Just how rich is rich?

May 26 JDN 2458630

I think if there is one single thing I would like more people to know about economics, it is the sheer magnitude of global inequality. Most people seem to have no idea just how rich some people are—and how poor so many others are. They have a vision in their head of what “rich” and “poor” are, and their “rich” is a low-level Wall Street trader making $400,000 a year (the kind of people Gordon Gekko mocks in the film), and “poor” is someone who lives under a bridge in New York City. (They’re both New Yorkers, I guess. New Yorkers seem to be the iconic Americans, which is honestly more representative than you might think—80% of Americans live in urban or suburban areas.)

If we take a global perspective, this is not what “rich” and “poor” truly mean.

In next week’s post I’ll talk about what “poor” means. It’s really appallingly bad. We have to leave the First World in order to find it; many people here are poor, but not that poor. It’s so bad that I think once you really understand it, it can’t but change your whole outlook on the world. But I’m saving that for next week.

This week, I’ll talk about what “rich” really means in today’s world. We needn’t leave the United States, for the top 3 and 6 of the top 10 richest people in the world live here. And they are all White men, by the way, though Carlos Slim and Amancio Ortega are at least Latino.

Going down the list of billionaires ranked by wealth, you have to get down to 15th place before encountering a woman, and it’s really worse than that, because Francoise Bettencourt (15), Alice Walton (17), Jacqueline Mars (33), Yang Huiyan (42), Susan Klatton (46), Laurena Powell-Jobs (54), Abigail Johnson (71), and Iris Fontbona (74) are all heirs. The richest living woman who didn’t simply inherit from her father or husband is actually Gina Rinehart, the 75th richest person in the world. (And note that, while also in some sense an heir, Queen Elizabeth is not on that list; in fact, she’s nowhere near the richest people in the world. She’s not in the top 500.)

You have to get to 20th place before encountering someone non-White (Ma Huateng), and all the way down to 65th before encountering someone not White or East Asian (the Hinduja brothers). Not one of the top 100 richest people is Black.

Just how rich are these people? Well, there’s a meme going around saying that Jeff Bezos could afford to buy every homeless person in the world a house at median market price and still, with just what’s left over, be a multi-billionaire among the top 100 richest people in the world.

And that meme is completely correct. The math checks out.

There are about 554,000 homeless people in the US at any given time.

The median sale price of a currently existing house in the US is about $253,000.

Multiply those two numbers together, and you get $140 billion.

And Jeff Bezos has net wealth of $157 billion.

This means that he would still have $17 billion left after buying all those houses. The 100th richest person in the world has $13 billion, so Jeff Bezos would still be higher than that.

Even $17 billion is enough to spend over $2 million every single day—over $20 per second—and never run out of money as long as the dividends keep paying out.

Jeff Bezos in fact made so much in dividends and capital gains this past quarter that he was taking in as much money as the median Amazon employee’s annual salary—which is more than what I make as a grad student, and only slightly less than the median US individual incomeevery nine seconds. Yes, you read that correctly: Nine (9) seconds. In the time it took you to read this paragraph, Jeff Bezos probably received more in capital gains than you will make this whole year. And if not (because you’re relatively rich or you read quickly), I’m sure he will have in the time it takes you to read this whole post.

When Mitt Romney ran for President, a great deal was made of his net wealth of over $250 million. This is indeed very rich, richer than anyone really needs or probably deserves. But compared to the world’s richest, this is pocket change. Jeff Bezos gets that much in dividends and capital gains every day. Bill Gates could give away that much every day for a year and still not run out of money. (He doesn’t quite give that much, but he does give a lot.)

I grew up in Ann Arbor, Michigan. Ann Arbor is a medium-sized city of about 120,000 people (230th in the US by population), and relatively well-off (median household income about 16% higher than the US median). Nevertheless, if Jeff Bezos wanted to, he could give every single person in Ann Arbor the equivalent of 30 years of their income—over a million dollars each—and still have enough money left to be among the world’s 100 richest people.

Or suppose instead that all the world’s 500 richest people decided to give away all the money they have above $1 billion—so they’d all still be billionaires, but only barely. That $8.7 trillion they have together, minus the $500 billion they’re keeping, would be $8.2 trillion. In fact, let’s say they keep a little more, just to make sure they all have the same ordering: Give each one an extra $1 million for each point they are in the ranking, so that Jeff Bezos would stay on top at $1 B + 500 ($0.001 B) = $1.5 billion, while Bill Gates in second place would have $1 million less, and so on. That would leave us with still over $8 trillion to give away.

How far could that $8 trillion go? Well, suppose we divided it evenly between all 328 million people in the United States. How much would each person receive? Oh, just about $24,000—basically my annual income.

Or suppose instead we spread it out over the entire world: Every single man, woman, and child on the planet Earth gets an equal share. There are 7.7 billion people in the world, so by spreading out $8 trillion between them, each one would get over $1000. For you or I that’s a big enough windfall to feel. For the world’s poorest people, it’s more than they make in several years. It would be life-changing for them. (Actually that’s about what GiveDirectly gives each family—and it is life-changing.)

And let me remind you: This would be leaving them billionaires. They’re just not as much billionaires as before—they only have $1 billion instead of $20 billion or $50 billion or $100 billion. And even $1 billion is obviously enough to live however you want, wherever you want, for the rest of your life, never working another day if you don’t want to. With $1 billion, you can fly in jets (a good one will set you back $20 million), sail in yachts (even a massive 200-footer wouldn’t run much above $200 million), and eat filet mignon at every meal (in fact, at $25 per pound, you can serve it to yourself and a hundred of your friends without breaking a sweat). You can decorate your bedroom with original Jackson Pollock paintings (at $200 million, his most expensive painting is only 20% of your wealth) and bathe in bottles of Dom Perignon (at $400 per liter, a 200-liter bath would cost you about $80,000—even every day that’s only $30 million a year, or maybe half to a third of your capital income). Remember, this is all feasible at just $1 billion—and Jeff Bezos has over a hundred times that. There is no real lifestyle improvement that happens between $1 billion and $157 billion; it’s purely a matter of status and power.

Taking enough to make them mere millionaires would give us another $0.5 trillion to spend (about the GDP of Sweden, one-fourth the GDP of Canada, or 70% of the US military budget).

Do you think maybe these people have too much money?

I’m not saying that we should confiscate all private property. I’m not saying that we should collectivize all industry. I believe in free markets and private enterprise. People should be able to get rich by inventing things and starting businesses.

But should they be able to get that rich? So rich that one man could pay off every mortgage in a whole major city? So rich that the CEO of a company makes what his employees make in a year in less than a minute? So rich that 500 people—enough to fill a large lecture hall—own enough wealth that if it were spread out evenly they could give $1000 to every single person in the world?

If Jeff Bezos had $1.5 million, I’d say he absolutely earned it. Some high-level programmers at Amazon have that much, and they absolutely earned it. If he had $15 million, I’d think maybe he could deserve that, given his contribution to the world. If he had $150 million, I’d find it hard to believe that anyone could really deserve that much, but if it’s part of what we need to make capitalism work, I could live with that.

But Jeff Bezos doesn’t have $1.5 million. He doesn’t have $15 million. He doesn’t have $150 million. He doesn’t have $1.5 billion. He doesn’t even have $15 billion. He has $150 billion. He has over a thousand times the level of wealth at which I was already having to doubt whether any human being could possibly deserve so much money—and once it gets that big, it basically just keeps growing. A stock market crash might drop it down temporarily, but it would come back in a few years.

And it’s not like there’s nothing we could do to spread this wealth around. Some fairly simple changes in how we tax dividends and capital gains would be enough to get a lot of it, and a wealth tax like the one Elizabeth Warren has proposed would help a great deal as well. At the rates people have seriously proposed, these taxes would only really stop their wealth from growing; it wouldn’t meaningfully shrink it.

That could be combined with policy changes about compensation for corporate executives, particularly with regard to stock options, to make it harder to extract such a large proportion of a huge multinational corporation’s wealth into a single individual. We could impose a cap on the ratio between median employee salary (including the entire supply chain!) and total executive compensation (including dividends and capital gains!), say 100 to 1. (Making in 9 seconds what his employees make in a year, Jeff Bezos is currently operating at a ratio of over 3 million to 1.) If you exceed the cap, the remainder is taxed at 100%. This would mean that as a CEO you can still make $100 million a year, but only if your median employee makes $1 million. If your median employee makes $30,000, you’d better keep your own compensation under $3 million, because we’re gonna take the rest.

Is this socialism? I guess maybe it’s democratic socialism, the high-tax, high-spend #ScandinaviaIsBetter welfare state. But it would not be an end to free markets or free enterprise. We’re not collectivizing any industries, let alone putting anyone in guillotines. You could still start a business and make millions or even hundreds of millions of dollars; you’d simply be expected to share that wealth with your employees and our society as a whole, instead of hoarding it all for yourself.

Pinker Propositions

May 19 2458623

What do the following statements have in common?

1. “Capitalist countries have less poverty than Communist countries.

2. “Black men in the US commit homicide at a higher rate than White men.

3. “On average, in the US, Asian people score highest on IQ tests, White and Hispanic people score near the middle, and Black people score the lowest.

4. “Men on average perform better at visual tasks, and women on average perform better on verbal tasks.

5. “In the United States, White men are no more likely to be mass shooters than other men.

6. “The genetic heritability of intelligence is about 60%.

7. “The plurality of recent terrorist attacks in the US have been committed by Muslims.

8. “The period of US military hegemony since 1945 has been the most peaceful period in human history.

These statements have two things in common:

1. All of these statements are objectively true facts that can be verified by rich and reliable empirical data which is publicly available and uncontroversially accepted by social scientists.

2. If spoken publicly among left-wing social justice activists, all of these statements will draw resistance, defensiveness, and often outright hostility. Anyone making these statements is likely to be accused of racism, sexism, imperialism, and so on.

I call such propositions Pinker Propositions, after an excellent talk by Steven Pinker illustrating several of the above statements (which was then taken wildly out of context by social justice activists on social media).

The usual reaction to these statements suggests that people think they imply harmful far-right policy conclusions. This inference is utterly wrong: A nuanced understanding of each of these propositions does not in any way lead to far-right policy conclusions—in fact, some rather strongly support left-wing policy conclusions.

1. Capitalist countries have less poverty than Communist countries, because Communist countries are nearly always corrupt and authoritarian. Social democratic countries have the lowest poverty and the highest overall happiness (#ScandinaviaIsBetter).

2. Black men commit more homicide than White men because of poverty, discrimination, mass incarceration, and gang violence. Black men are also greatly overrepresented among victims of homicide, as most homicide is intra-racial. Homicide rates often vary across ethnic and socioeconomic groups, and these rates vary over time as a result of cultural and political changes.

3. IQ tests are a highly imperfect measure of intelligence, and the genetics of intelligence cut across our socially-constructed concept of race. There is far more within-group variation in IQ than between-group variation. Intelligence is not fixed at birth but is affected by nutrition, upbringing, exposure to toxins, and education—all of which statistically put Black people at a disadvantage. Nor does intelligence remain constant within populations: The Flynn Effect is the well-documented increase in intelligence which has occurred in almost every country over the past century. Far from justifying discrimination, these provide very strong reasons to improve opportunities for Black children. The lead and mercury in Flint’s water suppressed the brain development of thousands of Black children—that’s going to lower average IQ scores. But that says nothing about supposed “inherent racial differences” and everything about the catastrophic damage of environmental racism.

4. To be quite honest, I never even understood why this one shocks—or even surprises—people. It’s not even saying that men are “smarter” than women—overall IQ is almost identical. It’s just saying that men are more visual and women are more verbal. And this, I think, is actually quite obvious. I think the clearest evidence of this—the “interocular trauma” that will convince you the effect is real and worth talking about—is pornography. Visual porn is overwhelmingly consumed by men, even when it was designed for women (e.g. Playgirla majority of its readers are gay men, even though there are ten times as many straight women in the world as there are gay men). Conversely, erotic novels are overwhelmingly consumed by women. I think a lot of anti-porn feminism can actually be explained by this effect: Feminists (who are usually women, for obvious reasons) can say they are against “porn” when what they are really against is visual porn, because visual porn is consumed by men; then the kind of porn that they like (erotic literature) doesn’t count as “real porn”. And honestly they’re mostly against the current structure of the live-action visual porn industry, which is totally reasonable—but it’s a far cry from being against porn in general. I have some serious issues with how our farming system is currently set up, but I’m not against farming.

5. This one is interesting, because it’s a lack of a race difference, which normally is what the left wing always wants to hear. The difference of course is that this alleged difference would make White men look bad, and that’s apparently seen as a desirable goal for social justice. But the data just doesn’t bear it out: While indeed most mass shooters are White men, that’s because most Americans are White, which is a totally uninteresting reason. There’s no clear evidence of any racial disparity in mass shootings—though the gender disparity is absolutely overwhelming: It’s almost always men.

6. Heritability is a subtle concept; it doesn’t mean what most people seem to think it means. It doesn’t mean that 60% of your intelligence is due to your your genes. Indeed, I’m not even sure what that sentence would actually mean; it’s like saying that 60% of the flavor of a cake is due to the eggs. What this heritability figure actually means that when you compare across individuals in a population, and carefully control for environmental influences, you find that about 60% of the variance in IQ scores is explained by genetic factors. But this is within a particular population—here, US adults—and is absolutely dependent on all sorts of other variables. The more flexible one’s environment becomes, the more people self-select into their preferred environment, and the more heritable traits become. As a result, IQ actually becomes more heritable as children become adults, called the Wilson Effect.

7. This one might actually have some contradiction with left-wing policy. The disproportionate participation of Muslims in terrorism—controlling for just about anything you like, income, education, age etc.—really does suggest that, at least at this point in history, there is some real ideological link between Islam and terrorism. But the fact remains that the vast majority of Muslims are not terrorists and do not support terrorism, and antagonizing all the people of an entire religion is fundamentally unjust as well as likely to backfire in various ways. We should instead be trying to encourage the spread of more tolerant forms of Islam, and maintaining the strict boundaries of secularism to prevent the encroach of any religion on our system of government.

8. The fact that US military hegemony does seem to be a cause of global peace doesn’t imply that every single military intervention by the US is justified. In fact, it doesn’t even necessarily imply that any such interventions are justified—though I think one would be hard-pressed to say that the NATO intervention in the Kosovo War or the defense of Kuwait in the Gulf War was unjustified. It merely points out that having a hegemon is clearly preferable to having a multipolar world where many countries jockey for military supremacy. The Pax Romana was a time of peace but also authoritarianism; the Pax Americana is better, but that doesn’t prevent us from criticizing the real harms—including major war crimes—committed by the United States.

So it is entirely possible to know and understand these facts without adopting far-right political views.

Yet Pinker’s point—and mine—is that by suppressing these true facts, by responding with hostility or even ostracism to anyone who states them, we are actually adding fuel to the far-right fire. Instead of presenting the nuanced truth and explaining why it doesn’t imply such radical policies, we attack the messenger; and this leads people to conclude three things:

1. The left wing is willing to lie and suppress the truth in order to achieve political goals (they’re doing it right now).

2. These statements actually do imply right-wing conclusions (else why suppress them?).

3. Since these statements are true, that must mean the right-wing conclusions are actually correct.

Now (especially if you are someone who identifies unironically as “woke”), you might be thinking something like this: “Anyone who can be turned away from social justice so easily was never a real ally in the first place!”

This is a fundamentally and dangerously wrongheaded view. No one—not me, not you, not anyone—was born believing in social justice. You did not emerge from your mother’s womb ranting against colonalist imperialism. You had to learn what you now know. You came to believe what you now believe, after once believing something else that you now think is wrong. This is true of absolutely everyone everywhere. Indeed, the better you are, the more true it is; good people learn from their mistakes and grow in their knowledge.

This means that anyone who is now an ally of social justice once was not. And that, in turn, suggests that many people who are currently not allies could become so, under the right circumstances. They would probably not shift all at once—as I didn’t, and I doubt you did either—but if we are welcoming and open and honest with them, we can gradually tilt them toward greater and greater levels of support.

But if we reject them immediately for being impure, they never get the chance to learn, and we never get the chance to sway them. People who are currently uncertain of their political beliefs will become our enemies because we made them our enemies. We declared that if they would not immediately commit to everything we believe, then they may as well oppose us. They, quite reasonably unwilling to commit to a detailed political agenda they didn’t understand, decided that it would be easiest to simply oppose us.

And we don’t have to win over every person on every single issue. We merely need to win over a large enough critical mass on each issue to shift policies and cultural norms. Building a wider tent is not compromising on your principles; on the contrary, it’s how you actually win and make those principles a reality.

There will always be those we cannot convince, of course. And I admit, there is something deeply irrational about going from “those leftists attacked Charles Murray” to “I think I’ll start waving a swastika”. But humans aren’t always rational; we know this. You can lament this, complain about it, yell at people for being so irrational all you like—it won’t actually make people any more rational. Humans are tribal; we think in terms of teams. We need to make our team as large and welcoming as possible, and suppressing Pinker Propositions is not the way to do that.

Subsidies can’t make things unaffordable

May 12 2458616

In last week’s post I talked about a supposed benefit of subsidies that almost never materializes. In this week, I’m going to talk about a supposed harm of subsidies that is literally impossible.

The American Enterprise Institute (a libertarian think-tank) has been sending around a graph of price increases over the last 20 years by sector, showing what everyone already intuitively knows: healthcare and education have gotten wildly more expensive, while high-tech products have gotten extremely cheap. Actually I was a surprised how little they found housing prices had increased (enough to make me wonder what metric they are using for housing prices).

They argue that it is government intervention which has created these rising prices:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government.

Along similar lines, Grey Gordon and Aaron Hedlund published a book chapter presenting evidence that student loans and federal subsidies are responsible for increases in college tuition. They are professional economists, so I feel like I ought to take their argument seriously… but it’s really hard to do, because it’s such a silly concept at the most basic level. I could nitpick their assumptions about elasticity of demand and monopoly power, but the whole argument just doesn’t pass the smell test.

Subsidies always make things more affordable for the person being subsidized.

It’s possible for subsidies to create other distortions, and make things more expensive for those who aren’t subsidized. But it’s literally impossible for subsidies to make something unaffordable to the person being subsidized.

That result is absolutely fundamental, and it comes directly from the Law of Supply and Law of Demand.

Subsidies

On this graph, the blue line is the demand curve. The red line is the supply curve. The thick green line is where they intersect, at the competitive equilibrium price. In this case, that equilibrium means we sell 6 units at a price of $3 each.

The thin green lines show what happen if we introduce a subsidy. Here the subsidy is $3. The sticker price can be read off of the supply curve: It will rise to $4. But the actual price paid by consumers is read off the demand curve: It will fall to $1. Total sales will rise to 8 units. The total cost to the government is then 8($3) = $24.

These exact numbers are of course specific to the example I chose. But the overall direction is not.

We can go ahead and draw this with all sorts of different supply and demand curves, and we’ll keep getting the same result.

Here’s one where I didn’t even make the curves linear:

Subsidies_2

In this case, a subsidy of $5.40 raises the sticker price from $6.10 to $11.20, only reducing the price for consumers to $5.80, while increasing the quantity sold from 3.5 to 4.8. The total cost of the subsidy is $25.92. The price effects are very different in magnitude from the previous example, and yet all the directions are exactly the same—and they will continue to be the same, however you draw the curves.

And here’s yet another example:

Subsidies_3

Here, a subsidy of $2.30 raises the sticker price from $4 to $5.30, lowers the cost to consumers to $3, increases the quantity sold from 4 to 7 units, and costs $16.10.

If you’re still not convinced, try drawing some more of the same diagrams yourself. As long as you make the supply curve slope upward and the demand curve slope downward, you’ll keep getting the same results.
A subsidy will always do four things:

  1. Increase the sticker price, benefiting sellers.
  2. Decrease the price that subsidized consumers actually pay, benefiting those consumers.
  3. Increase the quantity sold.
  4. Cost the government money.

The intuition here is quite simple: If I give you free money every time you buy a thing, you’ll buy more of that thing (3) because it costs you less to do so (2). Because you buy more of the thing, the price will go up (1), but not enough to cancel out the reduced cost to you (or else you’d stop). Since I’m giving you free money, that will cost me money (4). This intuition is fully general: It doesn’t matter what kind of product we are talking about, you’re never going to buy less or have to pay more for each one because I gave you free money.

The size of each effect depends upon elasticity of demand and supply, in basically the same way as tax incidence. The more inelastic side of the market is harmed less by the tax and also benefits less from the subsidy. For any given change in quantity, more inelastic markets raise more tax revenue and cost more subsidy spending.

If we allow elasticities of demand or supply to be zero or infinite (which is almost never the case in real life), then some of these effects might be zero. But they will never go the opposite direction, not as long as the supply curve slopes upward and the demand curve slopes downward.

I suspect that education has relatively inelastic demand and relatively elastic supply, which would mean that the subsidies are actually largely felt by the consumer, not the seller. But that’s actually a legitimate economic question: I might be overestimating the elasticity of supply.

There are other legitimate economic questions here as well, such as how much benefit we get out of a given subsidy versus other ways we might spend that money, and how subsidies may hurt others in the same market who aren’t subsidized.

What is not a legitimate question is the one that these libertarian think-tanks seem to be asking, which is “If you give people money, will they end up with less stuff?” No, they won’t. That’s not how any of this works.

And I’m pretty sure the people in these think-tanks are smart enough to know that. They might be blinded by their anti-government ideology, but I actually suspect it’s more sinister than that: They know that what they are saying isn’t true, but they consider it a “noble lie”: A falsehood told to the common folk in the service of a higher good.

They are clever enough to not simply state the lie outright, but instead imply it through misleading presentation of real facts. Yes, it’s true that subsidies will raise the sticker price—so they can say that this was all they were asserting. But not only is that obvious and trivial: It wouldn’t even support the argument they are obviously trying to make. Nobody cares about the sticker price. They care about what people actually pay. And a subsidy, by construction, as a law of economics, cannot possibly increase the amount paid by the buyer who is subsidized.

What they obviously want you to think is that the reason healthcare and education are so unaffordable is because the government has been subsidizing them. But this is basically the opposite of the truth: These things became unaffordable for various reasons, and the government stepped in to subsidize them in order to stop the bleeding. Is that a permanent solution? No, it’s not. But it does actually help keep them affordable for the time being—and it could not have done otherwise. There’s simply no way to give someone free money and make them poorer. (Of course, fully socialized healthcare and education might be permanent solutions, so if the libertarians aren’t careful what they wish for….)

Subsidies almost never create jobs

May 5 JDN 2458609

The most extreme examples of harmful subsidies are fossil fuel industries and stadiums.

Fossil fuels are obviously the worst: The $1 trillion per year in direct and indirect government subsidies to fossil fuel corporations are second only to the $4 trillion in climate change externalities produced by the fossil fuel industry. Instead of subsidizing these corporations $1 trillion, the world should be taxing them $4 trillion—so we are off by $5 trillion, every single year. This is 6.5% of the world’s GDP. In the United States, our largest oil subsidy is called the Interstate Highway System, but other countries have us beat: Iran, Uzbekistan, and Libya each give more than 10% of their GDP in subsidies to the fossil fuel industry.

Most stadiums receive some kind of subsidy, and many are outright publicly funded—and yet banks still get the naming rights. The largest teams with the most wealth of their own are typically also the most subsidized. The benefits of building a new stadium are not even particularly large, which is probably why over 85% of US economists agree that these subsidies don’t make sense.

But subsidies are all over the place, and one of the most common reasons given for them, if not the most common reason, is that they will “create jobs”.

This is the reason Trump gave for trying to subsidize coal (which isn’t even working). It’s the reason people give for subsidizing huge filmmaking conglomerates in making films (which costs the government about $90,000 per job created). Why are we handing money to rich people? It will create jobs!

This is almost never actually true. We have known that this kind of subsidy doesn’t work since at least the 1980s.

The states and cities that create the most jobs aren’t the ones that offer the most generous handouts to corporations. They are the ones that have the cleanest air, the best infrastructure, and above all the most educated population. This is why there have been months when the majority of US jobs were created in California. California is the largest state, but it’s not that large—it’s only about 12% of the US population. If as many as 70% of the new jobs are being created there, it’s because California is doing something right that most other states are doing very, very wrong.

And then there is the rent-seeking competition that megacorporations like Amazon engage in, getting cities to bid higher and higher subsidies, then locating where they probably would have anyway but with billions of dollars in free money. This is a trick we need to stop falling for: The federal government should outright ban any attempt to use subsidies to get an existing corporation to locate in a specific state or city. That’s not contributing to American society; it’s just moving things around.

There are a few kinds of industries it makes sense to subsidize, because they have high up-front costs and large public benefits. Examples include research and development and renewable energy. But here the goal is not to create jobs. It’s to create wealth, typically in the form of scientific knowledge. We aren’t trying to get them to hire people; we’re trying to get them to accomplish something that’s difficult and important.

Why don’t subsidies create jobs? It’s really quite simple: You need to pay for those subsidies.

The federal government doesn’t face a hard budget constraint like businesses do; they can print money. But state and municipal governments don’t have that power, and so their subsidies need to be made up in either taxes or debt—which means either taxes now, or taxes later. Or they could cut spending elsewhere, which means losing whatever benefits they were getting from that spending. This means that any jobs you created with the subsidies are just going to be destroyed somewhere else, by higher taxes or lower government spending.

Most state and local governments have really tight budgets. Allen, Texas was running a $30 billion budget deficit and cutting salaries for public school teachers, but still somehow found $60 billion to subsidize building a stadium. The stadium might “create jobs” by moving some economic activity from one place to another, but the actual real economic benefit of a stadium is very small. Public schools are the foundation of a highly-developed economy. Without widespread education, this high a standard of living is simply impossible to sustain. Cutting public education is one of the last things you should be willing to do to balance a government budget—and yet somehow it seems to be one of the first we actually do.

It is true that we spend a great deal on education, and that spending could be made a lot more cost-effective (we can start by cutting athletic coaches and administrators); but every $1 spent on education yields between $4 and $6 in additional long-run wealth for our society. This means that at quite reasonable tax rates (17% to 25%) a public education system can directly pay for itself. Compare this to subsidizing a stadium, which gets back less than $1 of benefit per $1 spent, or subsidizing oil companies, which actively harms the world.

People don’t seem to understand that a capitalist economy basically just creates as many jobs as it needs. In a financial crisis, that mechanism falters; that’s when the federal government should step in and print money to get it running again. But when the economy is running smoothly, trying to “create jobs” is just not a useful thing to do. Jobs will be created and destroyed by the market. Policy should be trying to increase welfare. Educate your population. Improve your healthcare system. Build more public transit. Invest in fighting poverty and homelessness. And if you don’t think you can afford those things, then you definitely can’t afford handouts to megacorporations that won’t even make back what you paid.

Green New Deal Part 4: Guaranteeing employment and housing is very hard—but we should still try (public policy)

Apr 28 JDN 2458602

In previous posts I have talked about the “easy parts” of the Green New Deal (infrastructure, healthcare and education), as well as one of the “hard parts” (net-zero carbon emissions). But today it’s time for the “very hard parts”: guaranteed employment and housing.

“Guaranteeing a job with a family-sustaining wage, adequate family and medical leave, paid vacations, and retirement security to all people of the United States.”

“Providing all people of the United States with – […] (ii) affordable, safe, and adequate housing; (iii) economic security; […].

Let me start by giving you a sense of how difficult this is: No country on Earth has ever successfully guaranteed employment and housing. Even Scandinavia’s extensive social safety nets and active labor market programs are not sufficient to eliminate homelessness or unemployment (though they do dramatically reduce them).
The Soviet Union came close to guaranteed employment, but only as part of a labor system that was extremely inefficient and unproductive. Effectively, they guaranteed everyone a job by not even firing people who didn’t actually do the jobs they were given. This is clearly not a sustainable solution.
There are serious proposals on the table for a job guarantee program, but they are extremely ambitious.
The Center on Budget and Policy Priorities has a proposal that would add 9.7 million people to the federal workforce and cost over $500 billion per year to operate. For comparison, the current non-postal federal workforce is only 2.1 million. The postal service has about another 600,000. So we are talking about quintupling the federal workforce, at a cost comparable to the entire (bloated) military budget. That’s a huge number of people and a lot of money.
The basic idea of such a program is that we can (hopefully) find various forms of public service that need to be done, and pay people to do that public service at a certain minimum level of pay and benefits. These jobs would be available to anyone who wanted them, and any time you lost a private-sector job you could always take the guaranteed job. This would effectively create a floor on wages and benefits; any job that offered a worse deal than the government job would be competed out of existence.
I’ve written before about why I’m skeptical of such programs. If there is all this work that needs done, why aren’t we already doing it? If people have the skills they need to do this work, why is no one currently employing them?
Maybe there is a way to solve these problems. Maybe I’m underestimating the public goods that could be produced by people with low levels of skill. But at the very least we need to face up to the fact that it is a problem. We need to actually find work that it makes sense to guarantee—we can’t just wave our hands and say that “obviously” there is plenty of valuable work to be done that will happen to line up exactly with the skills of the people who are currently unemployed.
And then we need to think about the fact that we can’t really guarantee it, not the way the Soviet Union did. We do need to be able to fire people. We need to be able to fire them for not showing up to work, for being drunk at work, for sexually harassing co-workers, or simply for being incompetent. We need to be have some sort of policy in place for what happens to people who get fired: How long before they can get another guaranteed job? And being fired should hurt: It’s supposed to be an incentive to do your job correctly. We don’t need to punish laziness or incompetence with homelessness—but we do need to punish it with something.
Ultimately what I would like to see is not guaranteed jobs but guaranteed income: A basic income that everyone gets, no questions asked. And then I would hope that our norms about work would change, and people would stop defining themselves by their paid employment and start defining themselves by other things, like creating art, supporting their family, or contributing to their community.
What about guaranteed housing? On that front I am more optimistic.
Housing is quite expensive, particularly in major cities. But homelessness is also very expensive from a societal perspective. In the long run, free housing might actually pay for itself.
One of the most successful programs at reducing homelessness is called Housing First. Rather than going through the usual machinations of shelters and transitional housing, the program just takes people off the streets and gives them homes. Like a basic income, it sounds ludicrously simple; it’s the sort of thing a five-year-old would suggest. Surely it can’t be that easy?
Well, the results speak for themselves. Implementation of Housing First programs in several major US cities has resulted in reductions in homeless of over 30% and reductions in the social cost of homelessness of over 50%.

The current population of about 80,000 chronically homeless Americans each cost taxpayers about $40,000 per year in social costs, via emergency room visits, shelter maintenance, crime, court costs, and so on. This is about $3 billion per year. For that same amount of money—or potentially even less—we could have put all those people into homes.

There is an additional population of about 500,000 transient homeless—people who are homeless for a short period after an adverse life event (such as losing a job, having a divorce, or getting their mortgage foreclosed) but will find housing within a few weeks or months. Their situation is not as dire, and the costs they impose on society are not as large. But standard estimates are still generally over $10,000 per person per year—which, if given to them in cash, would probably be enough to get most of these people into homes.
So this is not a question of affordability: We are already paying these costs, but doing so in a way that doesn’t actually solve homelessness.
The real challenge is subtler than that: How do we make this fair and politically feasible?
When we’re talking about chronically homelessness, I think we can make a pretty strong case: These people are in a really bad way and they need our help. Since we’re already spending all this money anyway, we may as well spend it in a way that would actually help them.
But transient homelessness gets a bit more complicated. Many people who are transiently homeless are not all that poor. They may be college students, or recent divorcees, or failed entrepreneurs, or people who could afford a home but not the expensive home they actually tried to buy. Once they get back on their feet, they will probably go on to maintain a middle-class standard of living. So it really does seem unfair to just hand these people free homes that other people would not get.
And making housing in general completely free is simply a pipe dream. No country has ever even gotten close to that. Housing is such a huge part of a country’s expenditures that even a country like Denmark where the government is half the economy still can’t afford to put everyone in public housing.
I think what I would do instead is provide guaranteed subsidized loans—much as we do for student loans. These loans could be used to pay rent, to pay a mortgage, or even to make a down payment. They would be available to any adult US citizen, regardless of credit history, in relatively large amounts (the average down payment in the US is about $14,000, but as high as $50,000 is not unusual), at very low interest rates (I’d say aim for 0% real interest, so target the nominal interest rate to inflation) and very generous repayment terms (like student loans, you would never be required to pay more than a certain percentage of your adjusted gross income on the loan). If someone did try to avoid paying, their wages could be garnished or their taxes could be increased—this would make the default rates very low.
This policy would allow people who are temporarily homeless to get back into a home immediately, rather than having to wait until they can get more income—which can become a paradox as most employers will require a permanent address. But it wouldn’t be a free home; this policy would cost taxpayers next to nothing. The only costs would come from subsidizing interest rates and bearing defaults, which wouldn’t be more than about 5% of the outstanding balance—even if we loaned out as much as $100 billion, that still wouldn’t be more than what we’re currently losing in social costs of homelessness.
Had this policy been in place during the 2008 crash, people who lost their homes to foreclosure would have been able to immediately re-borrow and buy new homes. This would have blunted the financial crisis and maybe even done as much as the far more expensive stimulus package and quantitative easing programs.
These policies would not, unfortunately, eliminate unemployment and homelessness. Maybe that’s not even possible. But they would at least greatly reduce the harm caused by unemployment and homelessness, and that alone makes them worth doing.

Green New Deal Part 3: Guaranteeing education and healthcare is easy—why aren’t we doing it?

Apr 21 JDN 2458595

Last week was one of the “hard parts” of the Green New Deal. Today it’s back to one of the “easy parts”: Guaranteed education and healthcare.

“Providing all people of the United States with – (i) high-quality health care; […]

“Providing resources, training, and high-quality education, including higher education, to all people of the United States.”

Many Americans seem to think that providing universal healthcare would be prohibitively expensive. In fact, it would have literally negative net cost.
The US currently has the most bloated, expensive, inefficient healthcare system in the entire world. We spend almost $10,000 per person per year on healthcare, and get outcomes no better than France or the UK where they spend less than $5,000.
In fact, our public healthcare expenditures are currently higher than almost every other country. Our private expenditures are therefore pure waste; all they are doing is providing returns for the shareholders of corporations. If we were to simply copy the UK National Health Service and spend money in exactly the same way as they do, we would spend the same amount in public funds and almost nothing in private funds—and the UK has a higher mean lifespan than the US.
This is absolutely a no-brainer. Burn the whole system of private insurance down. Copy a healthcare system that actually works, like they use in every other First World country.
It wouldn’t even be that complicated to implement: We already have a single-payer healthcare system in the US; it’s called Medicare. Currently only old people get it; but old people use the most healthcare anyway. Hence, Medicare for All: Just lower the eligibility age for Medicare to 18 (if not zero). In the short run there would be additional costs for the transition, but in the long run we would save mind-boggling amounts of money, all while improving healthcare outcomes and extending our lifespans. Current estimates say that the net savings of Medicare for All would be about $5 trillion over the next 10 years. We can afford this. Indeed, the question is, as it was for infrastructure: How can we afford not to do this?
Isn’t this socialism? Yeah, I suppose it is. But healthcare is one of the few things that socialist countries consistently do extremely well. Cuba is a socialist country—a real socialist country, not a social democratic welfare state like Norway but a genuinely authoritarian centrally-planned economy. Cuba’s per-capita GDP PPP is a third of ours. Yet their life expectancy is actually higher than ours, because their healthcare system is just that good. Their per-capita healthcare spending is one-fourth of ours, and their health outcomes are better. So yeah, let’s be socialist in our healthcare. Socialists seem really good at healthcare.
And this makes sense, if you think about it. Doctors can do their jobs a lot better when they’re focused on just treating everyone who needs help, rather than arguing with insurance companies over what should and shouldn’t be covered. Preventative medicine is extremely cost-effective, yet it’s usually the first thing that people skimp on when trying to save money on health insurance. A variety of public health measures (such as vaccination and air quality regulation) are extremely cost-effective, but they are public goods that the private sector would not pay for by itself.
It’s not as if healthcare was ever really a competitive market anyway: When you get sick or injured, do you shop around for the best or cheapest hospital? How would you even go about that, when they don’t even post most of their prices and what prices they post are often wildly different than what you’ll actually pay?
The only serious argument I’ve heard against single-payer healthcare is a moral one: “Why should I have to pay for other people’s healthcare?” Well, I guess, because… you’re a human being? You should care about other human beings, and not want them to suffer and die from easily treatable diseases?
I don’t know how to explain to you that you should care about other people.

Single-payer healthcare is not only affordable: It would be cheaper and better than what we are currently doing. (In fact, almost anything would be cheaper and better than what we are currently doing—Obamacare was an improvement over the previous mess, but it’s still a mess.)
What about public education? Well, we already have that up to the high school level, and it works quite well.
Contrary to popular belief, the average public high school has better outcomes in terms of test scores and college placements than the average private high school. There are some elite private schools that do better, but they are extraordinarily expensive and they self-select only the best students. Public schools have to take all students, and they have a limited budget; but they have high quality standards and they require their teachers to be certified.
The flaws in our public school system are largely from it being not public enough, which is to say that schools are funded by their local property taxes instead of having their costs equally shared across whole states. This gives them the same basic problem as private schools: Rich kids get better schools.
If we removed that inequality, our educational outcomes would probably be among the best in the world—indeed, in our most well-funded school districts, they are. The state of Massachusetts which actually funds their public schools equally and well, gets international test scores just as good as the supposedly “superior” educational systems of Asian countries. In fact, this is probably even unfair to Massachusetts, as we know that China specifically selects the regions that have the best students to be the ones to take these international tests. Massachusetts is the best the US has to offer, but Shanghai is also the best China has to offer, so it’s only fair we compare apples to apples.
Public education has benefits for our whole society. We want to have a population of citizens, workers, and consumers who are well-educated. There are enormous benefits of primary and secondary education in terms of reducing poverty, improving public health, and increased economic growth.
So there’s my impassioned argument for why we should continue to support free, universal public education up to high school.
When it comes to college, I can’t be quite so enthusiastic. While there are societal benefits of college education, most of the benefits of college accrue to the individuals who go to college themselves.
The median weekly income of someone with a high school diploma is about $730; with a bachelor’s degree this rises to $1200; and with a doctoral or professional degree it gets over $1800. Higher education also greatly reduces your risk of being unemployed; while about 4% of the general population is unemployed, only 1.5% of people with doctorates or professional degrees are. Add that up over all the weeks of your life, and it’s a lot of money.
The net present value of a college education has been estimated at approximately $1 million. This result is quite sensitive to the choice of discount rate; at a higher discount rate you can get the net present value as “low” as $250,000.
With this in mind, the fact that the median student loan debt for a college graduate is about $30,000 doesn’t sound so terrible, does it? You’re taking out a loan for $30,000 to get something that will earn you between $250,000 and $1 million over the course of your life.
There is some evidence that having student loans delays homeownership; but this is a problem with our mortgage system, not our education system. It’s mainly the inability to finance a down payment that prevents people from buying homes. We should implement a system of block grants for first-time homeowners that gives them a chunk of money to make a down payment, perhaps $50,000. This would cost about as much as the mortgage interest tax deduction which mainly benefits the upper-middle class.
Higher education does have societal benefits as well. Perhaps the starkest I’ve noticed is how categorically higher education decided people’s votes on Donald Trump: Counties with high rates of college education almost all voted for Clinton, and counties with low rates of college education almost all voted for Trump. This was true even controlling for income and a lot of other demographic factors. Only authoritarianism, sexism and racism were better predictors of voting for Trump—and those could very well be mediating variables, if education reduces such attitudes.
If indeed it’s true that higher education makes people less sexist, less racist, less authoritarian, and overall better citizens, then it would be worth every penny to provide universal free college.
But it’s worth noting that even countries like Germany and Sweden which ostensibly do that don’t really do that: While college tuition is free for Swedish citizens and Germany provides free college for all students of any nationality, nevertheless the proportion of people in Sweden and Germany with bachelor’s degrees is actually lower than that of the United States. In Sweden the gap largely disappears if you restrict to younger cohorts—but in Germany it’s still there.
Indeed, from where I’m sitting, “universal free college” looks an awful lot like “the lower-middle class pays for the upper-middle class to go to college”. Social class is still a strong predictor of education level in Sweden. Among OECD countries, education seems to be the best at promoting upward mobility in Australia, and average college tuition in Australia is actually higher than average college tuition in the US (yes, even adjusting for currency exchange: Australian dollars are worth only slightly less than US dollars).
What does Australia do? They have a really good student loan system. You have to reach an annual income of about $40,000 per year before you need to make payments at all, and the loans are subsidized to be interest-free. Once you do owe payments, the debt is repaid at a rate proportional to your income—so effectively it’s not a debt at all but an equity stake.
In the US, students have been taking the desperate (and very cyberpunk) route of selling literal equity stakes in their education to Wall Street banks; this is a terrible idea for a hundred reasons. But having the government have something like an equity stake in students makes a lot of sense.
Because of the subsidies and generous repayment plans, the Australian government loses money on their student loan system, but so what? In order to implement universal free college, they would have spent an awful lot more than they are losing now. This way, the losses are specifically on students who got a lot of education but never managed to raise their income high enough—which means the government is actually incentivized to improve the quality of education or job-matching.
The cost of universal free college is considerable: That $1.3 trillion currently owed as student loans would be additional government debt or tax liability instead. Is this utterly unaffordable? No. But it’s not trivial either. We’re talking about roughly $60 billion per year in additional government spending, a bit less than what we currently spend on food stamps. An expenditure like that should have a large public benefit (as food stamps absolutely, definitely do!); I’m not convinced that free college would have such a benefit.
It would benefit me personally enormously: I currently owe over $100,000 in debt (about half from my undergrad and half from my first master’s). But I’m fairly privileged. Once I finally make it through this PhD, I can expect to make something like $100,000 per year until I retire. I’m not sure that benefiting people like me should be a major goal of public policy.
That said, I don’t think universal free college is a terrible policy. Done well, it could be a good thing. But it isn’t the no-brainer that single-payer healthcare is. We can still make sure that students are not overburdened by debt without making college tuition actually free.

Green New Deal Part 2: How do we get to net-zero carbon emissions?

Apr 14 JDN 2458588

I said in my post last week that the Green New Deal has “easy parts”, “hard parts”, and “very hard parts”, and discussed one of the “easy parts”: increased investment in infrastructure. Next week I’ll talk about another “easy part”, guaranteeing education and healthcare.

Today is the most important “hard part”: Reducing our net carbon emissions to zero—or even less.

“Meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources.”

“Overhauling transportation systems in the United States to eliminate pollution and greenhouse gas emissions from the transportation sector as much as is technologically feasible, including through investment in – (i) zero-emission vehicle infrastructure and manufacturing; (ii) clean, affordable, and accessible public transportation; and (iii) high-speed rail.”

“Spurring massive growth in clean manufacturing in the United States and removing pollution and greenhouse gas emissions from manufacturing and industry as much as is technologically feasible.”

“Working collaboratively with farmers and ranchers in the United States to eliminate pollution and greenhouse gas emissions from the agricultural sector as much as is technologically feasible.”

There have been huge expansions in solar and wind power generation, which are now cheaper than coal, nuclear, and hydroelectric, on a par with natural gas, and only outcompeted by geothermal. As a result of this dramatic increase in renewable energy production, electric power is no longer the largest source of carbon emissions in the United States; it is now second to transportation.
Policy clearly matters here: While total US carbon emissions were trending downward during the Obama administration, they began trending back upward once Trump took office. Even under Obama, they were not trending down fast enough to realistically meet the Paris Agreement targets. Only 14 states are on track to meet those targets, and they are all hard-Blue states except for Virginia and North Carolina. Unsurprisingly, the most carbon-efficient states are New York and California; yet even our emissions (about 9 tonnes per person per year, about twice the world average) are still far too high.
Of course the US is not alone in failing to meet the targets; in the EU, only three countries (Sweden, France, and Germany) are on track to hit the Paris targets. How did they do it? Germany has managed to do it mainly by expanding wind power, but for most countries, the fastest route to zero-carbon electricity is clearly nuclear power.
Germany has been foolishly phasing out their nuclear capacity, but it’s still 11% of their generation; Sweden’s grid is 40% nuclear; and France has a whopping 72% of their grid on nuclear (no other country comes close). The US grid is about 20% nuclear, which isn’t bad; but if California for instance had not phased out half of our nuclear generation since 2001, we could have taken out 15,000 GWh/yr of natural gas generation instead. At least we did basically eliminate coal and oil power in California, so that’s good.
How much would it cost to convert the entire US electricity grid to renewables and nuclear by 2050? Estimates vary widely, but a good ballpark figure is about $20 trillion.
Let’s not kid ourselves: That is a lot. It’s almost an entire year of the whole US economy. It would be enough to establish a permanent fund to end world hunger almost ten times over. Inflation-adjusted, it’s five times the total amount spent by the US in the Second World War.
Completely re-doing our entire electricity generation system is a project on a scale we’ve really never attempted before. It would be very difficult and very expensive.
But is it feasible? Yes, it’s entirely feasible. Assuming our real GDP grows at a paltry 2% per year between now and 2050, the total economic output of the United States during that period will be almost $1 quadrillion. $20 trillion is only 2% of that. Since the top 1% get about 20% of the income, this means that we could raise enough revenue for this project by simply raising the tax rate on the top 1% by 10 percentage points—which would still make the top income tax rate substantially lower than what we had as recently as the 1970s.
Unfortunately, converting the electricity grid is only part of the story. We also need to make radical changes in our transportation system—switching from airplanes to high-speed rail, and converting cars either to electric cars or public transit systems. Trains are really the best bet, but rail systems have a high up-front cost to build.
Even state-of-the-art high-speed rail systems just can’t be a jet airliner for speed. The best high-speed rail systems can cruise at about 250 kph, while a cruising Boeing 737 can easily exceed 800 kph. We’re just going to have to get used to our long-distance trips taking longer. Even 250 kph is a lot better than the 100 kph you’d probably average driving (not counting stops), which is also about the speed that most current US trains get—far worse than what they have in Europe or even China.
Then we have to deal with the other sources of carbon emissions, like manufacturing and agriculture. It’s simply not realistic to expect that we will actually produce zero carbon emissions; instead our goal needs to be net zero, which means we’ll need some way of pulling carbon out of the air.
To some extent, this is easier than it sounds: Reforestation is a very easy, efficient way of pulling carbon out of the air. Unfortunately it is also very slow, and can only be done in appropriate climates. To really pull enough carbon out of the air fast enough, we’re going to need industrial carbon sequestration or some form of geoengineering—right now iron seeding looks like the most promising candidate, but it could only compensate for about 1/6 of current carbon emissions. Solar geoengineering could do more—but at a very high cost, since we’re talking about pumping poisonous chemicals into the air in order to block out sunlight.
The reason we need to do this is essentially that we have waited too long: Had we started the process of converting the whole grid to renewables in the 1970s like we should have, we wouldn’t need such desperate measures now. But we didn’t, so here we are.
Estimates of how much it will cost to do all this vary even more widely, to the point where I’m hesitant to even put a number on it. But it seems likely that in addition to the $20 trillion for the electric grid, it will probably be something like another $30 trillion to do everything else that is necessary. But the global damage from climate change is estimated to be as much as $3.3 trillion per yearso a total of over $100 trillion over 30 years. Spending $50 trillion to save $100 trillion doesn’t sound like such a bad deal, does it?