billionaires

Glorifying superstars glorifies excessive risk

pnrj core principles, financial advice, inequality , , , , , , , ,

Apr 26 JDN 2458964

Suppose you were offered the choice of the following two gambles; which one would you take?

Gamble A: 99.9% chance of $0; 0.1% chance of $100 million

Gamble B: 10% chance of $50,000; 80% chance of $100,000; 10% chance of $1 million

I think it’s pretty clear that you should choose gamble B.

If you were risk-neutral, the expected payoffs would be $100,000 for gamble A and $185,000 for gamble B. So clearly gamble B is the better deal.

But you’re probably risk-averse. If you have logarithmic utility with a baseline and current wealth of $10,000, the difference is even larger:

0.001*ln(10001) = 0.009

0.1*ln(6) + 0.8*ln(11) + 0.1*ln(101) = 2.56

Yet suppose this is a gamble that a lot of people get to take. And furthermore suppose that what you read about in the news every day is always the people who are the very richest. Then you will read, over and over again, about people who took gamble A and got lucky enough to get the $100 million. You’d probably start to wonder if maybe you should be taking gamble A instead.

This is more or less the world we live in. A handful of billionaires own staggering amounts of wealth, and we are constantly hearing about them. Even aside from the fact that most of them inherited a large portion of it and all of them had plenty of advantages that most of us will never have, it’s still not clear that they were actually smart about taking the paths they did—it could simply be that they got spectacularly lucky.

Or perhaps there’s an even clearer example: Professional athletes. The vast majority of athletes make basically no money at sports. Even most paid athletes are in minor leagues and make only a modest living.

There’s certainly nothing wrong with being an amateur who plays sports for fun. But if you were to invest a large proportion of your time training in sports in the hopes of becoming a professional athlete, you would most likely find yourself gravely disappointed, as your chances of actually getting into the major leagues and becoming a multi-millionaire are exceedingly small. Yet you can probably name at least a few major league athletes who are multi-millionaires—perhaps dozens, if you’re a serious fan—and I doubt you can name anywhere near as many minor league players or players who never made it into paid leagues in the first place.

When we spend all of our time focused on the superstars, what we are effectively assessing is the maximum possible income available on a given career track. And it’s true; the maximum for professional athletes and especially entrepreneurs is extremely high. But the maximum isn’t what you should care about; you should really be concerned about the average or even the median.

And it turns out that the same professions that offer staggeringly high incomes at the very top also tend to be professions with extremely high risk attached. The average income for an athlete is very small; the median is almost certainly zero. Entrepreneurs do better; their average and median income aren’t too much worse than most jobs. But this moderate average comes with a great deal of risk; yes, you could become a billionaire—but far more likely, you could become bankrupt.

This is a deeply perverse result: The careers that our culture most glorifies, the ones that we inspire people to dream about, are precisely those that are the most likely to result in financial ruin.

Realizing this changes your perspective on a lot of things. For instance, there is a common lament that teachers aren’t paid the way professional athletes are. I for one am extremely grateful that this is the case. If teachers were paid like athletes, yes, 0.1% would be millionaires, but only 4.9% would make a decent living, and the remaining 95% would be utterly broke. Indeed, this is precisely what might happen if MOOCs really take off, and a handful of superstar teachers are able to produce all the content while the vast majority of teaching mostly amounts to showing someone else’s slideshows. Teachers are much better off in a world where they almost all make a decent living even though none of them ever get spectacularly rich. (Are many teachers still underpaid? Sure. How do I know this? Because there are teacher shortages. A chronic shortage of something is a surefire sign that its price is too low.) And clearly the idea that we could make all teachers millionaires is just ludicrous: Do you want to pay $1 million a year for your child’s education?

Is there a way that we could change this perverse pattern? Could we somehow make it feel more inspiring to choose a career that isn’t so risky? Well, I doubt we’ll ever get children to dream of being accountants or middle managers. But there are a wide range of careers that are fulfilling and meaningful while still making a decent living—like, well, teaching. Even working in creative arts can be like this: While very few authors are millionaires, the median income for an author is quite respectable. (On the other hand there’s some survivor bias here: We don’t count you as an author if you can’t get published at all.) Software engineers are generally quite satisfied with their jobs, and they manage to get quite high incomes with low risk. I think the real answer here is to spend less time glorifying obscene hoards of wealth and more time celebrating lives that are rich and meaningful.

I don’t know if Jeff Bezos is truly happy. But I do know that you and I are more likely to be happy if instead of trying to emulate him, we focus on making our own lives meaningful.

Billionaires bear the burden of proof

pnrj core principles, ethics, inequality, public policy , , , , , , , , , ,

Sep 15 JDN 2458743

A king sits atop a golden throne, surrounded by a thousand stacks of gold coins six feet high. A hundred starving peasants beseech him for just one gold coin each, so that they might buy enough food to eat and clothes for the winter. The king responds: “How dare you take my hard-earned money!”

This is essentially the world we live in today. I really cannot emphasize enough how astonishingly, horrifically, mind-bogglingly rich billionares are. I am writing this sentence at 13:00 PDT on September 8, 2019. A thousand seconds ago was 12:43, about when I started this post. A million seconds ago was Wednesday, August 28. A billion seconds ago was 1987. I will be a billion seconds old this October.

Jeff Bezos has $170 billion. 170 billion seconds ago was a thousand years before the construction of the Great Pyramid. To get as much money as he has gaining one dollar per second (that’s $3600 an hour!), Jeff Bezos would have had to work for as long as human civilization has existed.

At a more sensible wage like $30 per hour (still better than most people get), how long would it take to amass $170 billion? Oh, just about 600,000 years—or about twice the length of time that Homo sapiens has existed on Earth.

How does this compare to my fictional king with a thousand stacks of gold? A typical gold coin is worth about $500, depending on its age and condition. Coins are about 2 millimeters thick. So a thousand stacks, each 2 meters high, would be about $500*1000*1000 = $500 million. This king isn’t even a billionaire! Jeff Bezos has three hundred times as much as him.

Coins are about 30 millimeters in diameter, so assuming they are packed in neat rows, these thousand stacks of gold coins would fill a square about 0.9 meters to a side—in our silly Imperial units, that’s 3 feet wide, 3 feet deep, 6 feet tall. If Jeff Bezo’s stock portfolio were liquidated into gold coins (which would require about 2% of the world’s entire gold supply and surely tank the market), the neat rows of coins stacked a thousand high would fill a square over 16 meters to a side—that’s a 50-foot-wide block of gold coins. Smaug’s hoard in The Hobbit was probably about the same amount of money as what Jeff Bezos has.

And yet, somehow there are still people who believe that he deserves this money, that he earned it, that to take even a fraction of it away would be a crime tantamount to theft or even slavery.

Their arguments can be quite seductive: How would you feel about the government taking your hard-earned money? Entrepreneurs are brilliant, dedicated, hard-working people; why shouldn’t they be rewarded? What crime do CEOs commit by selling products at low prices?

The way to cut through these arguments is to never lose sight of the numbers. In defense of a man who had $5 million or even $20 million, such an argument might make sense. I can imagine how someone could contribute enough to humanity to legitimately deserve $20 million. I can understand how a talented person might work hard enough to earn $5 million. But it’s simply not possible for any human being to be so brilliant, so dedicated, so hard-working, or make such a contribution to the world, that they deserve to have more dollars than there have been seconds since the Great Pyramid.

It’s not necessary to find specific unethical behaviors that brought a billionaire to where he (and yes, it’s nearly always he) is. They are generally there to be found: At best, one becomes a billionaire by sheer luck. Typically, one becomes a billionaire by exerting monopoly power. At worst, one can become a billionaire by ruthless exploitation or even mass murder. But it’s not our responsibility to point out a specific crime for every specific billionaire.

The burden of proof is on billionaires: Explain how you can possibly deserve that much money.

It’s not enough to point to some good things you did, or emphasize what a bold innovator you are: You need to explain what you did that was so good that it deserves to be rewarded with Smaug-level hoards of wealth. Did you save the world from a catastrophic plague? Did you end world hunger? Did you personally prevent a global nuclear war? I could almost see the case for Norman Borlaug or Jonas Salk earning a billion dollars (neither did, by the way). But Jeff Bezos? You didn’t save the world. You made a company that sells things cheaply and ships them quickly. Get over yourself.

Where exactly do we draw that line? That’s a fair question. $20 million? $100 million? $500 million? Maybe there shouldn’t even be a hard cap. There are many other approaches we could take to reducing this staggering inequality. Previously I have proposed a tax system that gets continuously more progressive forever, as well as a CEO compensation cap based on the pay of the lowliest employees. We could impose a wealth tax, as Elizabeth Warren has proposed. Or we could simply raise the top marginal rate on income tax to something more like what it was in the 1960s. Or as Republicans today would call it, radical socialism.

Just how rich is rich?

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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 income—every 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.

So what can we actually do about sweatshops?

pnrj core principles, critique of neoclassical economics, development economics, public policy , , , , , , , , , , , , , , , , , , , , , , , , , ,

JDN 2457489

(The topic of this post was chosen by a vote of my Patreons.) There seem to be two major camps on most political issues: One camp says “This is not a problem, stop worrying about it.” The other says “This is a huge problem, it must be fixed right away, and here’s the easy solution.” Typically neither of these things is true, and the correct answer is actually “This is a huge problem, well worth fixing—but we need to do a lot of work to figure out exactly how.”

Sweatshop labor is a very good example of this phenomenon.

Camp A is represented here by the American Enterprise Institute, which even goes as far as to defend child labor on the grounds that “we used to do it before”. (Note that we also used to do slavery before. Also protectionism, but of course AEI doesn’t think that was good. Who needs logical consistency when you have ideological purity?) The College Conservative uses ECON 101 to defend sweatshops, perhaps not realizing that economics courses continue past ECON 101.

Camp B is represented here by Buycott, telling us to buy “made in the USA” products and boycott all companies that use sweatshops. Other commonly listed strategies include buying used clothes (I mean, there may be some ecological benefits to this, but clearly not all clothes can be used clothes) and “buy union-made” which is next to impossible for most products. Also in this camp is LaborVoices, a Silicon Valley tech company that seems convinced they can somehow solve the problem of sweatshops by means of smartphone apps, because apparently Silicon Valley people believe that smartphones are magical and not, say, one type of product that performs services similar to many other pre-existing products but somewhat more efficiently. (This would also explain how Uber can say with a straight face that they are “revolutionary” when all they actually do is mediate unlicensed taxi services, and Airbnb is “innovative” because it makes it slightly more convenient to rent out rooms in your home.)

Of course I am in that third camp, people who realize that sweatshops—and exploitative labor practices in general—are a serious problem, but a very complex and challenging one that does not have any easy, obvious solutions.

One thing we absolutely cannot do is return to protectionism or get American consumers to only buy from American companies (a sort of “soft protectionism” by social construction). This would not only be inefficient for us—it would be devastating for people in Third World countries. Sweatshops typically provide substantially better living conditions than the alternatives available to their workers.

Yet this does not mean that sweatshops are morally acceptable or should simply be left alone, contrary to the assertions of many economists—most famously Benjamin Powell. Anyone who doubts this must immediately read “Wrongful Beneficence” by Chris Meyers; the mere fact that an act benefits someone –or even everyone—does not prove that the act was morally acceptable. If someone is starving to death and you offer them bread in exchange for doing whatever you want them to do for the next year, you are benefiting them, surely—but what you are doing is morally wrong. And this is basically what sweatshops are; they provide survival in exchange for exploitation.

It can be remarkably difficult to even tell which companies are using sweatshops—and this is by design. While in response to public pressure corporations often try to create the image of improving their labor standards, they seem quite averse to actually improving labor standards, and even more averse to establishing systems of enforcement to make those labor standards followed consistently. Almost no sweatshops are directly owned by the retailers whose products they make; instead there is a chain of outsourced vendors and distributors, a chain that creates diffusion of responsibility and plausible deniability. When international labor organizations do get the chance to investigate the labor conditions of factories operated by multinational corporations, they invariably find that regulations are more honored in the breach than the observance.

So, what would a long-run solution to sweatshops look like? In a word: Development. The only sustainable solution to oppressive labor conditions is a world where everyone is healthy enough, educated enough, and provided with enough resources that their productivity is at a First World level; furthermore it is a world where workers have enough bargaining power that they are actually paid according to that productivity. (The US has lately been finding out what happens if you do the former but not the latter—the result is that you generate an enormous amount of wealth, but it all ends up in the hands of the top 0.1%. Yet it is quite possible to do the latter, as Denmark has figured out, #ScandinaviaIsBetter.)

To achieve this, we need more factories in Third World countries, not fewer—more investment, not less. We need to buy more of China’s exports, hire more factory workers in Bangladesh.

But it’s not enough to provide incentives to build factories—we must also provide incentives to give workers at those factories more bargaining power.

To see how we can pull this off, I offer a case study of a (qualified) success: Nike.

In the 1990s, Nike’s subcontractors had some of the worst labor conditions in the shoe industry. Today, they actually have some of the best. How did that happen?

It began with people noticing a problem—activists and investigative journalists documented the abuses in Nike’s factories. They drew public attention, which undermined Nike’s efforts at mass advertising (which was basically their entire business model—their shoes aren’t actually especially good). They tried to clean up their image with obviously biased reports, which triggered a backlash. Finally Nike decides to actually do something about the problem, and actually becomes a founding member of the Fair Labor Association. They establish new labor standards, and they audit regularly to ensure that those standards are being complied with. Today they publish an annual corporate social responsibility report that actually appears to be quite transparent and accurate, showing both the substantial improvements that have been made and the remaining problems. Activist campaigns turned Nike around almost completely.

In short, consumer pressure led to private regulation. Many development economists are increasingly convinced that this is what we need—we must put pressure on corporations to regulate themselves.

The pressure is a key part of this process; Willem Buiter wasn’t wrong when he quipped that “self-regulation stands in relation to regulation the way self-importance stands in relation to importance and self-righteousness to righteousness.” For any regulation to work, it must have an enforcement mechanism; for private regulation to work, that enforcement mechanism comes from the consumers.

Yet even this is not enough, because there are too many incentives for corporations to lie and cheat if they only have to be responsive to consumers. It’s unreasonable to expect every consumer to take the time—let alone have the expertise—to perform extensive research on the supply chain of every corporation they buy a product from. I also think it’s unreasonable to expect most people to engage in community organizing or shareholder activism as Green America suggests, though it certainly wouldn’t hurt if some did. But there are just too many corporations to keep track of! Like it or not, we live in a globalized capitalist economy where you almost certainly buy from a hundred different corporations over the course of a year.

Instead we need governments to step up—and the obvious choice is the government of the United States, which remains the world’s economic and military hegemon. We should be pressuring our legislators to make new regulations on international trade that will raise labor standards around the globe.

Note that this undermines the most basic argument corporations use against improving their labor standards: “If we raise wages, we won’t be able to compete.” Not if we force everyone to raise wages, around the globe. “If it’s cheaper to build a factory in Indonesia, why shouldn’t we?” It won’t be cheaper, unless Indonesia actually has a real comparative advantage in producing that product. You won’t be able to artificially hold down your expenses by exploiting your workers—you’ll have to actually be more efficient in order to be more profitable, which is how capitalism is supposed to work.

There’s another argument we often hear that is more legitimate, which is that raising wages would also force corporations to raise prices. But as I discussed in a previous post on this subject, the amount by which prices would need to rise is remarkably small, and nowhere near large enough to justify panic about dangerous global inflation. Paying 10% or even 20% more for our products is well worth it to reduce the corruption and exploitation that abuses millions of people—a remarkable number of them children—around the globe. Also, it doesn’t take a mathematical savant to realize that if increasing wages by a factor of 10 only increases prices by 20%, workers will in fact be better off.

Where would all that extra money come from? Now we come to the real reason why corporations don’t want to raise their labor standards: It would come from profits. Right now profits are extraordinarily large, much larger than they have any right to be in a fair market. It was recently estimated that 74% of billionaire wealth comes from economic rent—that is to say, from deception, exploitation, and market manipulation, rather than actual productivity. (There’s a lot of uncertainty in this estimate; the true figure is probably somewhere between 50% and 90%—it’s almost certainly a majority, and could be the vast majority.) In fact, I really shouldn’t say “money”, which we can just print; what we really want to know is where the extra wealth would come from to give that money value. But by paying workers more, improving their standard of living, and creating more consumer demand, we would in fact dramatically increase the amount of real wealth in the world.

So, we need regulations to improve global labor standards. But we must first be clear: What should these regulations say?

First, we must rule out protectionist regulations that would give unfair advantages to companies that produce locally. These would only result in economic inefficiency at best, and trade wars throwing millions back into poverty at worst. (Some advantage makes sense to internalize the externalities of shipping, but really that should be created by a carbon tax, not by trade tariffs. It’s a lot more expensive and carbon-intensive to ship from Detroit to LA than from Detroit to Windsor, but the latter is the “international” trade.)

Second, we should not naively assume that every country should have the same minimum wage. (I am similarly skeptical of Hillary Clinton’s proposal to include people with severe mental or physical disabilities in the US federal minimum wage; I too am concerned about people with disabilities being exploited, but the fact is many people with severe disabilities really aren’t as productive, and it makes sense for wages to reflect that.) If we’re going to have minimum wages at all—basic income and wage subsidies both make a good deal more sense than a hard price floor; see also my earlier post on minimum wage—they should reflect the productivity and prices of the region. I applaud California and New York for adopting $15 minimum wages, but I’d be a bit skeptical of doing the same in Mississippi, and adamantly opposed to doing so in Bangladesh.

It may not even be reasonable to expect all countries to have the same safety standards; workers who are less skilled and in more dire poverty may rationally be willing to accept more risk to remain employed, rather than laid off because their employer could not afford to meet safety standards and still pay them a sufficient wage. For some safety standards this is ridiculous; making sufficiently many exits with doors that swing outward and maintaining smoke detectors are not expensive things to do. (And yet factories in Bangladesh often fail to meet such basic requirements, which kills hundreds of workers each year.) But other safety standards may be justifiably relaxed; OSHA compliance in the US costs about $70 billion per year, about $200 per person, which many countries simply couldn’t afford. (On the other hand, OSHA saves thousands of lives, does not increase unemployment, and may actually benefit employers when compared with the high cost of private injury lawsuits.) We should have expert economists perform careful cost-benefit analyses of proposed safety regulations to determine which ones are cost-effective at protecting workers and which ones are too expensive to be viable.

While we’re at it, these regulations should include environmental standards, or a global carbon tax that’s used to fund climate change mitigation efforts around the world. Here there isn’t much excuse for not being strict; pollution and environmental degradation harms the poor the most. Yes, we do need to consider the benefits of production that is polluting; but we have plenty of profit incentives for that already. Right now the balance is clearly tipped far too much in favor of more pollution than the optimum rather than less. Even relatively heavy-handed policies like total bans on offshore drilling and mountaintop removal might be in order; in general I’d prefer to tax rather than ban, but these activities are so enormously damaging that if the choice is between a ban and doing nothing, I’ll take the ban. (I’m less convinced of this with regard to fracking; yes, earthquakes and polluted groundwater are bad—but are they Saudi Arabia bad? Because buying more oil from Saudi Arabia is our leading alternative.)

It should go without saying (but unfortunately it doesn’t seem to) that our regulations must include an absolute zero-tolerance policy for forced labor. If we find out that a company is employing forced labor, they should have to not only free every single enslaved worker, but pay each one a million dollars (PPP 2005 chained CPI of course). If they can’t do that and they go bankrupt, good riddance; remind me to play them the world’s saddest song on the world’s tiniest violin. Of course, first we need to find out, which brings me to the most important point.

Above all, these regulations must be enforced. We could start with enforceable multilateral trade agreements, where tariff reductions are tied to human rights and labor standards. This is something the President of the United States could do, right now, as an addendum to the Trans-Pacific Partnership. (What he should have done is made the TPP contingent on this, but it’s too late for that.) Future trade agreements should include these as a matter of course.If countries want to reap the benefits of free trade, they must be held accountable for sharing those benefits equitably with their people.

But ultimately we should not depend upon multilateral agreements between nations—we need truly international standards with global enforcement. We should empower the International Labor Organization to enact sanctions and inspections (right now it mostly enacts suggestions which are promptly and dutifully ignored), and possibly even to arrest executives for trial at the International Criminal Court. We should double if not triple or quadruple their funding—and if member nations will not pay this voluntarily, we should make them—the United Nations should be empowered to collect taxes in support of global development, which should be progressive with per-capita GDP. Coercion, you say? National sovereignty, you say? Millions of starving little girls is my reply.

Right now, the ability of multinational corporations to move between countries to find the ones that let them pay the least have created a race to the floor; it’s time for us to raise that floor.

What can you yourself do, assuming you’re not a head of state? (If you are, I’m honored. Also, any openings on your staff?) Well, you can vote—and you can use that vote to put pressure on your legislators to support these kinds of polices. There are also some other direct actions you can take that I discussed in a previous post; but mainly what we need is policy. Consumer pressure and philanthropy are good, and by all means, don’t stop; but to really achieve global justice we will need nothing short of global governance.

We do not benefit from economic injustice.

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JDN 2457461

Recently I think I figured out why so many middle-class White Americans express so much guilt about global injustice: A lot of people seem to think that we actually benefit from it. Thus, they feel caught between a rock and a hard place; conquering injustice would mean undermining their own already precarious standard of living, while leaving it in place is unconscionable.

The compromise, is apparently to feel really, really guilty about it, constantly tell people to “check their privilege” in this bizarre form of trendy autoflagellation, and then… never really get around to doing anything about the injustice.

(I guess that’s better than the conservative interpretation, which seems to be that since we benefit from this, we should keep doing it, and make sure we elect big, strong leaders who will make that happen.)

So let me tell you in no uncertain words: You do not benefit from this.

If anyone does—and as I’ll get to in a moment, that is not even necessarily true—then it is the billionaires who own the multinational corporations that orchestrate these abuses. Billionaires and billionaires only stand to gain from the exploitation of workers in the US, China, and everywhere else.

How do I know this with such certainty? Allow me to explain.

First of all, it is a common perception that prices of goods would be unattainably high if they were not produced on the backs of sweatshop workers. This perception is mistaken. The primary effect of the exploitation is simply to raise the profits of the corporation; there is a secondary effect of raising the price a moderate amount; and even this would be overwhelmed by the long-run dynamic effect of the increased consumer spending if workers were paid fairly.

Let’s take an iPad, for example. The price of iPads varies around the world in a combination of purchasing power parity and outright price discrimination; but the top model almost never sells for less than $500. The raw material expenditure involved in producing one is about $370—and the labor expenditure? Just $11. Not $110; $11. If it had been $110, the price could still be kept under $500 and turn a profit; it would simply be much smaller. That is, even if prices are really so elastic that Americans would refuse to buy an iPad at any more than $500 that would still mean Apple could still afford to raise the wages they pay (or rather, their subcontractors pay) workers by an order of magnitude. A worker who currently works 50 hours a week for $10 per day could now make $10 per hour. And the price would not have to change; Apple would simply lose profit, which is why they don’t do this. In the absence of pressure to the contrary, corporations will do whatever they can to maximize profits.

Now, in fact, the price probably would go up, because Apple fans are among the most inelastic technology consumers in the world. But suppose it went up to $600, which would mean a 1:1 absorption of these higher labor expenditures into price. Does that really sound like “Americans could never afford this”? A few people right on the edge might decide they couldn’t buy it at that price, but it wouldn’t be very many—indeed, like any well-managed monopoly, Apple knows to stop raising the price at the point where they start losing more revenue than they gain.

Similarly, half the price of an iPhone is pure profit for Apple, and only 2% goes into labor. Once again, wages could be raised by an order of magnitude and the price would not need to change.

Apple is a particularly obvious example, but it’s quite simple to see why exploitative labor cannot be the source of improved economic efficiency. Paying workers less does not make them do better work. Treating people more harshly does not improve their performance. Quite the opposite: People work much harder when they are treated well. In addition, at the levels of income we’re talking about, small improvements in wages would result in substantial improvements in worker health, further improving performance. Finally, substitution effect dominates income effect at low incomes. At very high incomes, income effect can dominate substitution effect, so higher wages might result in less work—but it is precisely when we’re talking about poor people that it makes the least sense to say they would work less if you paid them more and treated them better.

At most, paying higher wages can redistribute existing wealth, if we assume that the total amount of wealth does not increase. So it’s theoretically possible that paying higher wages to sweatshop workers would result in them getting some of the stuff that we currently have (essentially by a price mechanism where the things we want get more expensive, but our own wages don’t go up). But in fact our wages are most likely too low as well—wages in the US have become unlinked from productivity, around the time of Reagan—so there’s reason to think that a more just system would improve our standard of living also. Where would all the extra wealth come from? Well, there’s an awful lot of room at the top.

The top 1% in the US own 35% of net wealth, about as much as the bottom 95%. The 400 billionaires of the Forbes list have more wealth than the entire African-American population combined. (We’re double-counting Oprah—but that’s it, she’s the only African-American billionaire in the US.) So even assuming that the total amount of wealth remains constant (which is too conservative, as I’ll get to in a moment), improving global labor standards wouldn’t need to pull any wealth from the middle class; it could get plenty just from the top 0.01%.

In surveys, most Americans are willing to pay more for goods in order to improve labor standards—and the amounts that people are willing to pay, while they may seem small (on the order of 10% to 20% more), are in fact clearly enough that they could substantially increase the wages of sweatshop workers. The biggest problem is that corporations are so good at covering their tracks that it’s difficult to know whether you are really supporting higher labor standards. The multiple layers of international subcontractors make things even more complicated; the people who directly decide the wages are not the people who ultimately profit from them, because subcontractors are competitive while the multinationals that control them are monopsonists.

But for now I’m not going to deal with the thorny question of how we can actually regulate multinational corporations to stop them from using sweatshops. Right now, I just really want to get everyone on the same page and be absolutely clear about cui bono. If there is a benefit at all, it’s not going to you and me.

Why do I keep saying “if”? As so many people will ask me: “Isn’t it obvious that if one person gets less money, someone else must get more?” If you’ve been following my blog at all, you know that the answer is no.

On a single transaction, with everything else held constant, that is true. But we’re not talking about a single transaction. We’re talking about a system of global markets. Indeed, we’re not really talking about money at all; we’re talking about wealth.

By paying their workers so little that those workers can barely survive, corporations are making it impossible for those workers to go out and buy things of their own. Since the costs of higher wages are concentrated in one corporation while the benefits of higher wages are spread out across society, there is a Tragedy of the Commons where each corporation acting in its own self-interest undermines the consumer base that would have benefited all corporations (not to mention people who don’t own corporations). It does depend on some parameters we haven’t measured very precisely, but under a wide range of plausible values, it works out that literally everyone is worse off under this system than they would have been under a system of fair wages.

This is not simply theoretical. We have empirical data about what happened when companies (in the US at least) stopped using an even more extreme form of labor exploitation: slavery.

Because we were on the classical gold standard, GDP growth in the US in the 19th century was extremely erratic, jumping up and down as high as 10 lp and as low as -5 lp. But if you try to smooth out this roller-coaster business cycle, you can see that our growth rate did not appear tobe slowed by the ending of slavery:

US_GDP_growth_1800s

 

Looking at the level of real per capita GDP (on a log scale) shows a continuous growth trend as if nothing had changed at all:

US_GDP_per_capita_1800s

In fact, if you average the growth rates (in log points, averaging makes sense) from 1800 to 1860 as antebellum and from 1865 to 1900 as postbellum, you find that the antebellum growth rate averaged 1.04 lp, while the postbellum growth rate averaged 1.77 lp. Over a period of 50 years, that’s the difference between growing by a factor of 1.7 and growing by a factor of 2.4. Of course, there were a lot of other factors involved besides the end of slavery—but at the very least it seems clear that ending slavery did not reduce economic growth, which it would have if slavery were actually an efficient economic system.

This is a different question from whether slaveowners were irrational in continuing to own slaves. Purely on the basis of individual profit, it was most likely rational to own slaves. But the broader effects on the economic system as a whole were strongly negative. I think that part of why the debate on whether slavery is economically inefficient has never been settled is a confusion between these two questions. One side says “Slavery damaged overall economic growth.” The other says “But owning slaves produced a rate of return for investors as high as manufacturing!” Yeah, those… aren’t answering the same question. They are in fact probably both true. Something can be highly profitable for individuals while still being tremendously damaging to society.

I don’t mean to imply that sweatshops are as bad as slavery; they are not. (Though there is still slavery in the world, and some sweatshops tread a fine line.) What I’m saying is that showing that sweatshops are profitable (no doubt there) or even that they are better than most of the alternatives for their workers (probably true in most cases) does not show that they are economically efficient. Sweatshops are beneficent exploitation—they make workers better off, but in an obviously unjust way. And they only make workers better off compared to the current alternatives; if they were replaced with industries paying fair wages, workers would obviously be much better off still.

And my point is, so would we. While the prices of goods would increase slightly in the short run, in the long run the increased consumer spending by people in Third World countries—which soon would cease to be Third World countries, as happened in Korea and Japan—would result in additional trade with us that would raise our standard of living, not lower it. The only people it is even plausible to think would be harmed are the billionaires who own our multinational corporations; and yet even they might stand to benefit from the improved efficiency of the global economy.

No, you do not benefit from sweatshops. So stop feeling guilty, stop worrying so much about “checking your privilege”—and let’s get out there and do something about it.