public policy

Rethinking progressive taxation

PNRJ core principles, critique of neoclassical economics, ethics, inequality, public policy , , , , , , , , , , , , ,

Apr 17 JDN 2459687

There is an extremely common and quite bizarre result in the standard theory of taxation, which is that the optimal marginal tax rate for the highest incomes should be zero. Ever since that result came out, economists have basically divided into two camps.

The more left-leaning have said, “This is obviously wrong; so why is it wrong? What are we missing?”; the more right-leaning have said, “The model says so, so it must be right! Cut taxes on the rich!”

I probably don’t need to tell you that I’m very much in the first camp. But more recently I’ve come to realize that even the answers left-leaning economists have been giving for why this result is wrong are also missing something vital.

There have been papers explaining that “the zero top rate only applies at extreme incomes” (uh, $50 billion sounds pretty extreme to me!) or “the optimal tax system can be U-shaped” (I don’t want U-shaped—we’re not supposed to be taxing the poor!)


And many economists still seem to find it reasonable to say that marginal tax rates should decline over some significant part of the distribution.

In my view, there are really two reasons why taxes should be progressive, and they are sufficiently general reasons that they should almost always override other considerations.

The first is diminishing marginal utility of wealth. The real value of a dollar is much less to someone who already has $1 million than to someone who has only $100. Thus, if we want to raise the most revenue while causing the least pain, we typically want to tax people who have a lot of money rather than people who have very little.

But the right-wing economists have an answer to this one, based on these fancy models: Yes, taking a given amount from the rich would be better (a lump-sum tax), but you can’t do that; you can only tax their income at a certain rate. (So far, that seems right. Lump-sum taxes are silly and economists talk about them too much.) But the rich are rich because they are more productive! If you tax them more, they will work less, and that will harm society as a whole due to their lost productivity.

This is the fundamental intuition behind the “top rate should be zero” result: The rich are so fantastically productive that it isn’t worth it to tax them. We simply can’t risk them working less.

But are the rich actually so fantastically productive? Are they really that smart? Do they really work that hard?

If Tony Stark were real, okay, don’t tax him. He is a one-man Singularity: He invented the perfect power source on his own, “in a cave, with a box of scraps!”; he created a true AI basically by himself; he single-handedly discovered a new stable island element and used it to make his already perfect power source even better.

But despite what his fanboys may tell you, Elon Musk is not Tony Stark. Tesla and SpaceX have done a lot of very good things, but in order to do they really didn’t need Elon Musk for much. Mainly, they needed his money. Give me $270 billion and I could make companies that build electric cars and launch rockets into space too. (Indeed, I probably would—though I’d also set up some charitable foundations as well, more like what Bill Gates did with his similarly mind-boggling wealth.)

Don’t get me wrong; Elon Musk is a very intelligent man, and he works, if anything, obsessively. (He makes his employees work excessively too—and that’s a problem.) But if he were to suddenly die, as long as a reasonably competent CEO replaced him, Tesla and SpaceX would go on working more or less as they already do. The spectacular productivity of these companies is not due to Musk alone, but thousands of highly-skilled employees. These people would be productive if Musk had not existed, and they will continue to be productive once Musk is gone.

And they aren’t particularly rich. They aren’t poor either, mind you—a typical engineer at Tesla or SpaceX is quite well-paid, and rightly so. (Median salary at SpaceX is over $115,000.) These people are brilliant, tremendously hard-working, and highly productive; and they get quite well-paid. But very few of these people are in the top 1%, and basically none of them will ever be billionaires—let alone the truly staggering wealth of a hectobillionaire like Musk himself.

How, then, does one become a billionaire? Not by being brilliant, hard-working, or productive—at least that is not sufficient, and the existence of, say, Donald Trump suggests that it is not necessary either. No, the really quintessential feature every billionaire has is remarkably simple and consistent across the board: They own a monopoly.

You can pretty much go down the list, finding what monopoly each billionaire owned: Bill Gates owned software patents on (what is still) the most widely-used OS and office suite in the world. J.K. Rowling owns copyrights on the most successful novels in history. Elon Musk owns technology patents on various innovations in energy storage and spaceflight technology—very few of which he himself invented, I might add. Andrew Carnegie owned the steel industry. John D. Rockefeller owned the oil industry. And so on.

I honestly can’t find any real exceptions: Basically every billionaire either owned a monopoly or inherited from ancestors who did. The closest things to exceptions are billionaire who did something even worse, like defrauding thousands of people, enslaving an indigenous population or running a nation with an iron fist. (And even then, Leopold II and Vladimir Putin both exerted a lot of monopoly power as part of their murderous tyranny.)

In other words, billionaire wealth is almost entirely rent. You don’t earn a billion dollars. You don’t get it by working. You get it by owning—and by using that ownership to exert monopoly power.

This means that taxing billionaire wealth wouldn’t incentivize them to work less; they already don’t work for their money. It would just incentivize them to fight less hard at extracting wealth from everyone else using their monopoly power—which hardly seems like a downside.

Since virtually all of the wealth at the top is simply rent, we have no reason not to tax it away. It isn’t genuine productivity at all; it’s just extracting wealth that other people produced.

Thus, my second, and ultimately most decisive reason for wanting strongly progressive taxes: rent-seeking. The very rich don’t actually deserve the vast majority of what they have, and we should take it back so that we can give it to people who really need and deserve it.

Now, there is a somewhat more charitable version of the view that high taxes even on the top 0.01% would hurt productivity, and it is worth addressing. That is based on the idea that entrepreneurship is valuable, and part of the incentive for becoming and entrepreneur is the chance at one day striking it fabulously rich, so taxing the fabulously rich might result in a world of fewer entrepreneurs.

This isn’t nearly as ridiculous as the idea that Elon Musk somehow works a million times as hard as the rest of us, but it’s still pretty easy to find flaws in it.

Suppose you were considering starting a business. Indeed, perhaps you already have considered it. What are your main deciding factors in whether or not you will?

Surely they do not include the difference between a 0.0001% chance of making $200 billion and a 0.0001% chance of making $50 billion. Indeed, that probably doesn’t factor in at all; you know you’ll almost certainly never get there, and even if you did, there’s basically no real difference in your way of life between $50 billion and $200 billion.

No, more likely they include things like this: (1) How likely are you to turn a profit at all? Even a profit of $50,000 per year would probably be enough to be worth it, but how sure are you that you can manage that? (2) How much funding can you get to start it in the first place? Depending on what sort of business you’re hoping to found, it could be as little as thousands or as much as millions of dollars to get it set up, well before it starts taking in any revenue. And even a few thousand is a lot for most middle-class people to come up with in one chunk and be willing to risk losing.

This means that there is a very simple policy we could implement which would dramatically increase entrepreneurship while taxing only billionaires more, and it goes like this: Add an extra 1% marginal tax to capital gains for billionaires, and plow it into a fund that gives grants of $10,000 to $100,000 to promising new startups.

That 1% tax could raise several billion dollars a year—yes, really; US billionaires gained some $2 trillion in capital gains last year, so we’d raise $20 billion—and thereby fund many, many startups. Say the average grant is $20,000 and the total revenue is $20 billion; that’s one million new startups funded every single year. Every single year! Currently, about 4 million new businesses are founded each year in the US (leading the world by a wide margin); this could raise that to 5 million.

So don’t tell me this is about incentivizing entrepreneurship. We could do that far better than we currently do, with some very simple policy changes.

Meanwhile, the economics literature on optimal taxation seems to be completely missing the point. Most of it is still mired in the assumption that the rich are rich because they are productive, and thus terribly concerned about the “trade-off” between efficiency and equity involved in higher taxes. But when you realize that the vast, vast majority—easily 99.9%—of billionaire wealth is unearned rents, then it becomes obvious that this trade-off is an illusion. We can improve efficiency and equity simultaneously, by taking some of this ludicrous hoard of unearned wealth and putting it back into productive activities, or giving it to the people who need it most. The only people who will be harmed by this are billionaires themselves, and by diminishing marginal utility of wealth, they won’t be harmed very much.

Fortunately, the tide is turning, and more economists are starting to see the light. One of the best examples comes from Piketty, Saez, and Stantcheva in their paper on how CEO “pay for luck” (e.g. stock options) respond to top tax rates. There are a few other papers that touch on similar issues, such as Lockwood, Nathanson, and Weyl and Rothschild and Scheuer. But there’s clearly a lot of space left for new work to be done. The old results that told us not to raise taxes were wrong on a deep, fundamental level, and we need to replace them with something better.

The alienation of labor

PNRJ core principles, critique of neoclassical economics, development economics, ethics, futurism, inequality, public policy, science and academia , , , , , , , ,

Apr 10 JDN 2459680

Marx famously wrote that capitalism “alienates labor”. Much ink has been spilled over interpreting exactly what he meant by that, but I think the most useful and charitable reading goes something like the following:

When you make something for yourself, it feels fully yours. The effort you put into it feels valuable and meaningful. Whether you’re building a house to live in it or just cooking an omelet to eat it, your labor is directly reflected in your rewards, and you have a clear sense of purpose and value in what you are doing.

But when you make something for an employer, it feels like theirs, not yours. You have been instructed by your superiors to make a certain thing a certain way, for reasons you may or may not understand (and may or may not even agree with). Once you deliver the product—which may be as concrete as a carburetor or as abstract as an accounting report—you will likely never see it again; it will be used or not by someone else somewhere else whom you may not even ever get the chance to meet. Such labor feels tedious, effortful, exhausting—and also often empty, pointless, and meaningless.

On that reading, Marx isn’t wrong. There really is something to this. (I don’t know if this is really Marx’s intended meaning or not, and really I don’t much care—this is a valid thing and we should be addressing it, whether Marx meant to or not.)

There is a little parable about this, which I can’t quite remember where I heard:

Three men are moving heavy stones from one place to another. A traveler passes by and asks them, “What are you doing?”

The first man sighs and says, “We do whatever the boss tells us to do.”

The second man shrugs and says, “We pick up the rocks here, we move them over there.”

The third man smiles and says, “We’re building a cathedral.”

The three answers are quite different—yet all three men may be telling the truth as they see it.

The first man is fully alienated from his labor: he does whatever the boss says, following instructions that he considers arbitrary and mechanical. The second man is partially alienated: he knows the mechanics of what he is trying to accomplish, which may allow him to improve efficiency in some way (e.g. devise better ways to transport the rocks faster or with less effort), but he doesn’t understand the purpose behind it all, so ultimately his work still feels meaningless. But the third man is not alienated: he understands the purpose of his work, and he values that purpose. He sees that what he is doing is contributing to a greater whole that he considers worthwhile. It’s not hard to imagine that the third man will be the happiest, and the first will be the unhappiest.

There really is something about the capitalist wage-labor structure that can easily feed into this sort of alienation. You get a job because you need money to live, not because you necessarily value whatever the job does. You do as you are told so that you can keep your job and continue to get paid.

Some jobs are much more alienating than others. Most teachers and nurses see their work as a vocation, even a calling—their work has deep meaning for them and they value its purpose. At the other extreme there are corporate lawyers and derivatives traders, who must on some level understand that their work contributes almost nothing to the world (may in fact actively cause harm), but they continue to do the work because it pays them very well.

But there are many jobs in between which can be experienced both ways. Working in retail can be an agonizing grind where you must face a grueling gauntlet of ungrateful customers day in and day out—or it can be a way to participate in your local community and help your neighbors get the things they need. Working in manufacturing can be a mechanical process of inserting tab A into slot B and screwing it into place over, and over, and over again—or it can be a chance to create something, convert raw materials into something useful and valuable that other people can cherish.

And while individual perspective and framing surely matter here—those three men were all working in the same quarry, building the same cathedral—there is also an important objective component as well. Working as an artisan is not as alienating as working on an assembly line. Hosting a tent at a farmer’s market is not as alienating as working the register at Walmart. Tutoring an individual student is more purposeful than recording video lectures for a MOOC. Running a quirky local book store is more fulfilling than stocking shelves at Barnes & Noble.

Moreover, capitalism really does seem to push us more toward the alienating side of the spectrum. Assembly lines are far more efficient than artisans, so we make most of our products on assembly lines. Buying food at Walmart is cheaper and more convenient than at farmer’s markets, so more people shop there. Hiring one video lecturer for 10,000 students is a lot cheaper than paying 100 in-person lecturers, let alone 1,000 private tutors. And Barnes & Noble doesn’t drive out local book stores by some nefarious means: It just provides better service at lower prices. If you want a specific book for a good price right now, you’re much more likely to find it at Barnes & Noble. (And even more likely to find it on Amazon.)

Finding meaning in your work is very important for human happiness. Indeed, along with health and social relationships, it’s one of the biggest determinants of happiness. For most people in First World countries, it seems to be more important than income (though income certainly does matter).

Yet the increased efficiency and productivity upon which our modern standard of living depends seems to be based upon a system of production—in a word, capitalism—that systematically alienates us from meaning in our work.

This puts us in a dilemma: Do we keep things as they are, accepting that we will feel an increasing sense of alienation and ennui as our wealth continues to grow and we get ever-fancier toys to occupy our meaningless lives? Or do we turn back the clock, returning to a world where work once again has meaning, but at the cost of making everyone poorer—and some people desperately so?

Well, first of all, to some extent this is a false dichotomy. There are jobs that are highly meaningful but also highly productive, such as teaching and engineering. (Even recording a video lecture is a lot more fulfilling than plenty of jobs out there.) We could try to direct more people into jobs like these. There are jobs that are neither particularly fulfilling nor especially productive, like driving trucks, washing floors and waiting tables. We could redouble our efforts into automating such jobs out of existence. There are meaningless jobs that are lucrative only by rent-seeking, producing little or no genuine value, like the aforementioned corporate lawyers and derivatives traders. These, quite frankly, could simply be banned—or if there is some need for them in particular circumstances (I guess someone should defend corporations when they get sued; but they far more often go unjustly unpunished than unjustly punished!), strictly regulated and their numbers and pay rates curtailed.

Nevertheless, we still have decisions to make, as a society, about what we value most. Do we want a world of cheap, mostly adequate education, that feels alienating even to the people producing it? Then MOOCs are clearly the way to go; pennies on the dollar for education that could well be half as good! Or do we want a world of high-quality, personalized teaching, by highly-qualified academics, that will help students learn better and feel more fulfilling for the teachers? More pointedly—are we willing to pay for that higher-quality education, knowing it will be more expensive?

Moreover, in the First World at least, our standard of living is… pretty high already? Like seriously, what do we really need that we don’t already have? We could always imagine more, of course—a bigger house, a nicer car, dining at fancier restaurants, and so on. But most of us have roofs over our heads, clothes on our backs, and food on our tables.

Economic growth has done amazing things for us—but maybe we’re kind of… done? Maybe we don’t need to keep growing like this, and should start redirecting our efforts away from greater efficiency and toward greater fulfillment. Maybe there are economic possibilities we haven’t been considering.

Note that I specifically mean First World countries here. In Third World countries it’s totally different—they need growth, lots of it, as fast as possible. Fulfillment at work ends up being a pretty low priority when your children are starving and dying of malaria.

But then, you may wonder: If we stop buying cheap plastic toys to fill the emptiness in our hearts, won’t that throw all those Chinese factory workers back into poverty?

In the system as it stands? Yes, that’s a real concern. A sudden drop in consumption spending in general, or even imports in particular, in First World countries could be economically devastating for millions of people in Third World countries.

But there’s nothing inherent about this arrangement. There are less-alienating ways of working that can still provide a decent standard of living, and there’s no fundamental reason why people around the world couldn’t all be doing them. If they aren’t, it’s in the short run because they don’t have the education or the physical machinery—and in the long run it’s usually because their government is corrupt and authoritarian. A functional democratic government can get you capital and education remarkably fast—it certainly did in South Korea, Taiwan, and Japan.

Automation is clearly a big part of the answer here. Many people in the First World seem to suspect that our way of life depends upon the exploited labor of impoverished people in Third World countries, but this is largely untrue. Most of that work could be done by robots and highly-skilled technicians and engineers; it just isn’t because that would cost more. Yes, that higher cost would mean some reduction in standard of living—but it wouldn’t be nearly as dramatic as many people seem to think. We would have slightly smaller houses and slightly older cars and slightly slower laptops, but we’d still have houses and cars and laptops.

So I don’t think we should all cast off our worldly possessions just yet. Whether or not it would make us better off, it would cause great harm to countries that depend on their exports to us. But in the long run, I do think we should be working to achieve a future for humanity that isn’t so obsessed with efficiency and growth, and instead tries to provide both a decent standard of living and a life of meaning and purpose.

The economic impact of chronic illness

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

Mar 27 JDN 2459666

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

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

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

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

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

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

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

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

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

Russia has invaded Ukraine.

PNRJ core principles, current events, politics, public policy, tribal paradigm , , , , , , , , , , ,

Mar 6 JDN 2459645

Russia has invaded Ukraine. No doubt you have heard it by now, as it’s all over the news now in dozens of outlets, from CNN to NBC to The Guardian to Al-Jazeera. And as well it should be, as this is the first time in history that a nuclear power has annexed another country. Yes, nuclear powers have fought wars before—the US just got out of one in Afghanistan as you may recall. They have even started wars and led invasions—the US did that in Iraq. And certainly, countries have been annexing and conquering other countries for millennia. But never before—never before, in human history—has a nuclear-armed state invaded another country simply to claim it as part of itself. (Trump said he thought the US should have done something like that, and the world was rightly horrified.)

Ukraine is not a nuclear power—not anymore. The Soviet Union built up a great deal of its nuclear production in Ukraine, and in 1991 when Ukraine became independent it still had a sizable nuclear arsenal. But starting in 1994 Ukraine began disarming that arsenal, and now it is gone. Now that Russia has invaded them, the government of Ukraine has begun publicly reconsidering their agreements to disarm their nuclear arsenal.

Russia’s invasion of Ukraine has just disproved the most optimistic models of international relations, which basically said that major power wars for territory were over at the end of WW2. Some thought it was nuclear weapons, others the United Nations, still others a general improvement in trade integration and living standards around the world. But they’ve all turned out to be wrong; maybe such wars are rarer, but they can clearly still happen, because one just did.

I would say that only two major theories of the Long Peace are still left standing in light of this invasion, and that is nuclear deterrence and the democratic peace. Ukraine gave up its nuclear arsenal and later got attacked—that’s consistent with nuclear deterrence. Russia under Putin is nearly as authoritarian as the Soviet Union, and Ukraine is a “hybrid regime” (let’s call it a solid D), so there’s no reason the democratic peace would stop this invasion. But any model which posits that trade or the UN prevent war is pretty much off the table now, as Ukraine had very extensive trade with both Russia and the EU and the UN has been utterly toothless so far. (Maybe we could say the UN prevents wars except those led by permanent Security Council members.)

Well, then, what if the nuclear deterrence theory is right? What would have happened if Ukraine had kept its nuclear weapons? Would that have made this situation better, or worse? It could have made it better, if it acted as a deterrent against Russian aggression. But it could also have made it much, much worse, if it resulted in a nuclear exchange between Russia and Ukraine.

This is the problem with nukes. They are not a guarantee of safety. They are a guarantee of fat tails. To explain what I mean by that, let’s take a brief detour into statistics.

A fat-tailed distribution is one for which very extreme events have non-negligible probability. For some distributions, like a uniform distribution, events are clearly contained within a certain interval and nothing outside is even possible. For others, like a normal distribution or lognormal distribution, extreme events are theoretically possible, but so vanishingly improbable they aren’t worth worrying about. But for fat-tailed distributions like a Cauchy distribution or a Pareto distribution, extreme events are not so improbable. They may be unlikely, but they are not so unlikely they can simply be ignored. Indeed, they can actually dominate the average—most of what happens, happens in a handful of extreme events.

Deaths in war seem to be fat-tailed, even in conventional warfare. They seem to follow a Pareto distribution. There are lots of tiny skirmishes, relatively frequent regional conflicts, occasional major wars, and a handful of super-deadly global wars. This kind of pattern tends to emerge when a phenomenon is self-reinforcing by positive feedback—hence why we also see it in distributions of income and wildfire intensity.

Fat-tailed distributions typically (though not always—it’s easy to construct counterexamples, like the Cauchy distribution with low values truncated off) have another property as well, which is that minor events are common. More common, in fact, than they would be under a normal distribution. What seems to happen is that the probability mass moves away from the moderate outcomes and shifts to both the extreme outcomes and the minor ones.

Nuclear weapons fit this pattern perfectly. They may in fact reduce the probability of moderate, regional conflicts, in favor of increasing the probability of tiny skirmishes or peaceful negotiations. But they also increase the probability of utterly catastrophic outcomes—a full-scale nuclear war could kill billions of people. It probably wouldn’t wipe out all of humanity, and more recent analyses suggest that a catastrophic “nuclear winter” is unlikely. But even 2 billion people dead would be literally the worst thing that has ever happened, and nukes could make it happen in hours when such a death toll by conventional weapons would take years.

If we could somehow guarantee that such an outcome would never occur, then the lower rate of moderate conflicts nuclear weapons provide would justify their existence. But we can’t. It hasn’t happened yet, but it doesn’t have to happen often to be terrible. Really, just once would be bad enough.

Let us hope, then, that the democratic peace turns out to be the theory that’s right. Because a more democratic world would clearly be better—while a more nuclearized world could be better, but could also be much, much worse.

Who still uses cash?

PNRJ current events, macroeconomics, public policy , , , , , , , , , , ,

Feb 27 JDN 2459638

If you had to guess, what is the most common denomination of US dollar bills? You might check your wallet: $1? $20?

No, it’s actually $100. There are 13.1 billion $1 bills, 11.7 billion $20 bills, and 16.4 billion $100 bills. And since $100 bills are worth more, the vast majority of US dollar value in circulation is in those $100 bills—indeed, $1.64 trillion of the total $2.05 trillion cash supply.

This is… odd, to say the least. When’s the last time you spent a $100 bill? Then again, when’s the last time you spent… cash? In a typical week, 30% of Americans use no cash at all.

In the United States, cash is used for 26% of transactions, compared to 28% for debit card and 23% for credit cards. The US is actually a relatively cash-heavy country by First World standards. In the Netherlands and Scandinavia, cash is almost unheard of. When I last visited Amsterdam a couple of months ago, businesses were more likely to take US credit cards than they were to take cash euros.

A list of countries most reliant on cash shows mostly very poor countries, like Chad, Angola, and Burkina Faso. But even in Sub-Saharan Africa, mobile money is dominant in Botswana, Kenya and Uganda.

And yet the cash money supply is still quite large: $2.05 trillion is only a third of the US monetary base, but it’s still a huge amount of money. If most people aren’t using it, who is? And why is so much of it in the form of $100 bills?

It turns out that the answer to the second question can provide an answer to the first. $100 bills are not widely used for consumer purchases—indeed, most businesses won’t even accept them. (Honestly that has always bothered me: What exactly does “legal tender” mean, if you’re allowed to categorically refuse $100 bills? It’d be one thing to say “we can’t accept payment when we can’t make change”, and obviously nobody seriously expects you to accept $10,000 bills; but what if you have a $97 purchase?) When people spend cash, it’s mainly ones, fives, and twenties.

Who uses $100 bills? People who want to store money in a way that is anonymous, easily transportable—including across borders—and stable against market fluctuations. Drug dealers leap to mind (and indeed the money-laundering that HSBC did for drug cartels was largely in the form of thick stacks of $100 bills). Of course it isn’t just drug dealers, or even just illegal transactions, but it is mostly people who want to cross borders. 80% of US $100 bills are in circulation outside the United States. Since 80% of US cash is in the form of $100 bills, this means that nearly two-thirds of all US dollars are outside the US.

Knowing this, I have to wonder: Why does the Federal Reserve continue printing so many $100 bills? Okay, once they’re out there, it may be hard to get them back. But they do wear out eventually. (In fact, US dollars wear out faster than most currencies, because they are made of linen instead of plastic. Surprisingly, this actually makes them less eco-friendly despite being more biodegradable. Of course, the most eco-friendly method of payment is mobile payments, since their marginal environmental impact is basically zero.) So they could simply stop printing them, and eventually the global supply would dwindle.

They clearly haven’t done this—indeed, there were more $100 bills printed last year than any previous year, increasing the global supply by 2 billion bills, or $200 billion. Why not? Are they trying to keep money flowing for drug dealers? Even if the goal is to substitute for failing currencies in other countries (a somewhat odd, if altruistic, objective), wouldn’t that be more effective with $1 and $5 bills? $100 is a lot of money for people in Chad or Angola! Chad’s per-capita GDP is a staggeringly low $600 per year; that means that a $100 bill to a typical person in Chad would be like me holding onto a $10,000 bill (those exist, technically). Surely they’d prefer $1 bills—which would still feel to them like $100 bills feel to me. Even in middle-income countries, $100 is quite a bit; Ecuador actually uses the US dollar as its main currency, but their per-capita GDP is only $5,600, so $100 to them feels like $1000 to us.

If you want to usefully increase the money supply to stimulate consumer spending, print $20 bills—or just increase some numbers in bank reserve accounts. Printing $100 bills is honestly baffling to me. It seems at best inept, and at worst possibly corrupt—maybe they do want to support drug cartels?

Basic income reconsidered

PNRJ development economics, inequality, politics, public policy , , ,

Feb 20 JDN 2459631

In several previous posts I have sung the praises of universal basic income (though I have also tried to acknowledge the challenges involved).

In this post I’d like to take a step back and reconsider the question of whether basic income is really the best approach after all. One nagging thought keeps coming back to me, and it is the fact that basic income is extremely expensive.

About 11% of the US population lives below the standard poverty line. There are many criticisms of the standard poverty line: Some say it’s too high, because you can compare it favorably with middle-class incomes in much poorer countries. Others say it’s too low, because income at that level doesn’t allow people to really live in financial security. There are many difficult judgment calls that go into devising a poverty threshold, and we can reasonably debate whether the right ones were made here.

However, I think this threshold is at least approximately correct; maybe the true poverty threshold for a household of 1 should be not $12,880 but $11,000 or $15,000, but I don’t think it should be $5,000 or $25,000. Maybe for a household of 4 it should be not $26,500 but $19,000 or $32,000; but I don’t think it should be $12,000 or $40,000.

So let’s suppose that we wanted to implement a universal basic income in the United States that would lift everyone out of poverty. We could essentially do that by taking the 2-person-household threshold of $17,420 and dividing it by 2, yielding $8,710 per person per year. (Why not use the 1-person-household threshold? There aren’t very many 1-person households in poverty, and that threshold would be considerably higher and thus considerably more expensive. A typical poor household is a single parent and one or more children; as long as kids get the basic income, that household would be above the threshold in this system.)

The US population is currently about 331 million people. If every single one of them were to receive a basic income of $8,710, that would cost nearly $2.9 trillion per year. This is a feasible amount—it’s less than half the current total federal budget—but it is still a very large amount. The tax increases required to support it would be massive, and that’s probably why, despite ostensibly bipartisan support for the idea of a basic income, no serious proposal has ever gotten off of the ground.

If on the other hand we were to only give the basic income to people below the poverty line, that would cost only 11% of that amount: A far more manageable $320 billion per year.

We don’t want to do exactly that, however, because it would create all kinds of harmful distortions in the economy. Consider someone who is just below the threshold, considering whether to take on more work or get a higher-paying job. If their household pre-tax income is currently $15,000 and they could raise it to $18,000, a basic income given only to people below the threshold would mean that they are choosing between $15,000+$17,000=$32,000 if they keep their current work and $18,000 if they increase it. Clearly, they would not want to take on more work. That’s a terrible system—it amounts to a marginal tax rate above 100%.

Another possible method would be to simply top off people’s income, give them whatever they need to get to the poverty line but no more. (This would actually be even cheaper; it would probably cost something more like $160 billion per year.) That removes the distortion for people near the threshold, at the cost of making it much worse for those far below the threshold. Someone considering whether to work for $7,000 or work for $11,000 is, in such a system, choosing whether to work less for $17,000 or work more for… $17,000. They will surely choose to work less.

In order to solve these problems, what we would most likely need to do is gradually phase out the basic income, so that say increasing your pre-tax income by $1.00 would decrease your basic income payment by $0.50. The cost of this system would be somewhere in between that of a truly universal basic income and a threshold-based system, so let’s ballpark that as around $600 billion per year. It would effectively implement a marginal tax rate of 50% for anyone who is receiving basic income payments.

In theory, this is probably worse than a universal basic income, because in the latter case you can target the taxes however you like—and thus (probably) make them less cause less distortion than the phased-out basic income system would. But in practice, a truly universal basic income might simply not be politically viable, and some kind of phased-out system seems much more likely to actually get passed.


Even then, I confess I am not extremely optimistic. For some reason, everyone seems to want to end poverty, but very few seem willing to use the obvious solution: Give poor people money.

Cryptocurrency and its failures

PNRJ core principles, current events, ethics, financial advice, financial fraud, futurism, inequality, market failure, politics, public policy , , , , , ,

Jan 30 JDN 2459620

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Keynesian economics: It works, bitches

PNRJ current events, macroeconomics, public policy , , , , ,

Jan 23 JDN 2459613

(I couldn’t resist; for the uninitiated, my slightly off-color title is referencing this XKCD comic.)

When faced with a bad recession, Keynesian economics prescribes the following response: Expand the money supply. Cut interest rates. Increase government spending, but decrease taxes. The bigger the recession, the more we should do all these things—especially increasing spending, because interest rates will often get pushed to zero, creating what’s called a liquidity trap.

Take a look at these two FRED graphs, both since the 1950s.
The first is interest rates (specifically the Fed funds effective rate):

The second is the US federal deficit as a proportion of GDP:

Interest rates were pushed to zero right after the 2008 recession, and didn’t start coming back up until 2016. Then as soon as we hit the COVID recession, they were dropped back to zero.

The deficit looks even more remarkable. At the 2009 trough of the recession, the deficit was large, nearly 10% of GDP; but then it was quickly reduced back to normal, to between 2% and 4% of GDP. And that initial surge is as much explained by GDP and tax receipts falling as by spending increasing.

Yet in 2020 we saw something quite different: The deficit became huge. Literally off the chart, nearly 15% of GDP. A staggering $2.8 trillion. We’ve not had a deficit that large as a proportion of GDP since WW2. We’ve never had a deficit that large in real billions of dollars.

Deficit hawks came out of the woodwork to complain about this, and for once I was worried they might actually be right. Their most credible complaint was that it would trigger inflation, and they weren’t wrong about that: Inflation became a serious concern for the first time in decades.

But these recessions were very large, and when you actually run the numbers, this deficit was the correct magnitude for what Keynesian models tell us to do. I wouldn’t have thought our government had the will and courage to actually do it, but I am very glad to have been wrong about that, for one very simple reason:

It worked.

In 2009, we didn’t actually fix the recession. We blunted it; we stopped it from getting worse. But we never really restored GDP, we just let it get back to its normal growth rate after it had plummeted, and eventually caught back up to where we had been.

2021 went completely differently. With a much larger deficit, we fixed this recession. We didn’t just stop the fall; we reversed it. We aren’t just back to normal growth rates—we are back to the same level of GDP, as if the recession had never happened.

This contrast is quite obvious from the GDP of US GDP:

In 2008 and 2009, GDP slumps downward, and then just… resumes its previous trend. It’s like we didn’t do anything to fix the recession, and just allowed the overall strong growth of our economy to carry us through.

The pattern in 2020 is completely different. GDP plummets downward—much further, much faster than in the Great Recession. But then it immediately surges back upward. By the end of 2021, it was above its pre-recession level, and looks to be back on its growth trend. With a recession this deep, if we’d just waited like we did last time, it would have taken four or five years to reach this point—we actually did it in less than one.

I wrote earlier about how this is a weird recession, one that actually seems to fit Real Business Cycle theory. Well, it was weird in another way as well: We fixed it. We actually had the courage to do what Keynes told us to do in 1936, and it worked exactly as it was supposed to.

Indeed, to go from unemployment almost 15% in April of 2020 to under 4% in December of 2021 is fast enough I feel like I’m getting whiplash. We have never seen unemployment drop that fast. Krugman is fond of comparing this to “morning in America”, but that’s really an understatement. Pitch black one moment, shining bright the next: this isn’t a sunrise, it’s pulling open a blackout curtain.

And all of this while the pandemic is still going on! The omicron variant has brought case numbers to their highest levels ever, though fortunately death rates so far are still below last year’s peak.

I’m not sure I have the words to express what a staggering achievement of economic policy it is to so rapidly and totally repair the economic damage caused by a pandemic while that pandemic is still happening. It’s the equivalent of repairing an airplane that is not only still in flight, but still taking anti-aircraft fire.

Why, it seems that Keynes fellow may have been onto something, eh?

Reasons for optimism in 2022

PNRJ current events, futurism, public policy , , , , , , , , ,

Jan 2 JDN 2459582

When this post goes live, we will have begun the year 2022.

That still sounds futuristic, somehow. We’ve been in the 20th century long enough that most of my students were born in it and nearly all of them are old enough to drink (to be fair, it’s the UK, so “old enough to drink” only means 18). Yet “the year 2022” still seems like it belongs in science fiction, and not on our wall calendars.

2020 and 2021 were quite bad years. Death rates and poverty rates surged around the world. Almost all of that was directly or indirectly due to COVID.

Yet there are two things we should keep in perspective.

First, those death rates and poverty rates surged to what we used to consider normal 50 years ago. These are not uniquely bad times; indeed, they are still better than most of human history.

Second, there are many reasons to think that 2022—or perhaps a bit later than that, 2025 or 2030—will be better.

The Omicron variant is highly contagious, but so far does not appear to be as deadly as previous variants. COVID seems to be evolving to be more like influenza: Catching it will be virtually inevitable, but dying from it will be very rare.

Things are also looking quite good on the climate change front: Renewable energy production is growing at breathtaking speed and is now cheaper than almost every other form of energy. It’s awful that we panicked and locked down nuclear energy for the last 50 years, but at this point we may no longer need it: Solar and wind are just that good now.

Battery technology is also rapidly improving, giving us denser, cheaper, more stable batteries that may soon allow us to solve the intermittency problem: the wind may not always blow and the sun may not always shine, but if you have big enough batteries you don’t need them to. (You can get a really good feel for how much difference good batteries make in energy production by playing Factorio, or, more whimsically, Mewnbase.)

If we do go back to nuclear energy, it may not be fission anymore, but fusion. Now that we have nearly reached that vital milestone of break-even, investment in fusion technology has rapidly increased.


Fusion has basically all of the benefits of fission with none of the drawbacks. Unlike renewables, it can produce enormous amounts of energy in a way that can be easily scaled and controlled independently of weather conditions. Unlike fission, it requires no exotic nuclear fuels (deuterium can be readily attained from water), and produces no long-lived radioactive waste. (Indeed, development is ongoing of methods that could use fusion products to reduce the waste from fission reactors, making the effective rate of nuclear waste production for fusion negative.) Like both renewables and fission, it produces no carbon emissions other than those required to build the facility (mainly due to concrete).

Of course, technology is only half the problem: we still need substantial policy changes to get carbon emissions down. We’ve already dragged our feet for decades too long, and we will pay the price for that. But anyone saying that climate change is an inevitable catastrophe hasn’t been paying attention to recent developments in solar panels.

Technological development in general seems to be speeding up lately, after having stalled quite a bit in the early 2000s. Moore’s Law may be leveling off, but the technological frontier may simply be moving away from digital computing power and onto other things, such as biotechnology.

Star Trek told us that we’d have prototype warp drives by the 2060s but we wouldn’t have bionic implants to cure blindness until the 2300s. They seem to have gotten it backwards: We may never have warp drive, but we’ve got those bionic implants today.

Neural interfaces are allowing paralyzed people to move, speak, and now even write.

After decades of failed promises, gene therapy is finally becoming useful in treating real human diseases. CRISPR changes everything.

We are also entering a new era of space travel, thanks largely to SpaceX and their remarkable reusable rockets. The payload cost to LEO is a standard measure of the cost of space travel, which describes the cost of carrying a certain mass of cargo up to low Earth orbit. By this measure, costs have declined from nearly $20,000 per kg to only $1,500 per kg since the 1960s. Elon Musk claims that he can reduce the cost to as low as $10 per kg. I’m skeptical, to say the least—but even dropping it to $500 or $200 would be a dramatic improvement and open up many new options for space exploration and even colonization.

To put this in perspective, the cost of carrying a human being to the International Space Station (about 100 kg to LEO) has fallen from $2 million to $150,000. A further decrease to $200 per kg would lower that to $20,000, opening the possibility of space tourism; $20,000 might be something even upper-middle-class people could do as a once-in-a-lifetime vacation. If Musk is really right that he can drop it all the way to $10 per kg, the cost to carry a person to the ISS would be only $1000—something middle-class people could do regularly. (“Should we do Paris for our anniversary this year, or the ISS?”) Indeed, a cost that low would open the possibility of space-based shipping—for when you absolutely must have the product delivered from China to California in the next 2 hours.

Another way to put this in perspective is to convert these prices per mass in terms of those of commodities, such as precious metals. $20,000 per kg is nearly the price of solid platinum. $500 per kg is about the price of sterling silver. $10 per kg is roughly the price of copper.

The reasons for optimism are not purely technological. There has also been significant social progress just in the last few years, with major milestones on LGBT rights being made around the world in 2020 and 2021. Same-sex marriage is now legally recognized over nearly the entire Western Hemisphere.

None of that changes the fact that we are still in a global pandemic which seems to be increasingly out of control. I can’t tell you whether 2022 will be better than 2021, or just more of the same—or perhaps even worse.

But while these times are hard, overall the world is still making progress.

Low-skill jobs

PNRJ ethics, inequality, market failure, public policy , , , ,

Dec 5 JDN 2459554

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

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

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

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

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

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

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

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

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

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

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

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

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

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