decades—but there’s good reason to think it’s just a transitory spike that will soon settle back to normal.

The recovery from this recession was also much more rapid: Once vaccines started rolling out, the economy began to recover almost immediately. We recovered most of the employment losses in just the first six months, and we’re on track to recover completely in half the time it took after the Great Recession.

This makes it the exception that proves the rule: Now that you’ve seen a recession that actually resembles RBC, you can see just how radically different it was from a typical recession.

Moreover, even in this weird recession the usual policy conclusions from RBC are off-base. It would have been disastrous to withhold the economic relief payments—which I’m happy to say even most Republicans realized. The one thing that RBC got right as far as policy is that a positive technology shock was our salvation—vaccines.

Indeed, while the cause of this recession was very strange and not what Keynesian models were designed to handle, our government largely followed Keynesian policy advice—and it worked. We ran massive government deficits—over $3 trillion in 2020—and the result was rapid recovery in consumer spending and then employment. I honestly wouldn’t have thought our government had the political will to run a deficit like that, even when the economic models told them they should; but I’m very glad to be wrong. We ran the huge deficit just as the models said we should—and it worked. I wonder how the 2010s might have gone differently had we done the same after 2008.

Perhaps we’ve learned from some of our mistakes.

Responsible business owners support regulations

Jun 27 JDN 2459373

In last week’s post I explained why business owners so consistently overestimate the harms of regulations: In short, they ignore the difference between imposing a rule on a single competitor and imposing that same rule on all competitors equally. The former would be disastrous; the latter is often inconsequential.

In this follow-up post I’m going to explain why ethical, responsible business owners should want many types of regulation—and that in fact if they were already trying to behave ethically and responsibly, regulations can make them more profitable in doing so.

Let’s use an extreme example just to make things clear. Suppose you are running a factory building widgets, you are competing with several other factories, and you find out that some of the other factories are using slave labor in their production.

What would be the best thing for you to do? In terms of maximizing profit, you’ve really got two possible approaches: You could start using slaves yourself, or you could find a way to stop the other factories from using slaves. If you are even remotely a decent human being, you will choose the latter. How can you do that? By supporting regulations.

By lobbying your government to ban slavery—or, if it’s already banned, to enforce those laws more effectively—you can free the workers enslaved by the other factories while also increasing your own profits. This is a very big win-win. (I guess it’s not a Pareto improvement, because the factory owners who were using slaves are probably worse off—but it’s hard to feel bad for them.)

Slavery is an extreme example (but sadly not an unrealistic one), but a similar principle applies to many other cases. If you are a business owner who wants to be environmentally responsible, you should support regulations on pollution—because you’re already trying to comply with them, so imposing them on your competitors who aren’t will give you an advantage. If you are a business owner who wants to pay high wages, you should support increasing minimum wage. Whatever socially responsible activities you already do, you have an economic incentive to make them mandatory for other companies.

Voluntary social responsibility sounds nice in theory, but in a highly competitive market it’s actually very difficult to sustain. I don’t doubt that many owners of sweatshops would like to pay their workers better, but they know they’d have to raise their prices a bit in order to afford it, and then they would get outcompeted and might even have to shut down. So any individual sweatshop owner really doesn’t have much choice: Either you meet the prevailing market price, or you go out of business. (The multinationals who buy from them, however, have plenty of market power and massive profits. They absolutely could afford to change their supply chain practices to support factories that pay their workers better.) Thus the best thing for them to do would be to support a higher minimum wage that would apply to their competitors as well.

Consumer pressure can provide some space for voluntary social responsibility, if customers are willing to pay more for products made by socially responsible companies. But people often don’t seem willing to pay all that much, and even when they are, it can be very difficult for consumers to really know which companies are being responsible (this is particular true for environmental sustainability: hence the widespread practice of greenwashing). In order for consumer pressure to work, you need a critical mass of a large number of consumers who are all sufficiently committed and well-informed. Regulation can often accomplish the same goals much more reliably.

In fact, there’s some risk that businesses could lobby for too many regulations, because they are more interested in undermining their competition than they are about being socially responsible. If you have lots of idiosyncratic business practices, it could be in your best interest to make those practices mandatory even if they have no particular benefits—simply because you were already doing them, and so the cost of transitioning to them will fall entirely on your competitors.


Regarding publicly-traded corporations in particular, there’s another reason why socially responsible CEOs would want regulations: Shareholders. If you’re trying to be socially responsible but it’s cutting into your profits, your shareholders may retaliate by devaluing your stock, firing you, or even suing you—as Dodge sued Ford in 1919 for the “crime” of making wages too high and prices too low. But if there are regulations that require you to be socially responsible, your shareholders can’t really complain; you’re simply complying with the law. In this case you wouldn’t want to be too vocal about supporting the regulations (since your shareholders might object to that); but you would, in fact, support them.

Market competition is a very cutthroat game, and both the prizes for winning and the penalties for losing are substantial. Regulations are what decides the rules of that game. If there’s a particular way that you want to play—either because it has benefits for the rest of society, or simply because it’s your preference—it is advantageous for you to get that written into the rules that everyone needs to follow.