White-collar crime dwarfs all other property crime

Aug 25 JDN 2458722

When you think of “property crime”, you probably envision pickpockets in crowded squares, muggers in dark alleys or burglars breaking into houses. But this is not the kind of property crime that does the most damage—not by a long shot.

Based on FBI estimates, the total economic value of all stolen property (in this conventional sense) is about $14 billion per year. This is less than 0.1% of US GDP.

Wage theft, in which corporations withhold pay that they are contractually obliged to pay, often by misrepresenting hours or not paying overtime rates, is by itself already $50 billion per year.

But this too pales in comparison to the real threat, which is white-collar crime. The direct cost of white-collar crime to the United States has been estimated at between $250 and $600 billion per year. This is about 1-3% of GDP; the average company loses 6% of its revenue to white-collar crime.

This is comparable to, and quite likely more than, the $280 billion total expenditure of all law enforcement and criminal justice in the United States—which has the highest total law enforcement expenditure in the world, and nearly the highest per capita as well.

This is only direct cost, mind you. If you include the indirect costs of all forms of crime, including violent crime, the total cost of all crime in the US rises to about $1.5 trillion. But this figure does not account for white-collar crime. Since the direct costs of white-collar crime are so much higher than those of other forms of crime, it’s quite likely that the indirect costs are higher as well. (Indeed, I think it can be reasonably argued that The Great Recession was an indirect cost of white-collar crime—and it cost about $14 trillion in lost economic output.)

And this is not including the approximately $300 billion per year in tax evasion (mostly in the form of unreported income and overstated charitable contributions).

The graph below compares these figures visually:

Value_of_crime

Crime pays quite well, as a matter of fact, as long as it’s the right kind of crime.

Our law enforcement system is designed to punish the crimes of the poor, and does so quite relentlessly. But it seems uninterested in punishing the crimes of the rich.

Some of the policies needed to reduce white-collar crime are quite obvious. The first is tax auditing: As the IRS budget has been cut, the number of tax audits has been plummeting, from 1.7 million in 2012 to only 1.1 million in 2017, a decrease of over a third. High-income returns—which are, obviously, where the worst tax evasion happens—have seen an even more precipitous decline in auditing. In 2011, a return over $1 million had about a 12% chance of being audited; now that probability is only 3%.

The budget cuts to the IRS make less than no sense; since 2002, they reduced spending by $14 billion and tax evasion increased by $34 billion. This is the opposite of fiscal responsibility.

Another obvious policy change is to increase spending on the FTC and SEC, the agencies responsible for investigating business transactions and rooting out securities fraud.

Meanwhile, we are actually cutting the SEC budget. This is beyond madness; the total SEC budget is a measly $1.5 billion, and collected entirely from banks, not taxpayers in general. The SEC budget does not contribute to the federal deficit in any way. And think about what madness was to begin with to allocate a budget of only $1.5 billion to regulate an industry with a market value of $26 trillion in this country alone. This is only 0.006%. Since a tax of 0.5% on stock trades, 0.1% on bond trades, and 0.005% on derivatives trades would raise a whopping $220 billion, this means that simply imposing a 0.01% tax on financial transactions would raise enough to increase the SEC budget by an order of magnitude. And this is low enough that it would be felt by basically no one. Frankly if you even care what happens to a single basis point of your rate of return, you are obviously over-leveraged. The difference between making 6.99% and 7.00% per year over 30 years is the difference between turning $1,000 into $7,590.94 and turning it into $7,612.25. That’s a difference of 2% over thirty years.

Simply increasing IRS and SEC audits would not eliminate white-collar crime, of course. It is far too ubiquitous and sophisticated for that. But the fact that we have been cutting these budgets instead of raising them speaks to a much more disturbing truth: These are not the policies of a government that is seriously trying to improve its budget balance. They are the policies of a government that is being corrupted from within, becoming tilted further and further toward the interests of the wealthy.

Defending yourself defends others

Mar 10 JDN 2458553

There’s a meme going around the feminist community that is very well-intentioned, but dangerously misguided. I first encountered it as a tweet, though it may have originated elsewhere:

If you’re promoting changes to women’s behaviour to “prevent” rape, you’re really saying “make sure he rapes the other girl”.

The good intention here is that we need to stop blaming victims. Victim-blaming is ubiquitous, and especially common and harmful in the case of sexual assault. If someone assaults you—or robs you, or abuses you—it is never your fault.

But I fear that there is a baby being thrown out with this bathwater: While failing to defend yourself doesn’t make it your fault, being able to defend yourself can still make you safer.

And, just as importantly, it can make others safer too. The game theory behind that is the subject of this post.

For purposes of the theory, it doesn’t matter what the crime is. So let’s set aside the intense emotional implications of sexual assault and suppose the crime is grand theft auto.

Some cars are defended—they have a LoJack system installed that will allow them to be recovered and the thieves to be prosecuted. (Don’t suppose it’s a car alarm; those don’t work.)

Other cars are not defended—once stolen, they may not be recovered.

There are two cases to consider: Defense that is visible, and defense that is invisible.

Let’s start by assuming that the defense is visible: When choosing which car to try to steal, the thieves can intentionally pick one that doesn’t have a LoJack installed. (This doesn’t work well for car theft, but it’s worth considering for the general question of self-defense. The kind of clothes you wear, the way you carry yourself, how many people are with you, and overall just how big and strong you look are visible signs of a capacity for self-defense.)

In that case, the game is one of perfect information: First each car owner chooses whether or not to install a LoJack at some cost L (in real life, about $700), and then thieves see which cars are equipped and then choose which car to steal.

Let’s say the probability of a car theft being recovered and prosecuted if it’s defended is p, and the probability of it being recovered if it’s not defended is q; p > q. In the real world, about half of stolen cars are recovered—but over 90% of LoJack-equipped vehicles are recovered, so p = 0.9 and q = 0.5.

Then let’s say the cost of being caught and prosecuted is C. This is presumably quite high: If you get convicted, you could spend time in prison. But maybe the car will be recovered and the thief won’t be convicted. Let’s ballpark that at about $30,000.

Finally, the value of successfully stealing a car is V. The average price of a used car in the US is about $20,000, so V is probably close to that.

If no cars are defended, what will the thieves choose? Assuming they are risk-neutral (car thieves don’t seem like very risk averse folks, in general), the expected benefit of stealing a car is V – q C. With the parameters above, that’s (20000)-(0.5)(30000) = $5,000. The thieves will choose a car at random and steal it.

If some cars are defended and some are not, what will the thieves choose? They will avoid the defended cars and steal one of the undefended cars.

But what if all cars are defended? Now the expected benefit is V – p C, which is (20000)-(0.9)(30000) = -$7,000. The thieves will not steal any cars at all. (This is actually the unique subgame-perfect equilibrium: Everyone installs a LoJack and no cars get stolen. Of course, that assumes perfect rationality.)

Yet that isn’t so impressive; everyone defending themselves results in everyone being defended? That sounds tautological. Expecting everyone to successfully defend themselves all the time sounds quite unreasonable. This might be what people have in mind when they say things like the quote above: It’s impossible for everyone to be defended always.

But it turns out that we don’t actually need that. Things get a lot more interesting when we assume that self-defense can be invisible. It would be very hard to know whether a car has a LoJack installed without actually opening it up, and there are many other ways to defend yourself that are not so visible—such as knowing techniques of martial arts or using a self-defense phone app.

Now the game has imperfect information. The thieves don’t know whether you have chosen to defend your car or not.

We need to add a couple more parameters. First is the number of cars per thief n. Then we need the proportion of cars that are defended. Let’s call it d. Then with probability d a given car is defended, and with probability 1-d it is not.

The expected value of stealing a car for the thieves is now this: V – p d C – q (1-d) C. If this is positive, they will steal a car; if it is negative, they will not.

Knowing this, should you install a LoJack? Remember that it costs you L to do so.

What’s the probability your car will be stolen? If they are stealing cars at all, the probability of your car being one stolen is 1/n. If that happens, you will have an expected loss of (1-p)V if you have a LoJack, or (1-q)V if you don’t. The difference between those is (p-q)V.

So your expected benefit of having a LoJack is (p-q)V/n – L. With the parameters above, that comes to: (0.9-0.5)(20000)/n – (700) = 8000/n – 700. So if there are no more than 11 cars per thief, this is positive and you should buy a LoJack. If there are 12 or more cars per thief, you’re better off taking your chances.

This only applies if the thieves are willing to steal at all. And then the interesting question is whether V – p d C – q (1-d) C is positive. For these parameters, that’s (20000) – (0.9)(30000)d – (0.5)(30000) + (0.5)(30000)d = 5000 – 12000 d. Notice that if we substitute in d=0 we get back $5,000, and at d=1 we get back -$7,000, just as before. There is a critical value of d at which the thieves aren’t sure whether to try or not: d* = 5/12 = 0.42.

Assuming that a given car is worth defending if it would be stolen (n <= 11), the equilibrium is actually when precisely d* of the cars are defended and 1-d* are not. Any less than this, and there is an undefended car that would be worth defending. Any more than this, and the thieves aren’t going to try to steal anything, so why bother defending?

Of course this is a very stylized model: In particular, we assumed that all cars are equally valuable and equally easy to steal, which is surely not true in real life.

Yet this model is still enough to make the most important point: Since presumably we do not value the welfare of the car thieves, it could happen that people choosing on their own would not defend their cars, but society as a whole would be better off if they did.

The net loss to society from a stolen car is (1-q)V if the car was not defended, or (1-p)V if it was. But if the thieves don’t steal any cars at all, the net loss to society is zero. The cost of defending a proportion d* of all cars is n d* L.

So if we are currently at d = 0, society is currently losing (1-q)V. We could eliminate this cost entirely by paying n d* L to defend a sufficient number of cars. Suppose n = 30. Then this total cost is (30)(5/12)(700) = $8,750. The loss from cars being stolen was (0.5)(20000) = $10,000. So it would be worth it, from society’s perspective, to randomly install LoJack systems in 42% of cars.

But for any given car owner, it would not be worth it; the expected benefit is 8000/30 – 700 = -$433. (I guess we could ask how much you’re willing to pay for “peace of mind”.)

Where does the extra benefit go? To all the other car owners. By defending your car, you are raising d and thereby lowering the expected payoff for a car thief. There is a positive externality; this is a public good. You get some of that benefit yourself, but others also share in that benefit.

This brings me at last to the core message of this post:

Self-defense is a public good.

The better each person defends themselves, the riskier it becomes for criminals to try to victimize anyone. Never feel guilty for trying to defend yourself; you are defending everyone else at the same time. In fact, you should consider taking actions to defend yourself even when you aren’t sure it’s worth it for you personally: That positive externality may be large enough to make your actions worthwhile for society as a whole.

Again, this does not mean we should blame victims when they are unable to defend themselves. Self-defense is easier for some people than others, and everyone is bound to slip up on occasion. (Also, eternal vigilance can quickly shade over into paranoia.) It is always the perpetrator’s fault.

The inherent atrocity of “border security”

Jun 24 JDN 2458294

By now you are probably aware of the fact that a new “zero tolerance” border security policy under the Trump administration has resulted in 2,000 children being forcibly separated from their parents by US government agents. If you weren’t, here are a variety of different sources all telling the same basic story of large-scale state violence and terror.

Make no mistake: This is an atrocity. The United Nations has explicitly condemned this human rights violation—to which Trump responded by making an unprecedented threat of withdrawing unilaterally from the UN Human Rights Council.

#ThisIsNotNormal, and Trump was everything we feared—everything we warned—he would be: Corrupt, incompetent, cruel, and authoritarian.

Yet Trump’s border policy differs mainly in degree, not kind, from existing US border policy. There is much more continuity here than most of us would like to admit.

The Trump administration has dramatically increased “interior removals”, the most obviously cruel acts, where ICE agents break into the houses of people living in the US and take them away. Don’t let the cold language fool you; this is literally people with guns breaking into your home and kidnapping members of your family. This is characteristic of totalitarian governments, not liberal democracies.

And yet, the Obama administration actually holds the record for most deportations (though only because they included “at-border deportations” which other administrations did not). A major policy change by George W. Bush started this whole process of detaining people at the border instead of releasing them and requiring them to return for later court dates.

I could keep going back; US border enforcement has gotten more and more aggressive as time goes on. US border security staffing has quintupled since just 1990. There was a time when the United States was a land of opportunity that welcomed “your tired, your poor, your huddled masses”; but that time is long past.

And this, in itself, is a human rights violation. Indeed, I am convinced that border security itself is inherently a human rights violation, always and everywhere; future generations will not praise us for being more restrained than Trump’s abject and intentional cruelty, but condemn us for acting under the same basic moral framework that justified it.

There is an imaginary line in the sand just a hundred miles south of where I sit now. On one side of the line, a typical family makes $66,000 per year. On the other side, a typical family makes only $20,000. On one side of the line, life expectancy is 81 years; on the other, 77. This means that over their lifetime, someone on this side of the line can expect to make over one million dollars more than they would if they had lived on the other side. Step across this line, get a million dollars; it sounds ridiculous, but it’s an empirical fact.

This would be bizarre enough by itself; but now consider that on that line there are fences, guard towers, and soldiers who will keep you from crossing it. If you have appropriate papers, you can cross; but if you don’t, they will arrest and detain you, potentially for months. This is not how we treat you if you are carrying contraband or have a criminal record. This is how we treat you if you don’t have a passport.

How can we possibly reconcile this with the principles of liberal democracy? Philosophers have tried, to be sure. Yet they invariably rely upon some notion that the people who want to cross our border are coming from another country where they were already granted basic human rights and democratic representation—which is almost never the case. People who come here from the UK or the Netherlands or generally have the proper visas. Even people who come here from China usually have visas—though China is by no means a liberal democracy. It’s people who come here from Haiti and Nicaragua who don’t—and these are some of the most corrupt and impoverished nations in the world.

As I said in an earlier post, I was not offended that Trump characterized countries like Haiti and Syria as “shitholes”. By any objective standard, that is accurate; these countries are terrible, terrible places to live. No, what offends me is that he thinks this gives us a right to turn these people away, as though the horrible conditions of their country somehow “rub off” on them and make them less worthy as human beings. On the contrary, we have a word for people who come from “shithole” countries seeking help, and that word is “refugee”.

Under international law, “refugee” has a very specific legal meaning, under which most immigrants do not qualify. But in a broader moral sense, almost every immigrant is a refugee. People don’t uproot themselves and travel thousands of miles on a whim. They are coming here because conditions in their home country are so bad that they simply cannot tolerate them anymore, and they come to us desperately seeking our help. They aren’t asking for handouts of free money—illegal immigrants are a net gain for our fiscal system, paying more in taxes than they receive in benefits. They are looking for jobs, and willing to accept much lower wages than the workers already here—because those wages are still dramatically higher than what they had where they came from.

Of course, that does potentially mean they are competing with local low-wage workers, doesn’t it? Yes—but not as much as you might think. There is only a very weak relationship between higher immigration and lower wages (some studies find none at all!), even at the largest plausible estimates, the gain in welfare for the immigrants is dramatically higher than the loss in welfare for the low-wage workers who are already here. It’s not even a question of valuing them equally; as long as you value an immigrant at least one tenth as much as a native-born citizen, the equation comes out favoring more immigration.

This is for two reasons: One, most native-born workers already are unwilling to do the jobs that most immigrants do, such as picking fruit and laying masonry; and two, increased spending by immigrants boosts the local economy enough to compensate for any job losses.

 

But even aside from the economic impacts, what is the moral case for border security?

I have heard many people argue that “It’s our home, we should be able to decide who lives here.” First of all, there are some major differences between letting someone live in your home and letting someone come into your country. I’m not saying we should allow immigrants to force themselves into people’s homes, only that we shouldn’t arrest them when they try cross the border.

But even if I were to accept the analogy, if someone were fleeing oppression by an authoritarian government and asked to live in my home, I would let them. I would help hide them from the government if they were trying to escape persecution. I would even be willing to house people simply trying to escape poverty, as long as it were part of a well-organized program designed to ensure that everyone actually gets helped and the burden on homeowners and renters was not too great. I wouldn’t simply let homeless people come live here, because that creates all sorts of coordination problems (I can only fit so many, and how do I prioritize which ones?); but I’d absolutely participate in a program that coordinates placement of homeless families in apartments provided by volunteers. (In fact, maybe I should try to petition for such a program, as Southern California has a huge homelessness rate due to our ridiculous housing prices.)

Many people seem to fear that immigrants will bring crime, but actually they reduce crime rates. It’s really kind of astonishing how much less crime immigrants commit than locals. My hypothesis is that immigrants are a self-selected sample; the kind of person willing to move thousands of miles isn’t the kind of person who commits a lot of crimes.
I understand wanting to keep out terrorists and drug smugglers, but there are already plenty of terrorists and drug smugglers here in the US; if we are unwilling to set up border security between California and Nevada, I don’t see why we should be setting it up between California and Baja California. But okay, fine, we can keep the customs agents who inspect your belongings when you cross the border. If someone doesn’t have proper documentation, we can even detain and interrogate them—for a few hours, not a few months. The goal should be to detect dangerous criminals and nothing else. Once we are confident that you have not committed any felonies, we should let you through—frankly, we should give you a green card. We should only be willing to detain someone at the border for the same reasons we would be willing to detain a citizen who already lives here—that is, probable cause for an actual crime. (And no, you don’t get to count “illegal border crossing” as a crime, because that’s begging the question. By the same logic I could justify detaining people for jaywalking.)

A lot of people argue that restricting immigration is necessary to “preserve local culture”; but I’m not even sure that this is a goal sufficiently important to justify arresting and detaining people, and in any case, that’s really not how culture works. Culture is not advanced by purism and stagnation, but by openness and cross-pollination. From anime to pizza, many of our most valued cultural traditions would not exist without interaction across cultural boundaries. Introducing more Spanish speakers into the US may make us start saying no problemo and vamonos, but it’s not going to destroy liberal democracy. If you value culture, you should value interactions across different societies.

Most importantly, think about what you are trying to justify. Even if we stop doing Trump’s most extreme acts of cruelty, we are still talking about using military force to stop people from crossing an imaginary line. ICE basically treats people the same way the SS did. “Papers, please” isn’t something we associate with free societies—it’s characteristic of totalitarianism. We are so accustomed to border security (or so ignorant of its details) that we don’t see it for the atrocity it so obviously is.

National borders function something very much like feudal privilege. We have our “birthright”, which grants us all sorts of benefits and special privileges—literally tripling our incomes and extending our lives. We did nothing to earn this privilege. If anything, we show ourselves to be less deserving (e.g. by committing more crimes). And we use the government to defend our privilege by force.

Are people born on the other side of the line less human? Are they less morally worthy? On what grounds do we point guns at them and lock them away for the “crime” of wanting to live here?

What Trump is doing right now is horrific. But it is not that much more horrific than what we were already doing. My hope is that this will finally open our eyes to the horrors that we had been participating in all along.

Why is redistribution of wealth so difficult to achieve in the US?

Jan 28 JDN 2458147

Income and wealth in equality is much higher in the US than in other First World countries. Within the OECD, only Mexico, Turkey, and Chile have higher income inequality than we do. Over 60% of Americans agree that the distribution of wealth in the US is unfair. Furthermore, the majority of Americans support the use of taxes and transfers to directly redistribute wealth from the rich to the poor.

Why, then, is it so hard to actually get any meaningful wealth redistribution in the United States?

Part of it is surely partisan differences: While about 70% of Democrats favor redistributive taxes, about 70% of Republicans oppose them. So one would not expect a move toward redistribution when Republicans control all three branches of government, and indeed we have seen quite the opposite. (Then again, one would also not expect a government shutdown under one-party rule, and yet that is what we have.)

But even most Republicans say they would like to see a much more equal distribution of wealth than the one we actually have. In fact, when I as an inequality economist look at the distribution of wealth people say they want, it looks a little too equal! Even Denmark and Sweden aren’t that egalitarian! I know more or less how to get from here to Denmark; but from here to “Equalden” looks like an awful long way. So if this is really the distribution of wealth people want, we need to be doing a huge amount of wealth redistribution—but we’re hardly doing any at all.

Indeed, we didn’t actually see all that much redistribution of wealth when Democrats more or less controlled all three branches in the period from 2008-2010. We may have seen a little bit shortly thereafter, and tax policy typically does come with a delay of a year or two. But as you can see in this graph, the Great Recession did more to reduce the top 1% income share than any tax policy changes:

US_top_income_share_1pct

The biggest changes made to our tax code under Obama were actually the handling of capital gains; the increase of the top rate on capital gains from 15% to 20%, plus the 3.8% capital surtax from the Affordable Care Act raised the tax bill for the top 0.1% by tens of billions of dollars. Surprisingly, Trump’s tax cuts don’t actually remove these provisions, though they did dramatically cut the corporate tax rate, which will probably have a similar effect on the income distribution.

To be honest, I’m not as disappointed with Trump’s tax cuts as I thought I would be. Some genuinely good ideas (like the reduction of the mortgage interest deduction, tighter restrictions on carried interest, and increase of the personal standard deduction) and some reasonable but debatable ideas (like cuts to the corporate tax rate, switching to a territorial corporate tax system, limits to deductions on corporate debt payments, removal of the deduction of state taxes, and extensions of 529 savings plans to private primary and secondary schools) were mixed in with the absolutely ludicrous and terrible ideas (like eliminating the Obamacare mandate, doubling the estate tax threshold, cutting the alcohol tax, and allowing offshore drilling in Alaska [One of these things is not like the other ones….]). Some of the terrible ideas, like ending the deduction of student loan interest and tuition waivers, were actually removed in the final version of the bill. Of course, you won’t be surprised when I tell you that the overall US tax system became a lot less progressive as a result of this bill. And even if cutting the corporate tax while raising the capital gains tax is probably a good idea (as I and many economists believe), cutting the corporate tax without raising the capital gains tax probably isn’t.

(An aside: For how much they claim to be “tough on crime”, it’s always kind of baffling to see how often Republicans like to cut alcohol taxes and pollution regulations, which are pretty much the only things that have ever been empirically shown to actually reduce crime. There is some evidence that maybe more policing also helps, but if so, it does so in a far less cost-effective way—indeed, the direct cost of alcohol taxes and pollution taxes is negative. Even if they didn’t work at all, they’d still be worth it just because they raise revenue. I begin to suspect that Republicans don’t actually want to reduce crime, because they know they can use the fear of crime to win votes; they simply want to appear tough on crime, and so they press as hard as they can for more policing and incarceration in the country that already has the highest incarceration rate in the world. This may be a more general phenomenon: While Democrats want to actually solve problems, Republicans want to appear to solve problems while actually exacerbating them, thus insuring their own job security. Compare how Bush kept talking about Osama bin laden while invading Iraq, and Obama actually killed Osama bin Laden. Is this too cynical? Can anything be too cynical in the era of Trump? There were 50,000 Russian bots on Twitter trying to tilt our election! Mueller’s FBI investigation is already implicating several of Trump’s top officials! Everything that seemed like paranoia or cynicism just a few years ago is turning out to be entirely true.)

This is what seems to happen: Year after year, we raise some taxes, then we cut some taxes. Then when raise some taxes, then we cut some taxes. The tax system gets a little more progressive for a few years and inequality begins to fall, and then those changes are removed and inequality begins to rise again. Back and forth and round and round we go.

Is there some way to lock in these tax changes for a longer period of time? The only way I can see would be a change in voter behavior: Keep voting in Democrats to all branches of government consistently for 20 years, and then maybe we would see a serious reduction in income and wealth inequality. Or at least stop voting in Republicans; aside from the Democrats, there are some third parties that would also support redistribution, like the Green Party. And yes, it really is about voting behavior: As prevalent as gerrymandering has become, as terrible as the Electoral College is, as widespread as voter suppression has gotten, Trump only won because 63 million Americans voted for him. Even after everything he’s done, Trumps’ approval rating is still about 39%. As long as there are enough people in this country whose partisan loyalty so strongly outweighs any rational assessment of policy, we are going to continue to see such travesties continue.

It would certainly help if our voting system were fairer, so that third parties had a better chance at taking seats. But it’s also difficult to see how that could happen any time soon. For now, the best I can come up with is trying to show people two things:

First, most Americans favor redistribution of wealth. You’re not alone in wanting that. It’s not some fringe opinion.

Second, there is a real difference between Democrats and Republicans on this issue. The canard “The two parties are the same” is the most untrue it has been in at least twenty years.

I would even understand if there are other issues you consider more important than wealth redistribution. Ecological sustainability is the most defensible—you can’t eat GNP—though that would push you even harder toward the left. Among things that might push you right, I can understand being concerned about higher taxes hurting economic growth, and while I think the view that abortion is murder is ludicrous, given that as your belief I can understand why you would want to prioritize fighting abortion. (If I thought we were murdering millions of babies every year, I’d be pretty mad too! Of course, you should be glad, then, that the US abortion rate has been falling. Right? You know about that, right?)

What I don’t get, however, is people who thought that voting for Donald Trump would help working people. I don’t understand how you can see someone who epitomizes everything that is wrong with the billionaire rentier class and think, “Yeah, he seems like he’s definitely a populist. That guy who was born insanely rich and made even more mind-boggling amounts of money by lying and screwing people over is definitely going to look out for folks like me.”

If I understood that, maybe I would know where to go from here. But people’s political beliefs can be astonishingly intransigent to evidence. Politics is the mind-killer.

What exactly is “gentrification”? How should we deal with it?

Nov 26, JDN 2458083

“Gentrification” is a word that is used in a variety of mutually-inconsistent ways. If you compare the way social scientists use it to the way journalists use it, for example, they are almost completely orthogonal.

The word “gentrification” is meant to invoke the concept of a feudal gentry—a hereditary landed class that extracts rents from the rest of the population while contributing little or nothing themselves.

If indeed that is what we are talking about, then obviously this is bad. Moreover, it’s not an entirely unfounded fear; there are some remarkably strong vestiges of feudalism in the developed world, even in the United States where we never formally had a tradition of feudal titles. There really is a significant portion of the world’s wealth held by a handful of billionaire landowner families.

But usually when people say “gentrification” they mean something much broader. Almost any kind of increase in urban real estate prices gets characterized as “gentrification” by at least somebody, and herein lies the problem.

In fact, the kind of change that is most likely to get characterized as “gentrification” isn’t even the rising real estate prices we should be most worried about. People aren’t concerned when the prices of suburban homes double in 20 years. You might think that things that are already too expensive getting more expensive would be the main concern, but on the contrary, people are most likely to cry “gentrification” when housing prices rise in poor areas where housing is cheap.

One of the most common fears about gentrification is that it will displace local residents. In fact, the best quasi-experimental studies show little or no displacement effect. It’s actually mainly middle-class urbanites who get displaced by rising rents. Poor people typically own their homes, and actually benefit from rising housing prices. Young upwardly-mobile middle-class people move to cities to rent apartments near where they work, and tend to assume that’s how everyone lives, but it’s not. Rising rents in a city are far more likely to push out its grad students than they are poor families that have lived there for generations. Part of why displacement does not occur may be because of policies specifically implemented to fight it, such as subsidized housing and rent control. If that’s so, let’s keep on subsidizing housing (though rent control will always be a bad idea).

Nor is gentrification actually a very widespread phenomenon. The majority of poor neighborhoods remain poor indefinitely. In most studies, only about 30% of neighborhoods classified as “gentrifiable” actually end up “gentrifying”. Less than 10% of the neighborhoods that had high poverty rates in 1970 had low poverty rates in 2010.

Most people think gentrification reduces crime, but in the short run the opposite is the case. Robbery and larceny are higher in gentrifying neighborhoods. Criminals are already there, and suddenly they get much more valuable targets to steal from, so they do.

There is also a general perception that gentrification involves White people pushing Black people out, but this is also an overly simplistic view. First of all, a lot of gentrification is led by upwardly-mobile Black and Latino people. Black people who live in gentrified neighborhoods seem to be better off than Black people who live in non-gentrified neighborhoods; though selection bias may contribute to this effect, it can’t be all that strong, or we’d observe a much stronger displacement effect. Moreover, some studies have found that gentrification actually tends to increase the racial diversity of neighborhoods, and may actually help fight urban self-segregation, though it does also tend to increase racial polarization by forcing racial mixing.

What should we conclude from all this? I think the right conclusion is we are asking the wrong question.

Rising housing prices in poor areas aren’t inherently good or inherently bad, and policies designed specifically to increase or decrease housing prices are likely to have harmful side effects. What we need to be focusing on is not houses or neighborhoods but people. Poverty is definitely a problem, for sure. Therefore we should be fighting poverty, not “gentrification”. Directly transfer wealth from the rich to the poor, and then let the housing market fall where it may.

There is still some role for government in urban planning more generally, regarding things like disaster preparedness, infrastructure development, and transit systems. It may even be worthwhile to design regulations or incentives that directly combat racial segregation at the neighborhood level, for, as the Schelling Segregation Model shows, it doesn’t take a large amount of discriminatory preference to have a large impact on socioeconomic outcomes. But don’t waste effort fighting “gentrification”; directly design policies that will incentivize desegregation.

Rising rent as a proportion of housing prices is still bad, and the fundamental distortions in our mortgage system that prevent people from buying houses are a huge problem. But rising housing prices are most likely to be harmful in rich neighborhoods, where housing is already overpriced; in poor neighborhoods where housing is cheap, rising prices might well be a good thing.
In fact, I have a proposal to rapidly raise homeownership across the United States, which is almost guaranteed to work, directly corrects an enormous distortion in financial markets, and would cost about as much as the mortgage interest deduction (which should probably be eliminated, as most economists agree). Give each US adult a one-time grant voucher which gives them $40,000 that can only be spent as a down payment on purchasing a home. Each time someone turns 18, they get a voucher. You only get one over your lifetime, so use it wisely (otherwise the policy could become extremely expensive); but this is an immediate direct transfer of wealth that also reduces your credit constraint. I know I for one would be house-hunting right now if I were offered such a voucher. The mortgage interest deduction means nothing to me, because I can’t afford a down payment. Where the mortgage interest deduction is regressive, benefiting the rich more than the poor, this policy gives everyone the same amount, like a basic income.

In the short run, this policy would probably be expensive, as we’d have to pay out a large number of vouchers at once; but with our current long-run demographic trends, the amortized cost is basically the same as the mortgage interest deduction. And the US government especially should care about the long-run amortized cost, as it is an institution that has lasted over 200 years without ever missing a payment and can currently borrow at negative real interest rates.

Financial fraud is everywhere

Jun 4, JDN 2457909
When most people think of “crime”, they probably imagine petty thieves, pickpockets, drug dealers, street thugs. In short, we think of crime as something poor people do. And certainly, that kind of crime is more visible, and typically easier to investigate and prosecute. It may be more traumatic to be victimized by it (though I’ll get back to that in a moment).

The statistics on this matter are some of the fuzziest I’ve ever come across, so estimates could be off by as much as an order of magnitude. But there is some reason to believe that, within most highly-developed countries, financial fraud may actually be more common than any other type of crime. It is definitely among the most common, and the only serious contenders for exceeding it are other forms of property crime such as petty theft and robbery.

It also appears that financial fraud is the one type of crime that isn’t falling over time. Violent crime and property crime are both at record lows; the average American’s probability of being victimized by a thief or a robber in any given year has fallen from 35% to 11% in the last 25 years. But the rate of financial fraud appears to be roughly constant, and the rate of high-tech fraud in particular is definitely rising. (This isn’t too surprising, given that the technology required is becoming cheaper and more widely available.)

In the UK, the rate of credit card fraud rose during the Great Recession, fell a little during the recovery, and has been holding steady since 2010; it is estimated that about 5% of people in the UK suffer credit card fraud in any given year.

About 1% of US car loans are estimated to contain fraudulent information (such as overestimated income or assets). As there are over $1 trillion in outstanding US car loans, that amounts to about $5 billion in fraud losses every year.

Using DOJ data, Statistic Brain found that over 12 million Americans suffer credit card fraud any given year; based on the UK data, this is probably an underestimate. They also found that higher household income had only a slight effect of increasing the probability of suffering such fraud.

The Office for Victims of Crime estimates that total US losses due to financial fraud are between $40 billion and $50 billion per year—which is to say, the GDP of Honduras or the military budget of Japan. The National Center for Victims of Crime estimated that over 10% of Americans suffer some form of financial fraud in any given year.

Why is fraud so common? Well, first of all, it’s profitable. Indeed, it appears to be the only type of crime that is. Most drug dealers live near the poverty line. Most bank robberies make off with less than $10,000.

But Bernie Madoff made over $50 billion before he was caught. Of course he was an exceptional case; the median Ponzi scheme only makes off with… $2.1 million. That’s over 200 times the median bank robbery.

Second, I think financial fraud allows the perpetrator a certain psychological distance from their victims. Just as it’s much easier to push a button telling a drone to launch a missile than to stab someone to death, it’s much easier to move some numbers between accounts than to point a gun at someone’s head and demand their wallet. Construal level theory is all about how making something seem psychologically more “distant” can change our attitudes toward it; toward things we perceive as “distant”, we think more abstractly, we accept more risks, and we are more willing to engage in violence to advance a cause. (It also makes us care less about outcomes, which may be a contributing factor in the collective apathy toward climate change.)

Perhaps related to this psychological distance, we also generally have a sense that fraud is not as bad as violent crime. Even judges and juries often act as though white-collar criminals aren’t real criminals. Often the argument seems to be that the behavior involved in committing financial fraud is not so different, after all, from the behavior of for-profit business in general; are we not all out to make an easy buck?

But no, it is not the same. (And if it were, this would be more an indictment of capitalism than it is a justification for fraud. So this sort of argument makes a lot more sense coming from socialists than it does from capitalists.)

One of the central justifications for free markets lies in the assumption that all parties involved are free, autonomous individuals acting under conditions of informed consent. Under those conditions, it is indeed hard to see why we have a right to interfere, as long as no one else is being harmed. Even if I am acting entirely out of my own self-interest, as long as I represent myself honestly, it is hard to see what I could be doing that is morally wrong. But take that away, as fraud does, and the edifice collapses; there is no such thing as a “right to be deceived”. (Indeed, it is quite common for Libertarians to say they allow any activity “except by force or fraud”, never quite seeming to realize that without the force of government we would all be surrounded by unending and unstoppable fraud.)

Indeed, I would like to present to you for consideration the possibility that large-scale financial fraud is worse than most other forms of crime, that someone like Bernie Madoff should be viewed as on a par with a rapist or a murderer. (To its credit, our justice system agrees—Madoff was given the maximum sentence of 150 years in maximum security prison.)

Suppose you were given the following terrible choice: Either you will be physically assaulted and beaten until several bones are broken and you fall unconscious—or you will lose your home and all the money you put into it. If the choice were between death and losing your home, obviously, you’d lose your home. But when it is a question of injury, that decision isn’t so obvious to me. If there is a risk of being permanently disabled in some fashion—particularly mentally disabled, as I find that especially terrifying—then perhaps I accept losing my home. But if it’s just going to hurt a lot and I’ll eventually recover, I think I prefer the beating. (Of course, if you don’t have health insurance, recovering from a concussion and several broken bones might also mean losing your home—so in that case, the dilemma is a no-brainer.) So when someone commits financial fraud on the scale of hundreds of thousands of dollars, we should consider them as having done something morally comparable to beating someone until they have broken bones.

But now let’s scale things up. What if terrorist attacks, or acts of war by a foreign power, had destroyed over one million homes, killed tens of thousands of Americans by one way or another, and cut the wealth of the median American family in half? Would we not count that as one of the greatest acts of violence in our nation’s history? Would we not feel compelled to take some overwhelming response—even be tempted toward acts of brutal vengeance? Yet that is the scale of the damage done by the Great Recession—much, if not all, preventable if our regulatory agencies had not been asleep at the wheel, lulled into a false sense of security by the unending refrain of laissez-faire. Most of the harm was done by actions that weren’t illegal, yes; but some of actually was illegal (20% of direct losses are attributable to fraud), and most of the rest should have been illegal but wasn’t. The repackaging and selling of worthless toxic assets as AAA bonds may not legally have been “fraud”, but morally I don’t see how it was different. With this in mind, the actions of our largest banks are not even comparable to murder—they are comparable to invasion or terrorism. No mere individual shooting here; this is mass murder.

I plan to make this a bit of a continuing series. I hope that by now I’ve at least convinced you that the problem of financial fraud is a large and important one; in later posts I’ll go into more detail about how it is done, who is doing it, and what perhaps can be done to stop them.

No, this isn’t like Watergate. It’s worse.

May 21, JDN 2457895

Make no mistake: This a historic moment. This may be the greatest corruption scandal in the history of the United States. Donald Trump has fired the director of the FBI in order to block an investigation—and he said so himself.

It has become cliche to compare scandals to Watergate—to the point where we even stick the suffix “-gate” on things to indicate scandals. “Gamergate”, “Climategate”, and so on. So any comparison to Watergate is bound to draw some raised eyebrows.

But just as it’s not Godwin’s Law when you’re really talking about fascism and genocide, it’s not the “-gate” cliche when we are talking about a corruption scandal that goes all the way up to the President of the United States. And The Atlantic is right: this isn’t Watergate; it’s worse.

First of all, let’s talk about the crime of which Trump is accused. Nixon was accused of orchestrating burglary and fraud. These are not minor offenses, to be sure. But they are ordinary criminal offenses, felonies at worst. Trump is accused of fundamental Constitutional violations (particularly the First Amendment and the Emoluments Clause), and above all, Trump is accused of treason. This is the highest crime recognized by the Constitution of the United States. It is the only crime with a specifically listed Constitutional punishment—and that punishment is execution.

Donald Trump is being investigated not for stealing something or concealing information, but for colluding with foreign powers in the attempt to undermine American democracy. Is he guilty? I don’t know; that’s why we’re investigating. But let me say this: If he isn’t guilty of something, it’s quite baffling that he would fight so hard to stop the investigation.

Speaking of which: Trump’s intervention to stop Comey is much more direct, and much more sudden, than anything Nixon did to stop the Watergate investigations. Nixon of course tried to stonewall the investigations, but he did so subtly, cautiously, always trying to at least appear like he valued due process and rule of law. Trump made no such efforts, openly threatening Comey personally on Twitter and publicly declaring on national television that he had fired him to block the investigation.

But perhaps what makes the Trump-Comey affair most terrifying is how the supposedly “mainstream” Republican Party has reacted. The Republicans of Nixon had some honor left in them; several resigned rather than follow Nixon’s illegal orders, and dozens of Republicans in Congress supported the investigations and called for Nixon’s impeachment. Apparently that honor is gone now, as GOP leaders like Mitch McConnell and Lindsey Graham have expressed support for the President’s corrupt and illegal actions citing no principle other than party loyalty. If we needed any more proof that the Republican Party of the United States is no longer a mainstream political party, this is it. They don’t believe in democracy or rule of law anymore. They believe in winning at any cost, loyalty at any price. They have become a radical far-right organization—indeed, if they continue down this road of supporting the President in undermining the freedom of the press and consolidating his own power, I think it is fair to call them literally neo-fascist.

We are about to see whether American institutions can withstand such an onslaught, whether liberty and justice can prevail against corruption and tyranny. So far, there have been reasons to be optimistic: In particular, the judicial branch has proudly and bravely held the line, blocking Trump’s travel ban (multiple times), resisting his order to undermine sanctuary cities, and standing up to direct criticisms and even threats from the President himself. Our system of checks and balances is being challenged, but so far it is holding up against that challenge. We will find out soon enough whether the American system truly is robust enough to survive.