If you really want grad students to have better mental health, remove all the high-stakes checkpoints

Post 260: Oct 14 JDN 2458406

A study was recently published in Nature Biotechnology showing clear evidence of a mental health crisis among graduate students (no, I don’t know why they picked the biotechnology imprint—I guess it wasn’t good enough for Nature proper?). This is only the most recent of several studies showing exceptionally high rates of mental health issues among graduate students.

I’ve seen universities do a lot of public hand-wringing and lip service about this issue—but I haven’t seen any that were seriously willing to do what it takes to actually solve the problem.

I think this fact became clearest to me when I was required to fill out an official “Individual Development Plan” form as a prerequisite for my advancement to candidacy, which included one question about “What are you doing to support your own mental health and work/life balance?”

The irony here is absolutely excruciating, because advancement to candidacy has been overwhelmingly my leading source of mental health stress for at least the last six months. And it is only one of several different high-stakes checkpoints that grad students are expected to complete, always threatened with defunding or outright expulsion from the graduate program if the checkpoint is not met by a certain arbitrary deadline.

The first of these was the qualifying exams. Then comes advancement to candidacy. Then I have to complete and defend a second-year paper, then a third-year paper. Finally I have to complete and defend a dissertation, and then go onto the job market and go through a gauntlet of applications and interviews. I can’t think of any other time in my life when I was under this much academic and career pressure this consistently—even finishing high school and applying to college wasn’t like this.

If universities really wanted to improve my mental health, they would find a way to get rid of all that.

Granted, a single university does not have total control over all this: There are coordination problems between universities regarding qualifying exams, advancement, and dissertation requirements. One university that unilaterally tried to remove all these would rapidly lose prestige, as it would not be regarded as “rigorous” to reduce the pressure on your grad students. But that itself is precisely the problem—we have equated “rigor” with pressuring grad students until they are on the verge of emotional collapse. Universities don’t seem to know how to make graduate school difficult in the ways that would actually encourage excellence in research and teaching; they simply know how to make it difficult in ways that destroy their students psychologically.

The job market is even more complicated; in the current funding environment, it would be prohibitively expensive to open up enough faculty positions to actually accept even half of all graduating PhDs to tenure-track jobs. Probably the best answer here is to refocus graduate programs on supporting employment outside academia, recognizing both that PhD-level skills are valuable in many workplaces and that not every grad student really wants to become a professor.

But there are clearly ways that universities could mitigate these effects, and they don’t seem genuinely interested in doing so. They could remove the advancement exam, for example; you could simply advance to candidacy as a formality when your advisor decides you are ready, never needing to actually perform a high-stakes presentation before a committee—because what the hell does that accomplish anyway? Speaking of advisors, they could have a formalized matching process that starts with interviewing several different professors and being matched to the one that best fits your goals and interests, instead of expecting you to reach out on your own and hope for the best. They could have you write a dissertation, but not perform a “dissertation defense”—because, again, what can they possibly learn from forcing you to present in a high-stakes environment that they couldn’t have learned from reading your paper and talking with you about it over several months?

They could adjust or even remove funding deadlines—especially for international students. Here at UCI at least, once you are accepted to the program, you are ostensibly guaranteed funding for as long as you maintain reasonable academic progress—but then they define “reasonable progress” in such a way that you have to form an advancement committee, fill out forms, write a paper, and present before a committee all by a certain date or your funding is in jeopardy. Residents of California (which includes all US students who successfully established residency after a full year) are given more time if we need it—but international students aren’t. How is that fair?

The unwillingness of universities to take such actions clearly shows that their commitment to improving students’ mental health is paper-thin. They are only willing to help their students improve their work-life balance as long as it doesn’t require changing anything about the graduate program. They will provide us with counseling services and free yoga classes, but they won’t seriously reduce the pressure they put on us at every step of the way.
I understand that universities are concerned about protecting their prestige, but I ask them this: Does this really improve the quality of your research or teaching output? Do you actually graduate better students by selecting only the ones who can survive being emotionally crushed? Do all these arbitrary high-stakes performances actually result in greater advancement of human knowledge?

Or is it perhaps that you yourselves were put through such hazing rituals years ago, and now your cognitive dissonance won’t let you admit that it was all for naught? “This must be worth doing, or else they wouldn’t have put me through so much suffering!” Are you trying to transfer your own psychological pain onto your students, lest you be forced to face it yourself?

MSRP is tacit collusion

Oct 7 JDN 2458399

It’s been a little while since I’ve done a really straightforward economic post. It feels good to get back to that.

You are no doubt familiar with the “Manufacturer’s Suggested Retail Price” or MSRP. It can be found on everything from books to dishwashers to video games.

The MSRP is a very simple concept: The manufacturer suggests that all retailers sell it (at least the initial run) at precisely this price.

Why would they want to do that? There is basically only one possible reason: They are trying to sustain tacit collusion.

The game theory of this is rather subtle: It requires that both manufacturers and retailers engage in long-term relationships with one another, and can pick and choose who to work with based on the history of past behavior. Both of these conditions hold in most real-world situations—indeed, the fact that they don’t hold very well in the agriculture industry is probably why we don’t see MSRP on produce.

If pricing were decided by random matching with no long-term relationships or past history, MSRP would be useless. Each firm would have little choice but to set their own optimal price, probably just slightly over their own marginal cost. Even if the manufacturer suggested an MSRP, retailers would promptly and thoroughly ignore it.

This is because the one-shot Bertrand pricing game has a unique Nash equilibrium, at pricing just above marginal cost. The basic argument is as follows: If I price cheaper than you, I can claim the whole market. As long as it’s profitable for me to do that, I will. The only time it’s not profitable for me to undercut you in this way is if we are both charging just slightly above marginal cost—so that is what we shall do, in Nash equilibrium. Human beings don’t always play according to the Nash equilibrium, but for-profit corporations do so quite consistently. Humans have limited attention and moral values; corporations have accounting departments and a fanatical devotion to the One True Profit.

But the iterated Bertrand pricing game is quite different. If instead of making only one pricing decision, we make many pricing decisions over time, always with a high probability of encountering the same buyers and sellers again in the future, then I may not want to undercut your price, for fear of triggering a price war that will hurt both of our firms.

Much like how the Iterated Prisoner’s Dilemma can sustain cooperation in Nash equilibrium while the one-shot Prisoner’s Dilemma cannot, the iterated Bertrand game can sustain collusion as a Nash equilibrium.

There is in fact a vast number of possible equilibria in the iterated Bertrand game. If prices were infinitely divisible, there would be an infinite number of equilibria. In reality, there are hundreds or thousands of equilibria, depending on how finely divisible the price may be.

This makes the iterated Bertrand game a coordination gamethere are many possible equilibria, and our task is to figure out which one to coordinate on.

If we had perfect information, we could deduce what the monopoly price would be, and then all choose the monopoly price; this would be what we call “payoff dominant”, and it’s often what people actually try to choose in real-world coordination games.

But in reality, the monopoly price is a subtle and complicated thing, and might not even be the same between different retailers. So if we each try to compute a monopoly price, we may end up with different results, and then we could trigger a price war and end up driving all of our profits down. If only there were some way to communicate with one another, and say what price we all want to set?

Ah, but there is: The MSRP. Most other forms of price communication are illegal: We certainly couldn’t send each other emails and say “Let’s all charge $59.99, okay?” (When banks tried to do that with the LIBOR, it was the largest white-collar crime in history.) But for some reason economists (particularly, I note, the supposed “free market” believers of the University of Chicago) have convinced antitrust courts that MSRP is somehow different. Yet it’s obviously hardly different at all: You’ve just made the communication one-way from manufacturers to retailers, which makes it a little less reliable, but otherwise exactly the same thing.

There are all sorts of subtler arguments about how MSRP is justifiable, but as far as I can tell they all fall flat. If you’re worried about retailers not promoting your product enough, enter into a contract requiring them to promote. Proposing a suggested price is clearly nothing but an attempt to coordinate tacit—frankly not even that tacit—collusion.

MSRP also probably serves another, equally suspect, function, which is to manipulate consumers using the anchoring heuristic: If the MSRP is $59.99, then when it does go on sale for $49.99 you feel like you are getting a good deal; whereas, if it had just been priced at $49.99 to begin with, you might still have felt that it was too expensive. I see no reason why this sort of crass manipulation of consumers should be protected under the law either, especially when it would be so easy to avoid.

There are all sorts of ways for firms to tacitly collude with one another, and we may not be able to regulate them all. But the MSRP is literally printed on the box. It’s so utterly blatant that we could very easily make it illegal with hardly any effort at all. The fact that we allow such overt price communication makes a mockery of our antitrust law.

What really works against bigotry

Sep 30 JDN 2458392

With Donald Trump in office, I think we all need to be thinking carefully about what got us to this point, how we have apparently failed in our response to bigotry. It’s good to see that Kavanaugh’s nomination vote has been delayed pending investigations, but we can’t hope to rely on individual criminal accusations to derail every potentially catastrophic candidate. The damage that someone like Kavanaugh would do to the rights of women, racial minorities, and LGBT people is too severe to risk. We need to attack this problem at its roots: Why are there so many bigoted leaders, and so many bigoted voters willing to vote for them?

The problem is hardly limited to the United States; we are witnessing a global crisis of far-right ideology, as even the UN has publicly recognized.

I think the left made a very dangerous wrong turn with the notion of “call-out culture”. There is now empirical data to support me on this. Publicly calling people racist doesn’t make them less racist—in fact, it usually makes them more racist. Angrily denouncing people doesn’t change their minds—it just makes you feel righteous. Our own accusatory, divisive rhetoric is part of the problem: By accusing anyone who even slightly deviates from our party line (say, by opposing abortion in some circumstances, as 75% of Americans do?) of being a fascist, we slowly but surely push more people toward actual fascism.

Call-out culture encourages a black-and-white view of the world, where there are “good guys” (us) and “bad guys” (them), and our only job is to fight as hard as possible against the “bad guys”. It frees us from the pain of nuance, complexity, and self-reflection—at only the cost of giving up any hope of actually understanding the real causes or solving the problem. Bigotry is not something that “other” people have, which you, fine upstanding individual, could never suffer from. We are all Judy Hopps.

This is not to say we should do nothing—indeed, that would be just as bad if not worse. The rise of neofascism has been possible largely because so many people did nothing. Knowing that there is bigotry in all of us shouldn’t stop us from recognizing that some people are far worse than others, or paralyze us against constructively improving ourselves and our society. See the shades of gray without succumbing to the Fallacy of Gray.

The most effective interventions at reducing bigotry are done in early childhood; obviously, it’s far too late for that when it comes to people like Trump and Kavanaugh.

But there are interventions that can work at reducing bigotry among adults. We need to first understand where the bigotry comes from—and it doesn’t always come from the same source. We need to be willing to look carefully—yes, even sympathetically—at people with bigoted views so that we can understand them.

There are deep, innate systems in the human brain that make bigotry come naturally to us. Even people on the left who devote their lives to combating discrimination against women, racial minorities and LGBT people can still harbor bigoted attitudes toward other groups—such as rural people or Republicans. If you think that all Republicans are necessarily racist, that’s not a serious understanding of what motivates Republicans—that’s just bigotry on your part. Trump is racist. Pence is racist. One could argue that voting for them constitutes, in itself, a racist act. But that does not mean that every single Republican voter is fundamentally and irredeemably racist.

It’s also important to have conversations face-to-face. I must admit that I am personally terrible at this; despite training myself extensively in etiquette and public speaking to the point where most people perceive me as charismatic, even charming, deep down I am still a strong introvert. I dislike talking in person, and dread talking over the phone. I would much prefer to communicate entirely in written electronic communication—but the data is quite clear on this: Face-to-face conversations work better at changing people’s minds. It may be awkward and uncomfortable, but by being there in person, you limit their ability to ignore you or dismiss you; you aren’t a tweet from the void, but an actual person, sitting there in front of them.

Speak with friends and family members. This, I know, can be especially awkward and painful. In the last few years I have lost connections with friends who were once quite close to me as a result of difficult political conversations. But we must speak up, for silence becomes complicity. And speaking up really can work.

Don’t expect people to change their entire worldview overnight. Focus on small, concrete policy ideas. Don’t ask them to change who they are; ask them to change what they believe. Ask them to justify and explain their beliefs—and really listen to them when they do. Be open to the possibility that you, too might be wrong about something.

If they say “We should deport all illegal immigrants!”, point out that whenever we try this, a lot of fields go unharvested for lack of workers, and ask them why they are so concerned about illegal immigrants. If they say “Illegal immigrants come here and commit crimes!” point them to the statistical data showing that illegal immigrants actually commit fewer crimes on average than native-born citizens (probably because they are more afraid of what happens if they get caught).

If they are concerned about Muslim immigrants influencing our culture in harmful ways, first, acknowledge that there are legitimate concerns about Islamic cultural values (particularly toward women and LGBT people)but then point out that over 90% of Muslim-Americans are proud to be American, and that welcoming people is much more effective at getting them to assimilate into our culture than keeping them out and treating them as outsiders.

If they are concerned about “White people getting outnumbered”, first point out that White people are still over 70% of the US population, and in most rural areas there are only a tiny fraction of non-White people. Point out that Census projections showing the US will be majority non-White by 2045 are based on naively extrapolating current trends, and we really have no idea what the world will look like almost 30 years from now. Next, ask them why they worry about being “outnumbered”; get them to consider that perhaps racial demographics don’t have to be a matter of zero-sum conflict.

After you’ve done this, you will feel frustrated and exhausted, and the relationship between you and the person you’re trying to convince will be strained. You will probably feel like you have accomplished absolutely nothing to change their mind—but you are wrong. Even if they don’t acknowledge any change in their beliefs, the mere fact that you sat down and asked them to justify what they believe, and presented calm, reasonable, cogent arguments against those beliefs will have an effect. It will be a small effect, difficult for you to observe in that moment. But it will still be an effect.

Think about the last time you changed your mind about something important. (I hope you can remember such a time; none of us were born being right about everything!) Did it happen all at once? Was there just one, single knock-down argument that convinced you? Probably not. (On some mathematical and scientific questions I’ve had that experience: Oh, wow, yeah, that proof totally demolishes what I believed. Well, I guess I was wrong. But most beliefs aren’t susceptible to such direct proof.) More likely, you were presented with arguments from a variety of sources over a long span of time, gradually chipping away at what you thought you knew. In the moment, you might not even have admitted that you thought any differently—even to yourself. But as the months or years went by, you believed something quite different at the end than you had at the beginning.

Your goal should be to catalyze that process in other people. Don’t take someone who is currently a frothing neo-Nazi and expect them to start marching with Black Lives Matter. Take someone who is currently a little bit uncomfortable about immigration, and calm their fears. Don’t take someone who thinks all poor people are subhuman filth and try to get them to support a basic income. Take someone who is worried about food stamps adding to our national debt, and show them how it is a small portion of our budget. Don’t take someone who thinks global warming was made up by the Chinese and try to get them to support a ban on fossil fuels. Take someone who is worried about gas prices going up as a result of carbon taxes and show them that carbon offsets would add only about $100 per person per year while saving millions of lives.

And if you’re ever on the other side, and someone has just changed your mind, even a little bit—say so. Thank them for opening your eyes. I think a big part of why we don’t spend more time trying to honestly persuade people is that so few people acknowledge us when we do.

How we can actually solve the housing shortage

Sep 16 JDN 2458378

In previous posts I’ve talked about the housing crisis facing most of the world’s major cities. (Even many cities in Africa are now facing a housing crisis!) In this post, I’m going to look at the empirical data to see if we can find a way to solve this crisis.

Most of the answer, it turns out, is really not that complicated: Build more housing.

There is a little bit more to it than that, but only a little bit. The basic problem is simply that there are more households than there are houses to hold them.

One of the biggest hurdles to fixing the housing crisis comes ironically from the left, in resistance to so-called “gentrification”. Local resistance to new construction is one of the greatest obstacles to keeping housing affordable. State and federal regulations are generally quite sensible: No industrial waste near the playgrounds. It’s the local regulations that make new housing so difficult.

I can understand why people fight “gentrification”: They see new housing going in as housing prices increase, and naturally assume that new houses cause higher prices. But it’s really the other way around: High prices cause new construction, which brings prices down. By its nature, new housing is almost always more expensive than existing housing. Building new housing still brings down the overall price of housing, even when the new housing is expensive. Building luxury condos does make existing apartments more affordable—and not building anything most certainly does not.

California’s housing crisis is particularly severe: California has been building less than half the units needed to sustain its current population trend since the crash in 2008. It’s worst of all in the Bay Area, where 500,000 jobs were added since 2009—and only 50,000 homes. California also has a big problem with delays in the permit process: Typically it takes as long as three or four years between approval and actual breaking ground.

We are seeing this in Oakland currently: The government has approved an actually reasonable amount of housing for once (vastly more than what they usually do), and as a result they may have a chance at keeping Oakland affordable even as it grows its population and economy. And yet we still get serious journalists saying utter nonsense like The building boom and resulting gentrification are squeezing the city’s most vulnerable.” Building booms don’t cause gentrification. Building booms are the best response to gentrification. When you say things like that, you sound to an economist like you’re saying “Pizza is so expensive; we need to stop people from making pizza!”

Homeowners who want to increase their property values may actually be rational—if incredibly selfish and monopolistic—in trying to block new construction. But activists who oppose “gentrification” need to stop shooting themselves in the foot by fighting the very same development that would have made housing cheaper.

The simplest thing we can do is make it easier to build housing. Streamline the permit process, provide subsidies, remove unnecessary regulations. Housing is one of the few markets where I can actually see a lot of unnecessary regulations. We don’t need to require parking; we should provide better public transit instead. And while requiring solar panels (as the whole state is now doing) sounds nice, it makes everything a lot more expensive—and by only requiring it on new housing, you are effectively saying you don’t want any new housing. I love solar panels, but what you should be doing is subsidizing solar panels, not requiring them. Does that cost the state budget more? Yes. Raise taxes on something else (a particularly good idea: electricity consumption) if you have to. But by mandating solar panels without any subsidies to support them, you are effectively putting a tax on new housing—which is exactly what California does not need.

It’s still a good idea to create incentives to build not simply housing, but affordable housing. There are ways to do this as well. Denver did an excellent job in creating an Affordable Housing Fund that they immediately spent in converting vacant apartments into affordable housing units.

There are also good reasons to try to fight foreign ownership of housing (and really, speculative ownership of housing in general). There is a strong correlation between current account deficits and housing appreciation, which makes sense if foreign investors are buying up our housing and making it more expensive. If Trump could actually reduce our trade deficit, that would drive down our current account deficit and quite likely make our housing more affordable. Of course, he has absolutely no idea how to do that.

Victor Duggan has a pretty good plan for lowering housing prices in Ireland which includes a land tax (as I’ve discussed previously) and a tax on foreign ownership of real estate. I disagree with him about the “Help-to-Buy” program, however; I actually think that was a fine idea, since the goal is not simply to keep housing cheap but to get people into houses. That wealth transfer is going to raise prices at the producer side—increasing production—but not at the consumer side—because people get compensated by the tax rebate. The net result should be more housing without more cost for buyers. You could have done the same thing by subsidizing construction, but I actually like the idea of putting the money directly in the pockets of homeowners. The tax incidence shouldn’t be much different in the long run, but it makes for a much more appealing and popular program.

We must stop Kavanaugh now!

Post 257: Sep 16 JDN 2458378

I realized that this post can’t afford to wait a week. It’s too urgent.

It’s the best news I’ve heard in a long time: Paul Manafort has pled guilty and is cooperating with the investigation. This is a good day for Mueller, a bad day for Trump—and a great day for America.

Manafort himself has been involved in international corruption for decades. It’s a shame that he will now be getting off light on some of his crimes. But prosecutors would only do that if he had information to share with them that was of commensurate value—and I’m willing to bet that means he has information to implicate the Donald himself. Trump is right to be afraid.

Of course, we are still a long way from impeaching Trump, let alone removing him from office, much less actually restoring normalcy and legitimacy to our executive branch. We are still in a long, dark tunnel—but perhaps at last we are beginning to glimpse the light at the other end.

We should let Mueller and the federal prosecutors do their jobs; so far, they’ve done them quite well. In the meantime, instead of speculating about just how deep this rabbit hole of corruption goes (come on, we know Trump is corrupt; the only question is how much and with whom), it would be better to focus our attention on ensuring that Trump cannot leave a lasting legacy of destruction in his wake.

Priority number one is stopping Brett Kavanaugh. Kavanaugh may seem like just another right-wing justice (after Scalia, how much worse can it get, really?), but no, he really is worse than that. He barely even pretends to respect the Constitution or past jurisprudence, and has done an astonishingly poor job of hiding his political agenda or his personal devotion to Trump. The most fundamental flaw of the US Supreme Court is the near-impossibility of removing a justice once appointed; that makes it absolutely vital that we stop his appointment from being confirmed.

It isn’t just Roe v. Wade that will be overturned if he gets on the court (that, at least, I can understand why a substantial proportion of Americans would approve—abortion is a much more complicated issue than either pro-life or pro-choice demagogues would have you believe, as the Stanford Encyclopedia of Philosophy agrees). Kavanaugh looks poised to tear apart a wide variety of protections for civil rights, environmental sustainability, and labor protections. Sadly, our current Republican Party has become so craven, so beholden to party above country and all else, that they will most likely vote to advance, and ultimately, confirm, his nomination. And America, and all the world, will suffer for it, for decades to come.

If this happens, whom should we blame? Well, first of all, Trump and Kavanaugh themselves, of course. Second, the Republicans who confirmed Kavanaugh. Third, everyone who voted for Trump. But fourth? Everyone who didn’t vote for Clinton. Everyone who said, “She’s just as bad”, or “The two parties are the same”, or “He can’t possibly win”, or “We need real change”, and either sat home or voted for a third party—every one of those people has a little bit of blood on their hands. If the US Supreme Court spends the next 30 years tearing away the rights of women, racial minorities, LGBT people, and the working class, it will be at least a little bit their fault. When the asbestos returns to our buildings, the ozone layer resumes its decay, and all the world’s coastlines flood ever higher, they will bear at least some responsibility. All their claimed devotion to a morally purer “true” left wing will mean absolutely nothing—for it was only our “cynical” “corrupt” “neoliberal” pragmatism that even tried to hold the line. It is not enough to deserve to win—you must actually win.

But it’s not too late. Not yet. We can still make our voices heard. If you have any doubt about whether your Senator will vote against Kavanaugh (living in California, I frankly don’t—say what you will about Dianne Feinstein and Kamala Harris, they have made their opposition to Kavanaugh abundantly clear at every opportunity), write or call that Senator and tell them why they must.

The confirmation vote is this Thursday, September 20. Make your voice heard by then, or it may be too late.

For labor day, thoughts on socialism

Planned Post 255: Sep 9 JDN 2458371

This week includes Labor Day, the holiday where we are perhaps best justified in taking the whole day off from work and doing nothing. Labor Day is sort of the moderate social democratic counterpart to the explicitly socialist holiday May Day.

The right wing in this country has done everything in their power to expand the definition of “socialism”, which is probably why most young people now have positive views of socialism. There was a time when FDR was seen as an alternative to socialism; but now I’m pretty sure he’d just be called a socialist.

Because of this, I am honestly not sure whether I should be considered a socialist. I definitely believe in the social democratic welfare state epitomized by Scandinavia, but I definitely don’t believe in total collectivization of all means of production.

I am increasingly convinced that shareholder capitalism is a terrible system (the renowned science fiction author Charles Stross actually gave an excellent talk on this subject), but I would not want to abandon free markets.
The best answer might be worker-owned cooperatives. The empirical data is actually quite consistent in showing worker co-ops to be as efficient if not more efficient than conventional corporations, and by construction their pay systems produce less inequality than corporations.

Indeed, I think there is reason to believe that a worker co-op is a much more natural outcome for free markets under a level playing field than a conventional corporation, and the main reason we have corporations is actually that capitalism arose out of (and in response to) feudalism.

Think about it: Why should most things be owned by the top 1%? (Okay, not quite “most”: to be fair, the top 1% only owns 40% of all US net wealth.) Why is 80% of the value of the stock market held by the top 10% of the population?

Most things aren’t done by the top 1%. There are a handful of individuals (namely, scientists who make seminal breakthroughs: Charles Darwin, Marie Curie, Albert Einstein, Rosalind Franklin, Alan Turing, Jonas Salk) who are so super-productive that they might conceivably deserve billionaire-level compensation—but they are almost never the ones who are actually billionaires. If markets were really distributing capital to those who would use it most productively, there’s no reason to think that inequality would be so self-sustaining—much less self-enhancing as it currently seems to be.

But when you realize that capitalism emerged out of a system where the top 1% (or less) already owned most things, and did so by a combination of “divine right” ideology and direct, explicit violence, this inequality becomes a lot less baffling. We never had a free market on a level playing field. The closest we’ve ever gotten has always been through social-democratic reforms (like the New Deal and Scandinavia).

How does this result in corporations? Well, when all the wealth is held by a small fraction of individuals, how do you start a business? You have to borrow money from the people who have it. Borrowing makes you beholden to your creditors, and puts you at great risk if your venture fails (especially back in the days when there were debtor’s prisons—and we’re starting to go back that direction!). Equity provides an alternative: In exchange for giving them the downside risk if your venture fails, you also give your creditors—now shareholders—the upside risk if your venture succeeds. But at the end of the day when your business has succeeded, where did most of the profits go? Into the hands of the people who already had money to begin with, who did nothing to actually contribute to society. The world would be better off if those people had never existed and their wealth had simply been shared with everyone else.

Compare this to what would happen if we all started with similar levels of wealth. (How much would each of us have? Total US wealth of about $44 trillion, spread among a population of 328 million, is about $130,000 each. I don’t know about you, but I think I could do quite a bit with that.) When starting a business, you wouldn’t go heavily into debt or sign away ownership of your company to some billionaire; you’d gather a group of dedicated partners, each of whom would contribute money and effort into building the business. As you added on new workers, it would make sense to pool their assets, and give them a share of the company as well. The natural structure for your business would be not a shareholder corporation, but a worker-owned cooperative.

I think on some level the super-rich actually understand this. If you look closely at the sort of policies they fight for, they really aren’t capitalist. They don’t believe in free, unfettered markets where competition reigns. They believe in monopoly, lobbying, corruption, nepotism, and above all, low taxes. (There’s actually nothing in the basic principles of capitalism that says taxes should be low. Taxes should be as high as they need to be to cover public goods—no higher, and no lower.) They don’t want to provide nationalized healthcare, not because they believe that private healthcare competition is more efficient (no one who looks at the data for even a few minutes can honestly believe that—US healthcare is by far the most expensive in the world), but because they know that it would give their employees too much freedom to quit and work elsewhere. Donald Trump doesn’t want a world where any college kid with a brilliant idea and a lot of luck can overthrow his empire; he wants a world where everyone owes him and his family personal favors that he can call in to humiliate them and exert his power. That’s not capitalism—it’s feudalism.

Crowdfunding also provides an interesting alternative; we might even call it the customer-owned cooperative. Kickstarter and Patreon provide a very interesting new economic model—still entirely within the realm of free markets—where customers directly fund production and interact with producers to decide what will be produced. This might turn out to be even more efficient—and notice that it would run a lot more smoothly if we had all started with a level playing field.

Establishing such a playing field, of course, requires a large amount of redistribution of wealth. Is this socialism? If you insist. But I think it’s more accurate to describe it as reparations for feudalism (not to mention colonialism). We aren’t redistributing what was fairly earned in free markets; we are redistributing what was stolen, so that from now on, wealth can be fairly earned in free markets.

We are in a golden age of corporate profits

Sep 2 JDN 245836

Take a good look at this graph, from the Federal Reserve Economic Database:

corporate_profits
The red line is corporate profits before tax. It is, unsurprisingly, the largest. The purple line is corporate profits after tax, with the standard adjustments for inventory depletion and capital costs. The green line is revenue from the federal corporate tax. Finally, I added a dashed blue line which multiplies before-tax profits by 30% to compare more directly with tax revenues. All these figures are annual, inflation-adjusted using the GDP deflator. The units are hundreds of billions of 2012 dollars.

The first thing you should notice is that the red and purple lines are near the highest they have ever been. Before-tax profits are over $2 trillion. After-tax profits are over $1.6 trillion.

Yet, corporate tax revenues are not the highest they have ever been. In 2006, they were over $400 billion; yet this year they don’t even reach $300 billion. The obvious reason for this is that we have been cutting corporate taxes. The more important reason is that corporations have gotten very good at avoiding whatever corporate taxes we charge.

On the books, we used to have a corporate tax rate of about 35%, which Trump just cut to 21%. But if you look at my dashed line, you can see that corporations haven’t actually paid more than 30% of their profits in taxes since 1970—and back then, the rate on the books was almost 50%.

Corporations have always avoided taxes. The effective tax rate—tax revenue divided by profits—is always much lower than the rate on the books. In 1951, the statutory tax rate was 50.75%; the effective rate was 47%. In 1970, the statutory rate was 49.2%; the effective rate was 31%. In 1993, the statutory rate was 35%; the effective rate was 26%. On average, corporations paid about 2/3 to 3/4 of what the statutory rate said.

corporate_tax_rate

You can even see how the effective rate trended steadily downward, much faster than the statutory rate. Corporations got better and better at finding and creating loopholes to let them avoid taxes. In 1950, the statutory rate was 38%—and sure enough, the effective rate was… 38%. Under Truman, corporations actually paid what they said they paid. Compare that to 1987, under Reagan, when the statutory rate was 40%—but the effective rate was only 26%.

Yet even with that downward trend, something happened under George W. Bush that widened the gap even further. While the statutory rate remained fixed at 35%, the effective rate plummeted from 26% in 2000 to 16% in 2002. The effective rate never again rose above 19%, and in 2009 it hit a minimum of just over 10%—less than one-third the statutory tax rate. It was trending upward, making it as “high” as 15%, until Trump’s tax cuts hit; in 2017 it was 13%, and it is projected to be even lower this year.

This is why it has always been disingenuous to compare our corporate tax rates with other countries and complain that they are too high. Our effective corporate tax rates have been in line with most other highly-developed countries for a long time now. The idea of “cutting rates and removing loopholes” sounds good in principle—but never actually seems to happen. George W. Bush’s “tax reforms” which were supposed to do this added so many loopholes that the effective tax rate plummeted.

I’m actually fairly ambivalent about corporate taxes in general. Their incidence really isn’t well-understood, though as Krugman has pointed out, so much of corporate profit is now monopoly rent that we can reasonably expect most of the incidence to fall on shareholders. What I’d really like to see happen is a repeal of the corporate tax combined with an increase in capital gains taxes. But we haven’t been increasing capital gains taxes; we’ve just been cutting corporate taxes.

The result has been a golden age for corporate profits. Make higher profits than ever before, and keep almost all of them without paying taxes! Nevermind that the deficit is exploding and our infrastructure is falling apart. America was founded in part on a hatred of taxes, so I guess we’re still carrying on that proud tradition.