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)
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.
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.)
We are of two minds about housing in our society. On the one hand, we recognize that shelter is a necessity, and we want it to be affordable for all. On the other hand, we see real estate as an asset, and we want it to appreciate in value and thereby provide a store of wealth. So on the one hand we want it to be cheap, but on the other hand we want it to be expensive. And of course it can’t be both.
This is not a uniquely American phenomenon. As Noah Smith points out, it seems to be how things are done in almost every country in the world. It may be foolish for me to try to turn such a tide. But I’m going to try anyway.
Housing should be cheap.
For some reason, inflation is seen as a bad thing for every other good, necessity and luxury alike; but when it comes to housing in particular—the single biggest expense for almost everyone—suddenly we are conflicted about it, and think that maybe inflation is a good thing actually.
This is because owning a home that appreciates in value provides the illusion of increasing wealth.
Yes, I said illusion. In some particular circumstances it can sometimes increase real wealth, but when housing is getting more expensive everywhere at once (which is basically true), it doesn’t actually increase real wealth—because you still need to have a home. So while you’d get more money if you sold your current home, you’d have to go buy another home that would be just as expensive. That extra wealth is largely imaginary.
In fact, what isn’t an illusion is your increased property tax bill. If you aren’t planning on selling your home any time soon, you should really see its appreciation as a bad thing; now you suddenly owe more in taxes.
Home equity lines of credit complicate this a bit; for some reason we let people collateralize part of the home—even though the whole home is already collateralized with a mortgage to someone else—and thereby turn that largely-imaginary wealth into actual liquid cash. This is just one more way that our financial system is broken; we shouldn’t be offering these lines of credit, just as we shouldn’t be creating mortgage-backed securities. Cleverness is not a virtue in finance; banking should be boring.
But you’re probably still not convinced. So I’d like you to consider a simple thought experiment, where we take either view to the extreme: Make housing 100 times cheaper or 100 times more expensive.
In Cheap World, there is no homelessness. Seriously, zero. It would make no sense at all for the government not to simply buy everyone a house. If you want to also buy your own house—or a dozen—go ahead, that’s fine; but you get one for free, paid for by tax dollars, because that’s cheaper than a year of schooling for a high-school student; it’s in fact not much more than what we’d currently spend to house someone in a homeless shelter for a year. So given the choice of offering someone two years at a shelter versus never homeless ever again, it’s pretty obvious we should choose the latter. Thus, in Cheap World, we all have a roof over our heads. And instead of storing their wealth in their homes in Cheap World, people store their wealth in stocks and bonds, which have better returns anyway.
In Expensive World, the top 1% are multi-millionaires who own homes, maybe the top 10% can afford rent, and the remaining 89% of the population are homeless. There’s simply no way to allocate the wealth of our society such that a typical middle class household has $40 million. We’re just not that rich. We probably never will be that rich. It may not even be possible to make a society that rich. In Expensive World, most people live in tents on the streets, because housing has been priced out of reach for all but the richest families.
Cheap World sounds like an amazing place to live. Expensive World is a horrific dystopia. The only thing I changed was the price of housing.
Yes, I changed it a lot; but that was to make the example as clear as possible, and it’s not even as extreme as it probably sounds. At 10% annual growth, 100 times more expensive only takes 49 years. At the current growth rate of housing prices of about 5% per year, it would take 95 years. A century from now, if we don’t fix our housing market, we will live in Expensive World. (Yes, we’ll most likely be richer then too; but will we be that much richer? Median income has not been rising nearly as fast as median housing price. If current trends continue, median income will be 5 times bigger and housing prices will be 100 times bigger—that’s still terrible.)
I think part of the problem is that people don’t really understand what wealth is. They see the number go up, and they think that means there is more wealth. Real wealth consists in goods, not in prices. The wealth we have is made of real things, not monetary prices. Prices merely decide how wealth is allocated.
A home is wealth, yes. But it’s the same amount of real wealth regardless of what price it has, because what matters is what it’s good for. If you become genuinely richer by selling an appreciated home, you gained that extra wealth from somewhere else; it was not contained within your home. You have appropriated wealth that someone else used to have. You haven’t created wealth; you’ve merely obtained it.
For you as an individual, that may not make a difference; you still get richer. But as a society, it makes all the difference: Moving wealth around doesn’t make our society richer, and all higher prices can do is move wealth around.
This means that rising housing prices simply cannot make our whole society richer. Better houses could do that. More houses could do that. But simply raising the price tag isn’t making our society richer. If it makes anyone richer—which, again, typically it does not—it does so by moving wealth from somewhere else. And since homeowners are generally richer than non-homeowners (even aside from their housing wealth!), more expensive homes means moving wealth from poorer people to richer people—increased inequality.
We used to have affordable housing, just a couple of generations ago. But we may never have truly affordable housing again, because people really don’t like to see that number go down, and they vote for policies accordingly—especially at the local level. Our best hope right now seems to be to keep it from going up faster than the growth rate of income, so that homes don’t become any more unaffordable than they already are.
But frankly I’m not optimistic. I think part of the cyberpunk dystopia we’re careening towards is Expensive World.
The concept of adverse selection is normally associated with finance and insurance, and they certainly do have a lot of important applications there. But finance and insurance are complicated (possibly intentionally?) and a lot of people are intimidated by them, and it turns out there’s a much simpler example of this phenomenon, which most people should find familiar:
All-you-can-eat meals.
At most restaurants, you buy a specific amount of food: One cheeseburger, one large order of fries. But at some, you have another option: You can buy an indeterminate amount of food, as much as you are able to eat at one sitting.
Now think about this from the restaurant’s perspective: How do you price an all-you-can-eat meal and turn a profit? Your cost obviously depends on how much food you need to prepare, but you don’t know exactly how much each customer is going to eat.
Fortunately, you don’t need to! You only need to know how much people will eat on average. As long as the average customer’s meal is worth less than what they paid for it, you will continue to make a profit, even though some customers end up eating more than what they paid for.
Insurance works the same way: Some people will cash in on their insurance, costing the company money; but most will not, providing the company with revenue. In fact, you could think of an all-you-can-eat-meal as a form of food insurance.
So, all you need to do is figure out how much an average person eats in one meal, and price based on that, right?
Wrong. Here’s the problem: The people who eat at your restaurant aren’t a random sample of people. They are specifically the kind of people who eat at all-you-can-eat restaurants.
Someone who eats very little probably won’t want to go to your restaurant very much, because they’ll have to pay a high price for very little food. But someone with a big appetite will go to your restaurant frequently, because they get to eat a large amount of food for that same price.
This means that, on average, your customers will end up eating more than what an average restaurant customer eats. You’ll have to raise the price accordingly—which will make the effect even stronger.
This can end in one of two ways: Either an equilibrium is reached where the price is pretty high and most of the customers have big appetites, or no equilibrium is reached, and the restaurant either goes bankrupt or gets rid of its all-you-can-eat policy.
But there’s basically no way to get the outcome that seems the best, which is a low price and a wide variety of people attending the restaurant. Those who eat very little just won’t show up.
That’s adverse selection. Because there’s no way to charge people who eat more a higher price (other than, you know, not being all-you-can-eat), people will self-select by choosing whether or not to attend, and the people who show up at your restaurant will be the ones with big appetites.
The same thing happens with insurance. Say we’re trying to price health insurance; we don’t just need to know the average medical expenses of our population, even if we know a lot of specific demographic information. People who are very healthy may choose not to buy insurance, leaving us with only the less-healthy people buying our insurance—which will force us to raise the price of our insurance.
Once again, you’re not getting a random sample; you’re getting a sample of the kind of people who buy health insurance.
Obamacare was specifically designed to prevent this, by imposing a small fine on people who choose not to buy health insurance. The goal was to get more healthy people buying insurance, in order to bring the cost down. It worked, at least for awhile—but now that individual mandate has been nullified, so adverse selection will once again rear its ugly head. Had our policymakers better understood this concept, they might not have removed the individual mandate.
Another option might occur to you, analogous to the restaurant: What if we just didn’t offer insurance, and made people pay for all their own healthcare? This would be like the restaurant ending its all-you-can-eat policy and charging for each new serving. Most restaurants do that, so maybe it’s the better option in general?
There are two problems here, one ethical, one economic.
The ethical problem is that people don’t deserve to be sick or injured. They didn’t choose those things. So it isn’t fair to let them suffer or bear all the costs of getting better. As a society, we should share in those costs. We should help people in need. (If you don’t already believe this, I don’t know how to convince you of it. But hopefully most people do already believe this.)
The economic problem is that some healthcare is rarely needed, but very expensive. That’s exactly the sort of situation where insurance makes sense, to spread the cost around. If everyone had to pay for their own care with no insurance at all, then most people who get severe illnesses simply wouldn’t be able to afford it. They’d go massively into debt, go bankrupt—people already do, even with insurance!—and still not even get much of the care they need. It wouldn’t matter that we have good treatments for a lot of cancers now; they are all very expensive, so most people with cancer would be unable to pay for them, and they’d just die anyway.
In fact, the net effect of such a policy would probably be to make us all poorer, because a lot of illness and disability would go untreated, making our workforce less productive. Even if you are very healthy and never need health insurance, it may still be in your own self-interest to support a policy of widespread health insurance, so that sick people get treated and can go back to work.
A world without all-you-can-eat restaurants wouldn’t be so bad. But a world without health insurance would be one in which millions of people suffer needlessly because they can’t afford healthcare.
We’re accustomed to this situation, so it may not seem strange to you. But stop and think for a moment: What are the odds that across every industry, exactly 40 hours per week is the most efficient arrangement?
Indeed, there is mounting evidence that in many industries, 40 hours is too much, and something like 5 or even 30 would actually be more efficient. Yet we continue to work 40-hour weeks.
This looks like a corner solution: Rather than choosing an optimal amount, we’re all up against some kind of constraint.
What’s the constraint? Well, the government requires (for most workers) that anything above 40 hours per week must be paid as overtime, that is, at a higher wage rate. So it looks like we would all be working more than 40 hours per week, but we hit the upper limit due to these regulations.
Does this mean we would be better off without the regulations? Clearly not. As I just pointed out, the evidence is mounting that 40 hours is too much, not too little. But why, then, would we all be trying to work so many hours?
I believe this is yet another example of hyper-competition, where competition drives us to an inefficient outcome.
Employers value employees who work a lot of hours. Indeed, I contend that they do so far more than makes any rational sense; they seem to care more about how many hours you work than about the actual quality or quantity of your output. Maybe this is because hours worked is easier to measure, or because it seems like a fairer estimate of your effort; but for whatever reason, employers really seem to reward employees who work a lot of hours, regardless of almost everything else.
In the absence of a limit on hours worked, then, employers are going to heap rewards on whoever works the most hours, and so people will be pressured to work more and more hours. Then we would all work ourselves to death, and it’s not even clear that this would be good for GDP.
But speaking of norms, that also seems to be a big factor here. The truth is, overtime isn’t really that expensive, and employers could be smarter about rewarding good work rather than more hours. But once a norm establishes itself in a society, it can be very hard to change. And right now, the norm is that 40 hours is a “normal” “standard” “full” work week—any more is above and beyond, and any less is inferior.
This is a problem, because a lot of people can’t work 40-hour weeks. Our standard for what makes someone “disabled” isn’t that you can’t work at all; it’s that you can’t work as much as society expects. I wonder how many people are currently living on disability who could have been working part-time, but there just weren’t enough part-time jobs available. The employment rate among people with a disability is only 41%, compared to 77% of the general population.
And it’s not that we need to work this much. Our productivity is now staggeringly high: We produce more than five times as much wealth per hour of work than we did as recently as the 1940s. So in theory, we should be able to live just as well while working one-fifth as much… but that’s clearly not what happened.
Indeed, it doesn’t even seem like we live five times as well while working just as much. Many things are better now—healthcare, entertainment, and of course electronics—but somehow, we really don’t feel like we are living better lives than our ancestors.
Up until about 1980, productivity and pay rose in lockstep. But then they started to diverge, and they never again converged. Productivity continued to soar, while real wages only barely increased. The result is that since then, productivity has grown by 64%, and hourly pay has only grown 15%.
This is definitely part of the problem, but I think there’s more to it as well. Housing and healthcare have become so utterly unaffordable in this country that it really doesn’t matter that our cars are nice and our phones are dirt cheap. We are theoretically wealthier now, but most of that extra wealth goes into simply staying healthy and having a home. Our consumption has been necessitized.
If we can solve these problems, maybe people won’t feel a need to work so many hours. Or, maybe competition will continue to pressure them to work those hours… but at least we’ll actually feel richer when we do it.
One of the best papers I’ve ever read—one that in fact was formative in making me want to be an economist—is Wrongful Beneficence by Chris Meyers.
This paper opened my eyes to a whole new class of unethical behavior: Acts that unambiguously make everyone better off, but nevertheless are morally wrong. Hence, wrongful beneficence.
A lot of economists don’t even seem to believe in such things. They seem convinced that as long as no one is made worse off by a transaction, that transaction must be ethically defensible.
Chris Meyers convinced me that they are wrong.
The key insight here is that it’s still possible to exploit someone even if you make them better off. This happens when they are in a desperate situation and you take advantage of that to get an unfair payoff.
Here one of the cases Meyers offers to demonstrate this:
Suppose Carole is driving across the desert on a desolate road when her car breaks down. After two days and two nights without seeing a single car pass by, she runs out of water and feels rather certain that she will perish if not rescued soon. Now suppose that Jason happens to drive down this road and finds Carole. He sees that her situation is rather desperate and that she needs (or strongly desires) to get to the nearest town as soon as possible. So Jason offers her a ride but only on the condition that […] [she gives him] her entire net worth, the title to her house and car, all of her money in the bank, and half of her earnings for the next ten years.
Carole obviously is better off than she would be if Jason hadn’t shown up—she might even have died. She freely consented to this transaction—again, because if she didn’t, she might die. Yet it seems absurd to say that Jason has done nothing wrong by making such an exorbitant demand. If he had asked her to pay for gas, or even to compensate him for his time at a reasonable rate, we’d have no objection. But to ask for her life savings, all her assets, and half her earnings for ten years? Obviously unfair—and obviously unethical. Jason is making Carole (a little) better off while making himself (a lot) better off, so everyone is benefited; but what he’s doing is obviously wrong.
Once you recognize that such behavior can exist, you start to see it all over the place, particularly in markets, where corporations are quite content to gouge their customers with high prices and exploit their workers with low wages—but still, technically, we’re better off than we would be with no products and no jobs at all.
Indeed, the central message of Wrongful Beneficence is actually about sweatshop labor: It’s not that the workers are worse off than they would have been (in general, they aren’t); it’s that they are so desperate that corporations can get away with exploiting them with obviously unfair wages and working conditions.
Maybe it would be easier just to move manufacturing back to First World countries?
Right-wingers are fond of making outlandish claims that making products at First World wages would be utterly infeasible; here’s one claiming that an iPhone would need to cost $30,000 if it were made in the US. In fact, the truth is that it would only need to cost about $40 more—because hardly any of its cost is actually going to labor. Most of its price is pure monopoly profit for Apple; most of the rest is components and raw materials. (Of course, if those also had to come from the US, the price would go up more; but even so, we’re talking something like double its original price, not thirty times. Workers in the US are indeed paid a lot more than workers in China; they are also more productive.)
It’s true that actually moving manufacturing from other countries back to the US would be a substantial undertaking, requiring retooling factories, retraining engineers, and so on; but it’s not like we’ve never done that sort of thing before. I’m sure it could not be done overnight; but of course it could be done. We do this sort of thing all the time.
Ironically, this sort of right-wing nonsense actually seems to feed the far left as well, supporting their conviction that all this prosperity around us is nothing more than an illusion, that all our wealth only exists because we steal it from others. But this could scarcely be further from the truth; our wealth comes from technology, not theft. If we offered a fairer bargain to poorer countries, we’d be a bit less rich, but they would be much less poor—the overall wealth in the world would in fact probably increase.
A better argument for not moving manufacturing back to the First World is that many Third World economies would collapse if they stopped manufacturing things for other countries, and that would be disastrous for millions of people.
And free trade really does increase efficiency and prosperity for all.
So, yes; let’s keep on manufacturing goods wherever it is cheapest to do so. But when we decide what’s cheapest, let’s evaluate that based on genuinely fair wages and working conditions, not the absolute cheapest that corporations think they can get away with.
Sometimes they may even decide that it’s not really cheaper to manufacture in poorer countries, because they need advanced technology and highly-skilled workers that are easier to come by in First World countries. In that case, bringing production back here is the right thing to do.
Of course, this raises the question:
What would be fair wages and working conditions?
That’s not so easy to answer. Since workers in Third World countries are less educated than workers in First World countries, and have access to less capital and worse technology, we should in fact expect them to be less productive and therefore get paid less. That may be unfair in some cosmic sense, but it’s not anyone’s fault, and it’s not any particular corporation’s responsibility to fix it.
But when there are products for which less than 1% of the sales price of the product goes to the workers who actually made the product, something is wrong. When the profit margin is often wildly larger than the total amount spent on labor, something is wrong.
It may be that we will never have precise thresholds we can set to decide what definitely is or is not exploitative; but that doesn’t mean we can’t ever recognize it when we see it. There are various institutional mechanisms we could use to enforce better wages and working conditions without ever making such a sharp threshold.
One of the simplest, in fact, is Fair Trade.
Fair Trade is by no means a flawless system; in fact there’s a lot of research debating how effective it is at achieving its goals. But it does seem to be accomplishing something. And it’s a system that we already have in place, operating successfully in many countries; it simply needs to be scaled up (and hopefully improved along the way).
One of the clearest pieces of evidence that it’s helping, in fact, is that farmers are willing to participate in it. That shows that it is beneficent.
Of course, that doesn’t mean that it’s genuinely fair! This could just be another kind of wrongful beneficence. Perhaps Fair Trade is really just less exploitative than all the available alternatives.
If so, then we need something even better still, some new system that will reliably pass on the increased cost for customers all the way down to increased wages for workers.
Fair Trade shows us something else, too: A lot of customers clearly are willing to pay a bit more in order to see workers treated better. Even if they weren’t, maybe they should be forced to. But the fact is, they are! Even those who are most adamantly opposed to Fair Trade can’t deny that people really are willing to pay more to help other people. (Yet another example of obvious altruism that neoclassical economists somehow manage to ignore.) They simply deny that it’s actually helping, which is an empirical matter.
But if this isn’t helping enough, fine; let’s find something else that does.
I don’t think most Americans realize just how much more the US spends on healthcare than other countries. This is true not simply in absolute terms—of course it is, the US is rich and huge—but in relative terms: As a portion of GDP, our healthcare spending is a major outlier.
Here’s a really nice graph from Healthsystemtracker.org that illustrates it quite nicely: Almost all other First World countries share a simple linear relationship between their per-capita GDP and their per-capita healthcare spending. But one of these things is not like the other ones….
The outlier in the other direction is Ireland, but that’s because their GDP is wildly inflated by Leprechaun Economics. (Notice that it looks like Ireland is by far the richest country in the sample! This is clearly not the case in reality.) With a corrected estimate of their true economic output, they are also quite close to the line.
Since US GDP per capita ($70,181) is in between that of Denmark ($64,898) and Norway ($80,496) both of which have very good healthcare systems (#ScandinaviaIsBetter), we would expect that US spending on healthcare would similarly be in between. But while Denmark spends $6,384 per person per year on healthcare and Norway spends $7,065 per person per year, the US spends $12,914.
That is, the US spends nearly twice as much as it should on healthcare.
The absolute difference between what we should spend and what we actually spend is nearly $6,000 per person per year. Multiply that out by the 330 million people in the US, and…
The US overspends on healthcare by nearly $2 trillion per year.
This might be worth it, if health in the US were dramatically better than health in other countries. (In that case I’d be saying that other countries spend too little.) But plainly it is not.
Probably the simplest and most comparable measure of health across countries is life expectancy. US life expectancy is 76 years, and has increased over time. But if you look at the list of countries by life expectancy, the US is not even in the top 50. Our life expectancy looks more like middle-income countries such as Algeria, Brazil, and China than it does like Norway or Sweden, who should be our economic peers.
There are of course many things that factor into life expectancy aside from healthcare: poverty and homicide are both much worse in the US than in Scandinavia. But then again, poverty is much worse in Algeria, and homicide is much worse in Brazil, and yet they somehow manage to nearly match the US in life expectancy (actually exceeding it in some recent years).
The US somehow manages to spend more on healthcare than everyone else, while getting outcomes that are worse than any country of comparable wealth—and even some that are far poorer.
This is largely why there is a so-called “entitlements crisis” (as many a libertarian think tank is fond of calling it). Since libertarians want to cut Social Security most of all, they like to lump it in with Medicare and Medicaid as an “entitlement” in “crisis”; but in fact we only need a few minor adjustments to the tax code to make sure that Social Security remains solvent for decades to come. It’s healthcare spending that’s out of control.
Here, take a look.
This is the ratio of Social Security spending to GDP from 1966 to the present. Notice how it has been mostly flat since the 1980s, other than a slight increase in the Great Recession.
This is the ratio of Medicare spending to GDP over the same period. Even ignoring the first few years while it was ramping up, it rose from about 0.6% in the 1970s to almost 4% in 2020, and only started to decline in the last few years (and it’s probably too early to say whether that will continue).
Medicaid has a similar pattern: It rose steadily from 0.2% in 1966 to over 3% today—and actually doesn’t even show any signs of leveling off.
If you look at Medicare and Medicaid together, they surged from just over 1% of GDP in 1970 to nearly 7% today:
Put another way: in 1982, Social Security was 4.8% of GDP while Medicare and Medicaid combined were 2.4% of GDP. Today, Social Security is 4.9% of GDP while Medicare and Medicaid are 6.8% of GDP.
Social Security spending barely changed at all; healthcare spending more than doubled. If we reduced our Medicare and Medicaid spending as a portion of GDP back to what it was in 1982, we would save 4.4% of GDP—that is, 4.4% of over $25 trillion per year, so $1.1 trillion per year.
Of course, we can’t simply do that; if we cut benefits that much, millions of people would suddenly lose access to healthcare they need.
The problem is not that we are spending frivolously, wasting the money on treatments no one needs. On the contrary, both Medicare and Medicaid carefully vet what medical services they are willing to cover, and if anything probably deny services more often than they should.
No, the problem runs deeper than this.
Healthcare is too expensive in the United States.
We simply pay more for just about everything, and especially for specialist doctors and hospitals.
In most other countries, doctors are paid like any other white-collar profession. They are well off, comfortable, certainly, but few of them are truly rich. But in the US, we think of doctors as an upper-class profession, and expect them to be rich.
Median doctor salaries are $98,000 in France and $138,000 in the UK—but a whopping $316,000 in the US. Germany and Canada are somewhere in between, at $183,000 and $195,000 respectively.
Nurses, on the other hand, are paid only a little more in the US than in Western Europe. This means that the pay difference between doctors and nurses is much higher in the US than most other countries.
US prices on brand-name medication are frankly absurd. Our generic medications are typically cheaper than other countries, but our brand name pills often cost twice as much. I noticed this immediately on moving to the UK: I had always been getting generics before, because the brand name pills cost ten times as much, but when I moved here, suddenly I started getting all brand-name medications (at no cost to me), because the NHS was willing to buy the actual brand name products, and didn’t have to pay through the nose to do so.
Let’s compare the prices of a few inpatient procedures between the US and Switzerland. Switzerland, you should note, is a very rich country that spends a lot on healthcare and has nearly the world’s highest life expectancy. So it’s not like they are skimping on care. (Nor is it that prices in general are lower in Switzerland; on the contrary, they are generally higher.)
A coronary bypass in Switzerland costs about $33,000. In the US, it costs $76,000.
A spinal fusion in Switzerland costs about $21,000. In the US? $52,000.
Angioplasty in Switzerland: $9.000. In the US? $32,000.
Hip replacement: Switzerland? $16,000. The US? $28,000.
Knee replacement: Switzerland? $19,000. The US? $27,000.
Cholecystectomy: Switzerland? $8,000. The US? $16,000.
Appendectomy: Switzerland? $7,000. The US? $13,000.
Caesarian section: Switzerland? $8,000. The US? $11,000.
Hospital prices are even lower in Germany and Spain, whose life expectancies are not as high as Switzerland—but still higher than the US.
These prices are so much lower that in fact if you were considering getting surgery for a chronic condition in the US, don’t. Buy plane tickets to Europe and get the procedure done there. Spend an extra few thousand dollars on a nice European vacation and you’d still end up saving money. (Obviously if you need it urgently you have no choice but to use your nearest hospital.) I know that if I ever need a knee replacement (which, frankly, is likely, given my height), I’m gonna go to Spain and thereby save $22,000 relative to what it would cost in the US. That’s a difference of a car.
Combine this with the fact that the US is the only First World country without universal healthcare, and maybe you can see why we’re also the only country in the world where people are afraid to call an ambulance because they don’t think they can afford it. We are also the only country in the world with a medical debt crisis.
Where is all this extra money going?
Well, a lot of it goes to those doctors who are paid three times as much as in France. That, at least, seems defensible: If we want the best doctors in the world maybe we need to pay for them. (Then again, do we have the best doctors in the world? If so, why is our life expectancy so mediocre?)
But a significant portion is going to shareholders.
I was surprised to find that the US is not unusual in that; in fact, for-profit hospitals exist in dozens of countries, and the fraction of US hospital capacity that is for-profit isn’t even particularly high by world standards.
Even nonprofit US hospitals are tremendously profitable—as oxymoronic as that may sound. In fact, mean operating profit is higher among nonprofit hospitals in the US than for-profit hospitals. So even the hospitals that aren’t supposed to be run for profit… pretty much still are. They get tax deductions as if they were charities—but they really don’t act like charities.
They are basically nonprofitin name only.
So fixing this will not be as simple as making all hospitals nonprofit. We must also restructure the institutions so that nonprofit hospitals are genuinely nonprofit, and no longer nonprofit in name only. It’s normal for a nonprofit to have a little bit of profit or loss—nobody can make everything always balance perfectly—but these hospitals have been raking in huge profits and keeping it all in cash instead of using it to reduce prices or improve services. In the study I linked above, those 2,219 “nonprofit” hospitals took in operating profits averaging $43 million each—for a total of $95 billion.
Between pharmaceutical companies and hospitals, that’s a total of over $170 billion per year just in profit. (That’s more than we spend on food stamps, even after surge due to COVID.) This is pure grift. It must be stopped.
But that still doesn’t explain why we’re spending $2 trillion more than we should! So after all, I must leave you with a question:
What is America doing wrong? Why is our healthcare so expensive?
As I write this, Edinburgh is currently in the middle of The Fringe: It’s often described as an “arts and culture festival”, but mainly it consists of a huge number of theatre and comedy performances that go on across the city in hundreds of venues all month long. It’s an “open access festival”, which basically means that it’s half a dozen different festivals that all run independently and are loosely coordinated with one another.
There is truly an embarrassment of riches in the sheer number and variety of performances going on. There’s no way I could ever go to all of them, or even half of them, even though most of them are going on every single day, all month long
It would be tremendously helpful to get good information about which performances are likely to suit my tastes, so I’d know which ones to attend. For once, advertising actually has a genuinely useful function to serve!
And yet, the ads for performances plastered across the city are almost completely useless. They tell you virtually nothing about the content or even style of the various shows. You are bombarded with hundreds of posters for hundreds of performances as you walk through the city, and almost none of them tell you anything useful that would help you decide which shows you want to attend.
Here’s what they look like; imagine this plastered on every bus shelter and spare bit of wall in the city, as well as plenty of specially-built structures explicitly for the purpose:
What I want to ask today is: Why are these posters so uninformative?
I think there are two forces at work here which may explain this phenomenon.
The first is about comedy: Most of these shows are comedy shows, and it’s very hard to explain to someone what is funny about a joke. In fact, most jokes aren’t even funny once they have been explained. Comedy seems to be closely tied to surprise: If you know exactly what they are going to say, it isn’t funny anymore. So it is inherently difficult to explain what’s good about a comedy show without making it actually less funny for those attending.
Yet this is not a complete explanation. For there are some things you could explain about comedy shows without ruining them. You could give it a general genre: political satire, slapstick, alternative, dark comedy, blue comedy, burlesque, cringe, insult, sitcom, parody, surreal, and so on. That would at least tell you something—I tend to like satire and parody, dark and blue are hit-or-miss, surreal leaves me cold, and I can’t stand cringe. And some of the posters do this—yet a remarkable number do not. I often find myself staring at a particular poster, poring over its details, trying to get some inkling of what kind of comedy I could expect from this performer.
To fully explain this, we need something more: And that, I believe, is provided by economic theory.
Consider for a moment that comedy is varied and largely subjective: What one person finds hilarious, another finds boring, and yet another finds outrageously offensive. And whether or not you find a particular routine funny can be hard to predict—even for you.
But consider that money is quite the opposite: Everyone wants it, everyone always wants more of it, and people pretty much want it for the same reasons.
So when you offer to pay money for comedy, you are offering something fundamentally fungible and objective in exchange for something almost totally individual and subjective. You are giving what everyone wants in exchange for something that only some people want and you yourself may or may not want—and may have no way of knowing whether you want until you have it.
I believe it is in the interests of the performers to keep you in the dark in this way. They don’t want to resolve your ignorance too thoroughly. Their goal is not to find the market niche of people who would most enjoy their comedy. Their goal is to get as many people as possible to show up to their shows. Even if someone absolutely hates their show, if they bought tickets, that’s a win. And even any negative reviews or word-of-mouth they might try to give the comedian is probably still a win—comedians are one profession for which there really may be no such thing as bad publicity.
In other words, even these relatively helpful advertisements aren’t actually designed to inform you. They are, as all advertisements are, designed to get you to buy something. And the way to get you to do that is twofold:
First, get your attention. That’s vital. And it’s quite difficult in such a saturated environment. As a result, all of the posters are quite eye-catching and often bizarre. They use loud colors and striking images, and the whole city is filled with them. It actually becomes exhausting to look at them all; but this is the Nash equilibrium, because there is an arms race between different performers to look more interesting and exciting than all the rest.
Second, convince you to go. But let’s be clear about this: It is not necessary to make you absolutely certain that this show is one you’ll enjoy. It is merely to tip the balance of probability, make you reasonably confident that it is likely to be one you’ll enjoy. Given the subjectivity and unpredictability of comedy, any attendee knows that they are likely to end up with a few duds. That risk effectively gets priced in: You accept that one £10 ticket may be wasted, in exchange for buying another £10 ticket that you’d have gladly paid £20 for.
If the posters tried to give more details about what the shows were about, there would be two costs to this: One, it might make the posters less eye-catching and interesting in the first place. And two, it might (perhaps correctly!) convince some customers that this flavor of comedy really wasn’t for them, making them decide not to buy a ticket. The task when designing such a poster, then, is to make one that conveys enough that people are willing to take the chance on it—but not too much so that you might scare some potential audience members away.
I think that this has implications which go beyond comedy. In fact, I think that something quite similar is going on with political speeches. But I’ll save that one for another post.
The cost of labor is measured in effort, toil, and time. It’s the pain of having to work instead of whatever else you’d like to do with your time.
The price of labor is a monetary amount, which is delivered in a transaction.
This may seem perfectly obvious, but it has important and oft-neglected implications. A cost, one paid, is gone. That value has been destroyed. We hope that it was worth it for some benefit we gained. A price, when paid, is simply transferred: One person had that money before, now someone else has it. Nothing was gained or lost.
So in fact when reports say that “labor costs have risen”, what they are really saying is that income is being transferred from owners to workers without any change in real value taking place. They are framing as a loss what is fundamentally a zero-sum redistribution.
In fact, it is disturbingly common to see a fundamentally good redistribution of income framed in the press as a bad outcome because of its expression as “costs”; the “cost” of chocolate is feared to go up if we insist upon enforcing bans on forced labor—when in fact it is only the price that goes up, and the cost actually goes down: chocolate would no longer include complicity in an atrocity. The real suffering of making chocolate would be thereby reduced, not increased. Even when they aren’t literally enslaved, those workers are astonishingly poor, and giving them even a few more cents per hour would make a real difference in their lives. But God forbid we pay a few cents more for a candy bar!
If labor costs were to rise, that would mean that work had suddenly gotten harder, or more painful; or else, that some outside circumstance had made it more difficult to work. Having a child increases your labor costs—you now have the opportunity cost of not caring for the child. COVID increased the cost of labor, by making it suddenly dangerous just to go outside in public. That could also increase prices—you may demand a higher wage, and people do seem to have demanded higher wages after COVID. But these are two separate effects, and you can have one without the other. In fact, women typically see wage stagnation or even reduction after having kids (but men largely don’t), despite their real opportunity cost of labor having obviously greatly increased.
On an individual level, it’s not such a big mistake to equate price and cost. If you are buying something, its cost to you basically just is its price, plus a little bit of transaction cost for actually finding and buying it. But on a societal level, it makes an enormous difference. It distorts our policy priorities and can even lead to actively trying to suppress things that are beneficial—such as rising wages.
This false equivalence between price and costs seems to be at least as common among economists as it is among laypeople. Economists will often justify it on the grounds that in an ideal perfect competitive market the two would be in some sense equated. But of course we don’t live in that ideal perfect market, and even if we did, they would only beproportional at the margin, not fundamentally equal across the board. It would still be obviously wrong to characterize the total value or cost of work by the price paid for it; only the last unit of effort would be priced so that marginal value equals price equals marginal cost. The first 39 hours of your work would cost you less than what you were paid, and produce more than you were paid; only that 40th hour would set the three equal.
Once you account for all the various market distortions in the world, there’s no particular relationship between what something costs—in terms of real effort and suffering—and its price—in monetary terms. Things can be expensive and easy, or cheap and awful. In fact, they often seem to be; for some reason, there seems to be a pattern where the most terrible, miserable jobs (e.g. coal mining) actually pay the leastand the easiest, most pleasant jobs (e.g. stock trading) pay the most. Some jobs that benefit society pay well (e.g. doctors) and others pay terribly or not at all (e.g. climate activists). Some actions that harm the world get punished (e.g. armed robbery) and others get rewarded with riches (e.g. oil drilling). In the real world, whether a job is good or bad and whether it is paid well or poorly seem to be almost unrelated.
In fact, sometimes they seem even negatively related, where we often feel tempted to “sell out” and do something destructive in order to get higher pay. This is likely due to Berkson’s paradox:If people are willing to do jobs if they are either high-paying or beneficial to humanity, then we should expect that, on average, most of the high-paying jobs people do won’t be beneficial to humanity. Even if there were inherently no correlation or a small positive one, people’s refusal to do harmful low-paying work removes those jobs from our sample and results in a negative correlation in what remains.
I think that the best solution, ultimately, is to stop reckoning costs in money entirely. We should reckon them in happiness.
This is of course much more difficult than simply using prices; it’s not easy to say exactly how many QALY are sacrificed in the extraction of cocoa beans or the drilling of offshore oil wells. But if we actually did find a way to count them, I strongly suspect we’d find that it was far more than we ought to be willing to pay.
A very rough approximation, surely flawed but at least a start, would be to simply convert all payments into proportions of their recipient’s income: For full-time wages, this would result in basically everyone being counted the same, as 1 hour of work if you work 40 hours per week, 50 weeks per year is precisely 0.05% of your annual income. So we could say that whatever is equivalent to your hourly wage constitutes 50 microQALY.
This automatically implies that every time a rich person pays a poor person, QALY increase, while every time a poor person pays a rich person, QALY decrease. This is not an error in the calculation. It is a fact of the universe. We ignore it only at out own peril. All wealth redistributed downward is a benefit, while all wealth redistributed upward is a harm. That benefit may cause some other harm, or that harm may be compensated by some other benefit; but they are still there.
This would also put some things in perspective. When HSBC was fined £70 million for its crimes, that can be compared against its £1.5 billion in net income; if it were an individual, it would have been hurt about 50 milliQALY, which is about what I would feel if I lost $2000. Of course, it’s not a person, and it’s not clear exactly how this loss was passed through to employees or shareholders; but that should give us at least some sense of how small that loss was for them. They probably felt it… a little.
When Trump was ordered to pay a $1.3 million settlement, based on his $2.5 billion net wealth (corresponding to roughly $125 million in annual investment income), that cost him about 10 milliQALY; for me that would be about $500.
At the other extreme, if someone goes from making $1 per day to making $1.50 per day, that’s a 50% increase in their income—500 milliQALY per year.
For those who have no income at all, this becomes even trickier; for them I think we should probably use their annual consumption, since everyone needs to eat and that costs something, though likely not very much. Or we could try to measure their happiness directly, trying to determine how much it hurts to not eat enough and work all day in sweltering heat.
Properly shifting this whole cultural norm will take a long time. For now, I leave you with this: Any time you see a monetary figure, ask yourself: “How much is that worth to them?” The world will seem quite different once you get in the habit of that.
As of March 9, Silicon Valley Bank (SVB) has failed and officially been put into receivership under the FDIC. A bank that held $209 billion in assets has suddenly become insolvent.
This is the second-largest bank failure in US history, after Washington Mutual (WaMu) in 2008. In fact it will probably have more serious consequences than WaMu, for two reasons:
1. WaMu collapsed as part of the Great Recession, so there was already a lot of other things going on and a lot of policy responses already in place.
2. WaMu was mostly a conventional commercial bank that held deposits and loans for consumers, so its assets were largely protected by the FDIC, and thus its bankruptcy didn’t cause contagion the spread out to the rest of the system. (Other banks—shadow banks—did during the crash, but not so much WaMu.) SVB mostly served tech startups, so a whopping 89% of its deposits were not protected by FDIC insurance.
You’ve likely heard of many of the companies that had accounts at SVB: Roku, Roblox, Vimeo, even Vox. Stocks of the US financial industry lost $100 billion in value in two days.
The good news is that this will not be catastrophic. It probably won’t even trigger a recession (though the high interest rates we’ve been having lately potentially could drive us over that edge). Because this is commercial banking, it’s done out in the open, with transparency and reasonably good regulation. The FDIC knows what they are doing, and even though they aren’t covering all those deposits directly, they intend to find a buyer for the bank who will, and odds are good that they’ll be able to cover at least 80% of the lost funds.
Then again, it’s worth asking whether we should really have a banking system in which failures are so routine.
The reason banks fail is kind of a dark open secret: They don’t actually have enough money to cover their deposits.
Banks loan away most of their cash, and rely upon the fact that most of their depositors will not want to withdraw their money at the same time. They are required to keep a certain ratio in reserves, but it’s usually fairly small, like 10%. This is called fractional-reserve banking.
As long as less than 10% of deposits get withdrawn at any given time, this works. But if a bunch of depositors suddenly decide to take out their money, the bank may not have enough to cover it all, and suddenly become insolvent.
In fact, the fear that a bank might become insolvent can actually cause it to become insolvent, in a self-fulfilling prophecy. Once depositors get word that the bank is about to fail, they rush to be the first to get their money out before it disappears. This is a bank run, and it’s basically what happened to SVB.
The FDIC was originally created to prevent or mitigate bank runs. Not only did they provide insurance that reduced the damage in the event of a bank failure; by assuring depositors that their money would be recovered even if the bank failed, they also reduced the chances of a bank run becoming a self-fulfilling prophecy.
Indeed, SVB is the exception that proves the rule, as they failed largely because their assets were mainly not FDIC insured.
Fractional-reserve banking effectively allows banks to create money, in the form of credit that they offer to borrowers. That credit gets deposited in other banks, which then go on to loan it out to still others; the result is that there is more money in the system than was ever actually printed by the central bank.
In most economies this commercial bank money is a far larger quantity than the central bank money actually printed by the central bank—often nearly 10 to 1. This ratio is called the money multiplier.
Indeed, it’s not a coincidence that the reserve ratio is 10% and the multiplier is 10; the theoretical maximum multiplier is always the inverse of the reserve ratio, so if you require reserves of 10%, the highest multiplier you can get is 10. Had we required 20% reserves, the multiplier would drop to 5.
Most countries have fractional-reserve banking, and have for centuries; but it’s actually a pretty weird system if you think about it.
Back when we were on the gold standard, fractional-reserve banking was a way of cheating, getting our money supply to be larger than the supply of gold would actually allow.
But now that we are on a pure fiat money system, it’s worth asking what fractional-reserve banking actually accomplishes. If we need more money, the central bank could just print more. Why do we delegate that task to commercial banks?
Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant — a fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five-dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a discreet way of transferring some of the income that the government receives from producing money to the banking system, and is worth mentioning at all only because it is the system presently in use in this country.
Our banking system evolved gradually over time, and seems to have held onto many features that made more sense in an earlier era. Back when we had arbitrarily tied our central bank money supply to gold, creating a new money supply that was larger may have been a reasonable solution. But today, it just seems to be handing the reins over to private corporations, giving them more profits while forcing the rest of society to bear more risk.
The obvious alternative is full-reserve banking, where banks are simply required to hold 100% of their deposits in reserve and the multiplier drops to 1. This idea has been supported by a number of quite prominent economists, including Milton Friedman.
It’s not just a right-wing idea: The left-wing organization Positive Money is dedicated to advocating for a full-reserve banking system in the UK and EU. (The ECB VP’s criticism of the proposal is utterly baffling to me: it “would not create enough funding for investment and growth.” Um, you do know you can print more money, right? Hm, come to think of it, maybe the ECB doesn’t know that, because they think inflation is literally Hitler. There are legitimate criticisms to be had of Positive Money’s proposal, but “There won’t be enough money under this fiat money system” is a really weird take.)
There’s a relatively simple way to gradually transition from our current system to a full-reserve sytem: Simply increase the reserve ratio over time, and print more central bank money to keep the total money supply constant. If we find that it seems to be causing more problems than it solves, we could stop or reverse the trend.
Krugman has pointed out that this wouldn’t really fix the problems in the banking system, which actually seem to be much worse in the shadow banking sector than in conventional commercial banking. This is clearly right, but it isn’t really an argument against trying to improve conventional banking. I guess if stricter regulations on conventional banking push more money into the shadow banking system, that’s bad; but really that just means we should be imposing stricter regulations on the shadow banking system first (or simultaneously).
We don’t need to accept bank runs as a routine part of the financial system. There are other ways of doing things.
It will not be news to most of you that there is a worldwide shortage of healthcare staff, especially nurses and emergency medical technicians (EMTs). I would like you to stop and think about the utterly terrible policy failure this represents. Maybe if enough people do, we can figure out a way to fix it.
It goes without saying—yet bears repeating—that people die when you don’t have enough nurses and EMTs. Indeed, surely a large proportion of the 2.6 million (!) deaths each year from medical errors are attributable to this. It is likely that at least one million lives per year could be saved by fixing this problem worldwide. In the US alone, over 250,000 deaths per year are caused by medical errors; so we’re looking at something like 100,000 lives we could safe each year by removing staffing shortages.
Precisely because these jobs have such high stakes, the mere fact that we would ever see the word “shortage” beside “nurse” or “EMT” was already clear evidence of dramatic policy failure.
This is not like other jobs. A shortage of accountants or baristas or even teachers, while a bad thing, is something that market forces can be expected to correct in time, and it wouldn’t be unreasonable to simply let them do so—meaning, let wages rise on their own until the market is restored to equilibrium. A “shortage” of stockbrokers or corporate lawyers would in fact be a boon to our civilization. But a shortage of nurses or EMTs or firefighters (yes, there are those too!) is a disaster.
Partly this is due to the COVID pandemic, which has been longer and more severe than any but the most pessimistic analysts predicted. But there shortages of nurses before COVID. There should not have been. There should have been a massive glut.
Even if there hadn’t been a shortage of healthcare staff before the pandemic, the fact that there wasn’t a glut was already a problem.
This is what a properly-functioning healthcare policy would look like: Most nurses are bored most of the time. They are widely regarded as overpaid. People go into nursing because it’s a comfortable, easy career with very high pay and usually not very much work. Hospitals spend most of their time with half their beds empty and half of their ambulances parked while the drivers and EMTs sit around drinking coffee and watching football games.
Why? Because healthcare, especially emergency care, involves risk, and the stakes couldn’t be higher. If the number of severely sick people doubles—as in, say, a pandemic—a hospital that usually runs at 98% capacity won’t be able to deal with them. But a hospital that usually runs at 50% capacity will.
COVID exposed to the world what a careful analysis would already have shown: There was not nearly enough redundancy in our healthcare system. We had been optimizing for a narrow-minded, short-sighted notion of “efficiency” over what we really needed, which was resiliency and robustness.
I’d like to compare this to two other types of jobs.
The first is stockbrokers.Set aside for a moment the fact that most of what they do is worthless is not actively detrimental to human society. Suppose that their most adamant boosters are correct and what they do is actually really important and beneficial.
Their experience is almost like what I just said nurses ought to be. They are widely regarded (correctly) as very overpaid. There is never any shortage of them; there are people lining up to be hired. People go into the work not because they care about it or even because they are particularly good at it, but because they know it’s an easy way to make a lot of money.
The one thing that seems to be different from my image may not be as different as it seems. Stockbrokers work long hours, but nobody can really explain why. Frankly most of what they do can be—and has been—successfully automated. Since there simply isn’t that much work for them to do, my guess is that most of the time they spend “working” 60-80 hour weeks is actually not actually working, but sitting around pretending to work. Since most financial forecasters are outperformed by a simple diversified portfolio, the most profitable action for most stock analysts to take most of the time would be nothing.
It may also be that stockbrokers work hard at sales—trying to convince people to buy and sell for bad reasons in order to earn sales commissions. This would at least explain why they work so many hours, though it would make it even harder to believe that what they do benefits society. So if we imagine our “ideal” stockbroker who makes the world a better place, I think they mostly just use a simple algorithm and maybe adjust it every month or two. They make better returns than their peers, but spend 38 hours a week goofing off.
There is a massive glut of stockbrokers. This is what it looks like when a civilization is really optimized to be good at something.
The second is soldiers. Say what you will about them, no one can dispute that their job has stakes of life and death. A lot of people seem to think that the world would be better off without them, but that’s at best only true if everyone got rid of them; if you don’t have soldiers but other countries do, you’re going to be in big trouble. (“We’ll beat our swords into liverwurst / Down by the East Riverside; / But no one wants to be the first!”) So unless and until we can solve that mother of all coordination problems, we need to have soldiers around.
What is life like for a soldier? Well, they don’t seem overpaid; if anything, underpaid. (Maybe some of the officers are overpaid, but clearly not most of the enlisted personnel. Part of the problem there is that “pay grade” is nearly synonymous with “rank”—it’s a primate hierarchy, not a rational wage structure. Then again, so are most industries; the military just makes it more explicit.) But there do seem to be enough of them. Military officials may lament of “shortages” of soldiers, but they never actually seem to want for troops to deploy when they really need them. And if a major war really did start that required all available manpower, the draft could be reinstated and then suddenly they’d have it—the authority to coerce compliance is precisely how you can avoid having a shortage while keeping your workers underpaid. (Russia’s soldier shortage is genuine—something about being utterly outclassed by your enemy’s technological superiority in an obviously pointless imperialistic war seems to hurt your recruiting numbers.)
In other words, there is a massive glut of soldiers. Most of them don’t even know what to do with themselves most of the time.
This makes perfect sense. Why? Because an army needs to be resilient. And to be resilient, you must be redundant. If you only had exactly enough soldiers to deploy in atypicalengagement, you’d never have enough for a really severe engagement. If on average you had enough, that means you’d spend half the time with too few. And the costs of having too few soldiers are utterly catastrophic.
This is probably an evolutionary outcome, in fact; civilizations may have tried to have “leaner” militaries that didn’t have so much redundancy, and those civilizations were conquered by other civilizations that were more profligate. (This is not to say that we couldn’t afford to cut military spending at all; it’s one thing to have the largest military in the world—I support that, actually—but quite another to have more than the next 10 combined.)
What’s the policy solution here? It’s actually pretty simple.
Pay nurses and EMTs more. A lot more. Whatever it takes to get to the point where we not only have enough, but have so many people lining up to join we don’t even know what to do with them all. If private healthcare firms won’t do it, force them to—or, all the more reason to nationalize healthcare. The stakes are far too high to leave things as they are.
Would this be expensive? Sure.
Removing the shortage of EMTs wouldn’t even be that expensive. There are only about 260,000 EMTs in the US, and they get paid the apallingly low median salary of $36,000. That means we’re currently spending only about $9 billion per year on EMTs. We could double their salaries and double their numbers for only an extra $27 billion—about 0.1% of US GDP.
Nurses would cost more. There are about 5 million nurses in the US, with an average salary of about $78,000, so we’re currently spending about $390 billion a year on nurses. We probably can’t afford to double both salary and staffing. But maybe we could increase both by 20%, costing about an extra $170 billion per year.
Altogether that would cost about $200 billion per year. To save one hundred thousand lives.
In fact if we nationalized US healthcare we could get more than these amounts in savings from not wasting our money on profits for insurance and drug companies—simply making the US healthcare system as cost-effective as Canada’s would save $6,000 per American per year, or a whopping $1.9 trillion. At that point we could double the number of nurses and their salaries and still be spending less.
No, it’s not because nurses and doctors are paid much less in Canada than the US. That’s true in some countries, but not Canada. The median salary for nurses in Canada is about $95,500 CAD, which is $71,000 US at current exchange rates. Doctors in Canada can make anywhere from $80,000 to $400,000 CAD, which is $60,000 to $300,000 US. Nor are healthcare outcomes in Canada worse than the US; if anything, they’re better, as Canadians live an average of four years longer than Americans. No, the radical difference in cost—a factor of 2 to 1—between Canada and the US comes from privatization. Privatization is supposed to make things more efficient and lower costs, but it has absolutely not done that in US healthcare.
And if our choice is between spending more money and letting hundreds of thousands or millions of people die every year, that’s no choice at all.
Human Economics 