For labor day, thoughts on socialism

Planned Post 255: Sep 9 JDN 2458371

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

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

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

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

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

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

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

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

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

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

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

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

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

The real crisis in education is access, not debt

Jan 8, JDN 2457762

A few weeks ago I tried to provide assurances that the “student debt crisis” is really not much of a crisis; there is a lot of debt, but it is being spent on a very good investment both for individuals and for society. Student debt is not that large in the scheme of things, and it more than pays for itself in the long run.

But this does not mean we are not in the midst of an education crisis. It’s simply not about debt.

The crisis I’m worried about involves access.

As you may recall, there are a substantial number of people with very small amounts of student debt, and they tend to be the most likely to default. The highest default rates are among the group of people with student debt greater than $0 but less than $5000.

So how is it that there are people with only $5,000 in student debt anyway? You can’t buy much college for $5,000 these days, as tuition prices have risen at an enormous rate: From 1983 to 2013, in inflation-adjusted dollars, average annual tuition rose from $7,286 at public institutions and $17,333 at private institutions to $15,640 at public institutions and $35,987 at private institutions—more than doubling in each case.

Enrollments are much higher, but this by itself should not raise tuition per student. So where is all the extra money going? Some of it is due to increases in public funding that have failed to keep up with higher enrollments; but a lot of it just seems to be going to higher pay for administrators and athletic coaches. This is definitely a problem; students should not be forced to subsidize the millions of dollars most universities lose on funding athletics—the NCAA, who if anything are surely biased in favor of athletics, found that the total net loss due to athletics spending at FBS universities was $17 million per year. Only a handful of schools actually turn a profit on athletics, all of them Division I. So it might be fair to speak of an “irresponsible college administration crisis”, administrators who heap wealth upon themselves and their beloved athletic programs while students struggle to pay their bills, or even a “college tuition crisis” where tuition keeps rising far beyond what is sustainable. But that’s not the same thing as a “student debt crisis”—just as the mortgage crisis we had in 2008 is distinct from the slow-burning housing price crisis we’ve been in since the 1980s. Making restrictions on mortgages tighter might prevent banks from being as predatory as they have been lately, but it won’t suddenly allow people to better afford houses.

And likewise, I’m much more worried about students who don’t go to college because they are afraid of this so-called “debt crisis”; they’re going to end up much worse off. As Eduardo Porter put it in the New York Times:

And yet Mr. Beltrán says he probably wouldn’t have gone to college full time if he hadn’t received a Pell grant and financial aid from New York State to defray the costs. He has also heard too many stories about people struggling under an unbearable burden of student loans to even consider going into debt. “Honestly, I don’t think I would have gone,” he said. “I couldn’t have done four years.”

And that would have been the wrong decision.

His reasoning is not unusual. The rising cost of college looms like an insurmountable obstacle for many low-income Americans hoping to get a higher education. The notion of a college education becoming a financial albatross around the neck of the nation’s youth is a growing meme across the culture. Some education experts now advise high school graduates that a college education may not be such a good investment after all. “Sticker price matters a lot,” said Lawrence Katz, a professor of Harvard University. “It is a deterrent.”

 

[…]

 

And the most perplexing part of this accounting is that regardless of cost, getting a degree is the best financial decision a young American can make.

According to the O.E.C.D.’s report, a college degree is worth $365,000 for the average American man after subtracting all its direct and indirect costs over a lifetime. For women — who still tend to earn less than men — it’s worth $185,000.

College graduates have higher employment rates and make more money. According to the O.E.C.D., a typical graduate from a four-year college earns 84 percent more than a high school graduate. A graduate from a community college makes 16 percent more.

A college education is more profitable in the United States than in pretty much every other advanced nation. Only Irish women get more for the investment: $185,960 net.

So, these students who have $5,000 or less in student debt; what does that mean? That amount couldn’t even pay for a single year at most universities, so how did that happen?

Well, they almost certainly went to community college; only a community college could provide you with a nontrivial amount of education for less than $5,000. But community colleges vary tremendously in their quality, and some have truly terrible matriculation rates. While most students who start at a four-year school do eventually get a bachelor’s degree (57% at public schools, 78% at private schools), only 17% of students who start at community college do. And once students drop out, they very rarely actually return to complete a degree.

Indeed, the only way to really have that little student debt is to drop out quickly. Most students who drop out do so chiefly for reasons that really aren’t all that surprising: Mostly, they can’t afford to pay their bills. “Unable to balance school and work” is the number 1 reported reason why students drop out of college.

In the American system, student loans are only designed to pay the direct expenses of education; they often don’t cover the real costs of housing, food, transportation and healthcare, and even when they do, they basically never cover the opportunity cost of education—the money you could be making if you were working full-time instead of going to college. For many poor students, simply breaking even on their own expenses isn’t good enough; they have families that need to be taken care of, and that means working full-time. Many of them even need to provide for their parents or grandparents who may be poor or disabled. Yet in the US system it is tacitly assumed that your parents will help you—so when you need to help them, what are you supposed to do? You give up on college and you get a job.

The most successful reforms for solving this problem have been comprehensive; they involved working to support students directly and intensively in all aspects of their lives, not just the direct financial costs of school itself.

Another option would be to do something more like what they do in Sweden, where there is also a lot of student debt, but for a very different reason. The direct cost of college is paid automatically by the government. Yet essentially all Swedish students have student debt, and total student debt in Sweden is much larger than other European countries and comparable to the United States; why? Because Sweden understands that you should also provide for the opportunity cost. In Sweden, students live fully self-sufficient on student loans, just as if they were working full-time. They are not expected to be supported by their parents.

The problem with American student loans, then, is not that they are too large—but that they are too small. They don’t provide for what students actually need, and thus don’t allow them to make the large investment in their education that would have paid off in the long run. Panic over student loans being too large could make the problem worse, if it causes us to reduce the amount of loanable funds available for students.

The lack of support for poor students isn’t the only problem. There are also huge barriers to education in the US based upon race. While Asian students do as well (if not better) than White students, Black and Latino students have substantially lower levels of educational attainment. Affirmative action programs can reduce these disparities, but they are unpopular and widely regarded as unfair, and not entirely without reason.

A better option—indeed one that should be a no-brainer in my opinion—is not to create counter-biases in favor of Black and Latino students (which is what affirmative action is), but to eliminate biases in favor of White students that we know exist. Chief among these are so-called “legacy admissions”, in which elite universities attract wealthy alumni donors by granting their children admission and funding regardless of whether they even remotely deserve it or would contribute anything academically to the university.

These “legacy admissions” are frankly un-American. They go against everything our nation supposedly stands for; in fact, they reek of feudalism. And unsurprisingly, they bias heavily in favor of White students—indeed, over 90 percent of legacy admits are White and Protestant. Athletic admissions are also contrary to the stated mission of the university, though their racial biases are more complicated (Black students are highly overrepresented in football and basketball admits, for example) and it is at least not inherently un-American to select students based upon their athletic talent as opposed to their academic talent.

But this by itself would not be enough; the gaps are clearly too large to close that way. Getting into college is only the start, and graduation rates are much worse for Black students than White students. Moreover, the education gap begins well before college—high school dropout rates are much higher among Black and Latino studentsas well.

In fact, even closing the education gap by itself would not be enough; racial biases permeate our whole society. Black individuals with college degrees are substantially more likely to be unemployed and have substantially lower wages on average than White individuals with college degrees—indeed, a bachelor’s degree gets a Black man a lower mean wage than a White man would get with only an associate’s degree.

Fortunately, the barriers against women in college education have largely been conquered. In fact, there are now more women in US undergraduate institutions than men. This is not to say that there are not barriers against women in society at large; women still make about 75% as much income as men on average, and even once you adjust for factors such as education and career choice they still only make about 95% as much. Moreover, these factors we’re controlling for are endogenous. Women don’t choose their careers in a vacuum, they choose them based upon a variety of social and cultural pressures. The fact that 93% of auto mechanics are men and 79% of clerical workers are women might reflect innate differences in preferences—but it could just as well reflect a variety of cultural biases or even outright discrimination. Quite likely, it’s some combination of these. So it is not obvious to me that the “adjusted” wage gap is actually a more accurate reflection of the treatment of women in our society than the “unadjusted” wage gap; the true level of bias is most likely somewhere in between the two figures.

Gender wage gaps vary substantially across age groups and between even quite similar countries: Middle-aged women in Germany make 28% less than middle-aged men, while in France that gap is only 19%. Young women in Latvia make 14% less than young men, but in Romania they make 1.1% more. This variation clearly shows that this is not purely the effect of some innate genetic difference in skills or preferences; it must be at least in large part the product of cultural pressures or policy choices.

Even within academia, women are less likely to be hired full-time instead of part-time, awarded tenure, or promoted to administrative positions. Moreover, this must be active discrimination in some form, because gaps in hiring and wage offers between men and women persist in randomized controlled experiments. You can literally present the exact same resume and get a different result depending on whether you attached a male name or a female name.

But at least when it comes to the particular question of getting bachelor’s degrees, we have achieved something approaching equality across gender, and that is no minor accomplishment. Most countries in the world still have more men than women graduating from college, and in some countries the difference is terrifyingly large. I found from World Bank data that in the Democratic Republic of Congo, only 3% of men go to college—and less than 1% of women do. Even in Germany, 29% of men graduate from college but only 19% of women do. Getting both of these figures over 30% and actually having women higher than men is a substantial achievement for which the United States should be proud.

Yet it still remains the case that Americans who are poor, Black, Native American, or Latino are substantially less likely to ever make it through college. Panic about student debt might well be making this problem worse, as someone whose family makes $15,000 per year is bound to hear $50,000 in debt as an overwhelming burden, even as you try to explain that it will eventually pay for itself seven times over.

We need to instead be talking about the barriers that are keeping people from attending college, and pressuring them to drop out once they do. Debt is not the problem. Even tuition is not really the problem. Access is the problem. College is an astonishingly good investment—but most people never get the chance to make it. That is what we need to change.

Selling debt goes against everything the free market stands for

JDN 2457555

I don’t think most people—or even most economists—have any concept of just how fundamentally perverse and destructive our financial system has become, and a large chunk of it ultimately boils down to one thing: Selling debt.

Certainly collateralized debt obligations (CDOs), and their meta-form, CDO2s (pronounced “see-dee-oh squareds”), are nothing more than selling debt, and along with credit default swaps (CDS; they are basically insurance, but without those pesky regulations against things like fraud and conflicts of interest) they were directly responsible for the 2008 financial crisis and the ensuing Great Recession and Second Depression.

But selling debt continues in a more insidious way, underpinning the entire debt collection industry which raises tens of billions of dollars per year by harassment, intimidation and extortion, especially of the poor and helpless. Frankly, I think what’s most shocking is how little money they make, given the huge number of people they harass and intimidate.

John Oliver did a great segment on debt collections (with a very nice surprise at the end):

But perhaps most baffling to me is the number of people who defend the selling of debt on the grounds that it is a “free market” activity which must be protected from government “interference in personal liberty”. To show this is not a strawman, here’s the American Enterprise Institute saying exactly that.

So let me say this in no uncertain terms: Selling debt goes against everything the free market stands for.

One of the most basic principles of free markets, one of the founding precepts of capitalism laid down by no less than Adam Smith (and before him by great political philosophers like John Locke), is the freedom of contract. This is the good part of capitalism, the part that makes sense, the reason we shouldn’t tear it all down but should instead try to reform it around the edges.

Indeed, the freedom of contract is so fundamental to human liberty that laws can only be considered legitimate insofar as they do not infringe upon it without a compelling public interest. Freedom of contract is right up there with freedom of speech, freedom of the press, freedom of religion, and the right of due process.

The freedom of contract is the right to make agreements, including financial agreements, with anyone you please, and under conditions that you freely and rationally impose in a state of good faith and transparent discussion. Conversely, it is the right not to make agreements with those you choose not to, and to not be forced into agreements under conditions of fraud, intimidation, or impaired judgment.

Freedom of contract is the basis of my right to take on debt, provided that I am honest about my circumstances and I can find a lender who is willing to lend to me. So taking on debt is a fundamental part of freedom of contract.

But selling debt is something else entirely. Far from exercising the freedom of contract, it violates it. When I take out a loan from bank A, and then they turn around and sell that loan to bank B, I suddenly owe money to bank B, but I never agreed to do that. I had nothing to do with their decision to work with bank B as opposed to keeping the loan or selling it to bank C.

Current regulations prohibit banks from “changing the terms of the loan”, but in practice they change them all the time—they can’t change the principal balance, the loan term, or the interest rate, but they can change the late fees, the payment schedule, and lots of subtler things about the loan that can still make a very big difference. Indeed, as far as I’m concerned they have changed the terms of the loan—one of the terms of the loan was that I was to pay X amount to bank A, not that I was to pay X amount to bank B. I may or may not have good reasons not to want to pay bank B—they might be far less trustworthy than bank A, for instance, or have a far worse social responsibility record—and in any case it doesn’t matter; it is my choice whether or not I want anything to do with bank B, whatever my reasons might be.

I take this matter quite personally, for it is by the selling of debt that, in moral (albeit not legal) terms, a British bank stole my parents’ house. Indeed, not just any British bank; it was none other than HSBC, the money launderers for terrorists.

When they first obtained their mortgage, my parents did not actually know that HSBC was quite so evil as to literally launder money for terrorists, but they did already know that they were involved in a great many shady dealings, and even specifically told their lender that they did not want the loan sold, and if it was to be sold, it was absolutely never to be sold to HSBC in particular. Their mistake (which was rather like the “mistake” of someone who leaves their car unlocked and has it stolen, or forgets to arm the home alarm system and suffers a burglary) was not to get this written into the formal contract, rather than simply made as a verbal agreement with the bankers. Such verbal contracts are enforceable under the law, at least in theory; but that would require proof of the verbal contract (and what proof could we provide?), and also probably have cost as much as the house in litigation fees.

Oh, by the way, they were given a subprime interest rate of 8% despite being middle-class professionals with good credit, no doubt to maximize the broker’s closing commission. Most banks reserved such behavior for racial minorities, but apparently this one was equal-opportunity in the worst way.Perhaps my parents were naive to trust bankers any further than they could throw them.

As a result, I think you know what happened next: They sold the loan to HSBC.

Now, had it ended there, with my parents unwittingly forced into supporting a bank that launders money for terrorists, that would have been bad enough. But it assuredly did not.

By a series of subtle and manipulative practices that poked through one loophole after another, HSBC proceeded to raise my parents’ payments higher and higher. One particularly insidious tactic they used was to sit on the checks until just after the due date passed, so they could charge late fees on the payments, then they recapitalized the late fees. My parents caught on to this particular trick after a few months, and started mailing the checks certified so they would be date-stamped; and lo and behold, all the payments were suddenly on time! By several other similarly devious tactics, all of which were technically legal or at least not provable, they managed to raise my parents’ monthly mortgage payments by over 50%.

Note that it was a fixed-rate, fixed-term mortgage. The initial payments—what should have been always the payments, that’s the point of a fixed-rate fixed-term mortgage—were under $2000 per month. By the end they were paying over $3000 per month. HSBC forced my parents to overpay on a mortgage an amount equal to the US individual poverty line, or the per-capita GDP of Peru.

They tried to make the payments, but after being wildly over budget and hit by other unexpected expenses (including defects in the house’s foundation that they had to pay to fix, but because of the “small” amount at stake and the overwhelming legal might of the construction company, no lawyer was willing to sue over), they simply couldn’t do it anymore, and gave up. They gave the house to the bank with a deed in lieu of foreclosure.

And that is the story of how a bank that my parents never agreed to work with, never would have agreed to work with, indeed specifically said they would not work with, still ended up claiming their house—our house, the house I grew up in from the age of 12. Legally, I cannot prove they did anything against the law. (I mean, other than laundered money for terrorists.) But morally, how is this any less than theft? Would we not be victimized less had a burglar broken into our home, vandalized the walls and stolen our furniture?

Indeed, that would probably be covered under our insurance! Where can I buy insurance against the corrupt and predatory financial system? Where are my credit default swaps to pay me when everything goes wrong?

And all of this could have been prevented, if banks simply weren’t allowed to violate our freedom of contract by selling their loans to other banks.

Indeed, the Second Depression could probably have been likewise prevented. Without selling debt, there is no securitization. Without securitization, there is far less leverage. Without leverage, there are not bank failures. Without bank failures, there is no depression. A decade of global economic growth was lost because we allowed banks to sell debt whenever they please.

I have heard the counter-arguments many times:

“But what if banks need the liquidity?” Easy. They can take out their own loans with those other banks. If bank A finds they need more cashflow, they should absolutely feel free to take out a loan from bank B. They can even point to their projected revenues from the mortgage payments we owe them, as a means of repaying that loan. But they should not be able to involve us in that transaction. If you want to trust HSBC, that’s your business (you’re an idiot, but it’s a free country). But you have no right to force me to trust HSBC.

“But banks might not be willing to make those loans, if they knew they couldn’t sell or securitize them!” THAT’S THE POINT. Banks wouldn’t take on all these ridiculous risks in their lending practices that they did (“NINJA loans” and mortgages with payments larger than their buyers’ annual incomes), if they knew they couldn’t just foist the debt off on some Greater Fool later on. They would only make loans they actually expect to be repaid. Obviously any loan carries some risk, but banks would only take on risks they thought they could bear, as opposed to risks they thought they could convince someone else to bear—which is the definition of moral hazard.

“Homes would be unaffordable if people couldn’t take out large loans!” First of all, I’m not against mortgages—I’m against securitization of mortgages. Yes, of course, people need to be able to take out loans. But they shouldn’t be forced to pay those loans to whoever their bank sees fit. If indeed the loss of subprime securitized mortgages made it harder for people to get homes, that’s a problem; but the solution to that problem was never to make it easier for people to get loans they can’t afford—it is clearly either to reduce the price of homes or increase the incomes of buyers. Subsidized housing construction, public housing, changes in zoning regulation, a basic income, lower property taxes, an expanded earned-income tax credit—these are the sort of policies that one implements to make housing more affordable, not “go ahead and let banks exploit people however they want”.

Remember, a regulation against selling debt would protect the freedom of contract. It would remove a way for private individuals and corporations to violate that freedom, like regulations against fraud, intimidation, and coercion. It should be uncontroversial that no one has any right to force you to do business with someone you would not voluntarily do business with, certainly not in a private transaction between for-profit corporations. Maybe that sort of mandate makes sense in rare circumstances by the government, but even then it should really be implemented as a tax, not a mandate to do business with a particular entity. The right to buy what you choose is the foundation of a free market—and implicit in it is the right not to buy what you do not choose.

There are many regulations on debt that do impose upon freedom of contract: As horrific as payday loans are, if someone really honestly knowingly wants to take on short-term debt at 400% APR I’m not sure it’s my business to stop them. And some people may really be in such dire circumstances that they need money that urgently and no one else will lend to them. Insofar as I want payday loans regulated, it is to ensure that they are really lending in good faith—as many surely are not—and ultimately I want to outcompete them by providing desperate people with more reasonable loan terms. But a ban on securitization is like a ban on fraud; it is the sort of law that protects our rights.

The credit rating agencies to be worried about aren’t the ones you think

JDN 2457499

John Oliver is probably the best investigative journalist in America today, despite being neither American nor officially a journalist; last week he took on the subject of credit rating agencies, a classic example of his mantra “If you want to do something evil, put it inside something boring.” (note that it’s on HBO, so there is foul language):

As ever, his analysis of the subject is quite good—it’s absurd how much power these agencies have over our lives, and how little accountability they have for even assuring accuracy.

But I couldn’t help but feel that he was kind of missing the point. The credit rating agencies to really be worried about aren’t Equifax, Experian, and Transunion, the ones that assess credit ratings on individuals. They are Standard & Poor’s, Moody’s, and Fitch (which would have been even easier to skewer the way John Oliver did—perhaps we can get them confused with Standardly Poor, Moody, and Filch), the agencies which assess credit ratings on institutions.

These credit rating agencies have almost unimaginable power over our society. They are responsible for rating the risk of corporate bonds, certificates of deposit, stocks, derivatives such as mortgage-backed securities and collateralized debt obligations, and even municipal and government bonds.

S&P, Moody’s, and Fitch don’t just rate the creditworthiness of Goldman Sachs and J.P. Morgan Chase; they rate the creditworthiness of Detroit and Greece. (Indeed, they played an important role in the debt crisis of Greece, which I’ll talk about more in a later post.)

Moreover, they are proven corrupt. It’s a matter of public record.

Standard and Poor’s is the worst; they have been successfully sued for fraud by small banks in Pennsylvania and by the State of New Jersey; they have also settled fraud cases with the Securities and Exchange Commission and the Department of Justice.

Moody’s has also been sued for fraud by the Department of Justice, and all three have been prosecuted for fraud by the State of New York.

But in fact this underestimates the corruption, because the worst conflicts of interest aren’t even illegal, or weren’t until Dodd-Frank was passed in 2010. The basic structure of this credit rating system is fundamentally broken; the agencies are private, for-profit corporations, and they get their revenue entirely from the banks that pay them to assess their risk. If they rate a bank’s asset as too risky, the bank stops paying them, and instead goes to another agency that will offer a higher rating—and simply the threat of doing so keeps them in line. As a result their ratings are basically uncorrelated with real risk—they failed to predict the collapse of Lehman Brothers or the failure of mortgage-backed CDOs, and they didn’t “predict” the European debt crisis so much as cause it by their panic.

Then of course there’s the fact that they are obviously an oligopoly, and furthermore one that is explicitly protected under US law. But then it dawns upon you: Wait… US law? US law decides the structure of credit rating agencies that set the bond rates of entire nations? Yes, that’s right. You’d think that such ratings would be set by the World Bank or something, but they’re not; in fact here’s a paper published by the World Bank in 2004 about how rather than reform our credit rating system, we should instead tell poor countries to reform themselves so they can better impress the private credit rating agencies.

In fact the whole concept of “sovereign debt risk” is fundamentally defective; a country that borrows in its own currency should never have to default on debt under any circumstances. National debt is almost nothing like personal or corporate debt. Their fears should be inflation and unemployment—their monetary policy should be set to minimize the harm of these two basic macroeconomic problems, understanding that policies which mitigate one may enflame the other. There is such a thing as bad fiscal policy, but it has nothing to do with “running out of money to pay your debt” unless you are forced to borrow in a currency you can’t control (as Greece is, because they are on the Euro—their debt is less like the US national debt and more like the debt of Puerto Rico, which is suffering an ongoing debt crisis you may not have heard about). If you borrow in your own currency, you should be worried about excessive borrowing creating inflation and devaluing your currency—but not about suddenly being unable to repay your creditors. The whole concept of giving a sovereign nation a credit rating makes no sense. You will be repaid on time and in full, in nominal terms; if inflation or currency exchange has devalued the currency you are repaid in, that’s sort of like a partial default, but it’s a fundamentally different kind of “default” than simply not paying back the money—and credit ratings have no way of capturing that difference.

In particular, it makes no sense for interest rates on government bonds to go up when a country is suffering some kind of macroeconomic problem.

The basic argument for why interest rates go up when risk is higher is that lenders expect to be paid more by those who do pay to compensate for what they lose from those who don’t pay. This is already much more problematic than most economists appreciate; I’ve been meaning to write a paper on how this system creates self-fulfilling prophecies of default and moral hazard from people who pay their debts being forced to subsidize those who don’t. But it at least makes some sense.

But if a country is a “high risk” in the sense of macroeconomic instability undermining the real value of their debt, we want to ensure that they can restore macroeconomic stability. But we know that when there is a surge in interest rates on government bonds, instability gets worse, not better. Fiscal policy is suddenly shifted away from real production into higher debt payments, and this creates unemployment and makes the economic crisis worse. As Paul Krugman writes about frequently, these policies of “austerity” cause enormous damage to national economies and ultimately benefit no one because they destroy the source of wealth that would have been used to repay the debt.

By letting credit rating agencies decide the rates at which governments must borrow, we are effectively treating national governments as a special case of corporations. But corporations, by design, act for profit and can go bankrupt. National governments are supposed to act for the public good and persist indefinitely. We can’t simply let Greece fail as we might let a bank fail (and of course we’ve seen that there are serious downsides even to that). We have to restructure the sovereign debt system so that it benefits the development of nations rather than detracting from it. The first step is removing the power of private for-profit corporations in the US to decide the “creditworthiness” of entire countries. If we need to assess such risks at all, they should be done by international institutions like the UN or the World Bank.

But right now people are so stuck in the idea that national debt is basically the same as personal or corporate debt that they can’t even understand the problem. For after all, one must repay one’s debts.

How about we listen to the Nobel Laureate when we set our taxes?

JDN 2457321 EDT 11:20

I know I’m going out on a limb here, but I think it would generally be a good thing if we based our tax system on the advice of Nobel Laureate economists. Joseph Stiglitz wrote a tax policy paper for the Roosevelt Institution last year that describes in detail how our tax system could be reformed to simultaneously restore economic growth, reduce income inequality, promote environmental sustainability, and in the long run even balance the budget. What’s more, he did the math (I suppose Nobel Laureate economists are known for that), and it looks like his plan would actually work.

The plan is good enough that I think it’s worth going through in some detail.

He opens by reminding us that our “debt crisis” is of our own making, the result of politicians (and voters) who don’t understand economics:

“But we should be clear that these crises – which have resulted in a government shutdown and a near default on the national debt – are not economic but political. The U.S. is not like Greece, unable to borrow to fund its debt and deficit. Indeed, the U.S. has been borrowing at negative real interest rates.”

Stiglitz pulls no punches against bad policies, and isn’t afraid to single out conservatives:

“We also show that some of the so-called reforms that conservatives propose would be counterproductive – they could simultaneously reduce growth and economic welfare and increase unemployment and inequality. It would be better to have no reform than these reforms.”

A lot of the news media keep trying to paint Bernie Sanders as a far-left radical candidate (like this article in Politico calling his hometown the “People’s Republic of Burlington”), because he says things like this: “in recent years, over 99 percent of all new income generated in the economy has gone to the top 1 percent.”

But the following statement was not said by Bernie Sanders, it was said by Joseph Stiglitz, who I will remind you one last time is a world-renowned Nobel Laureate economist:

“The weaknesses in the labor market are reflected in low wages and stagnating incomes. That helps explain why 95 percent of the increase in incomes in the three years after the recovery officially began went to the upper 1 percent. For most Americans, there has been no recovery.”

It was also Stiglitz who said this:

“The American Dream is, in reality, a myth. The U.S. has some of the worst inequality across generations (social mobility) among wealthy nations. The life prospects of a young American are more dependent on the income and education of his parents than in other advanced countries.”

In this country, we have reached the point where policies supported by the analysis of world-renowned economists is considered far-left radicalism, while the “mainstream conservative” view is a system of tax policy that is based on pure fantasy, which has been called “puppies and rainbows” by serious policy analysts and “voodoo economics” by yet another Nobel Laureate economist. A lot of very smart people don’t understand what’s happening in our political system, and want “both sides” to be “equally wrong”, but that is simply not the case: Basic facts of not just social science (e.g. Keynesian monetary policy), but indeed natural science (evolutionary biology, anthropogenic climate change) are now considered “political controversies” because the right wing doesn’t want to believe them.

But let’s get back to the actual tax plan Stiglitz is proposing. He is in favor of raising some taxes and lowering others, spending more on some things and less on other things. His basic strategy is actually quite simple: Raise taxes with low multipliers and cut taxes with high multipliers. Raise spending with high multipliers and cut spending with low multipliers.

“While in general taxes take money out of the system, and therefore have a deflationary bias, some taxes have a larger multiplier than others, i.e. lead to a greater reduction in aggregate demand per dollar of revenue raised. Taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand. Taxes on lower income individuals have the most adverse effect on aggregate demand.”

In other words, by making the tax system more progressive, we can directly stimulate economic growth while still increasing the amount of tax revenue we raise. And of course we have plenty of other moral and economic reasons to prefer progressive taxation.

Stiglitz tears apart the “job creator” myth:

“It is important to dispel a misunderstanding that one often hears from advocates of lower taxes for the rich and corporations, which contends that the rich are the job producers, and anything that reduces their income will reduce their ability and incentive to create jobs. First, at the current time, it is not lack of funds that is holding back investment. It is not even a weak and dysfunctional financial sector. America’s large corporations are sitting on more than $2 trillion in cash. What is holding back investment, especially by large corporations, is the lack of demand for their products.”

Stiglitz talks about two principles of taxation to follow:

First is the Generalized Henry George Principle, that we should focus taxes on things that are inelastic, meaning their supply isn’t likely to change much with the introduction of a tax. Henry George favored taxing land, which is quite inelastic indeed. The reason we do this is to reduce the economic distortions created by a tax; the goal is to collect revenue without changing the number of real products that are bought and sold. We need to raise revenue and we want to redistribute income, but we want to do it without creating unnecessary inefficiencies in the rest of the economy.

Second is the Generalized Polluter Pays Principle, that we should tax things that have negative externalities—effects on other people that are harmful. When a transaction causes harm to others who were not party to the transaction, we should tax that transaction in an amount equal to the harm that it would cause, and then use that revenue to offset the damage. In effect, if you hurt someone else, you should have to pay to clean up your own mess. This makes obvious moral sense, but it also makes good economic sense; taxing externalities can improve economic efficiency and actually make everyone better off. The obvious example is again pollution (the original Polluter Pays Principle), but there are plenty of other examples as well.

Stiglitz of course supports taxes on pollution and carbon emissions, which really should be a no-brainer. They aren’t just good for the environment, they would directly increase economic efficiency. The only reason we don’t have comprehensive pollution taxes (or something similar like cap-and-trade) is again the political pressure of right-wing interests.

Stiglitz focuses in particular on the externalities of the financial system, the boom-and-bust cycle of bubble, crisis, crash that has characterized so much of our banking system for generations. With a few exceptions, almost every major economic crisis has been preceded by some sort of breakdown of the financial system (and typically widespread fraud by the way). It is not much exaggeration to say that without Wall Street there would be no depressions. Externalities don’t get a whole lot bigger than that.

Stiglitz proposes a system of financial transaction taxes that are designed to create incentives against the most predatory practices in finance, especially the high-frequency trading in which computer algorithms steal money from the rest of the economy thousands of times per second. Even a 0.01% tax on each financial transaction would probably be enough to eliminate this particular activity.

He also suggests the implementation of “bonus taxes” which disincentivize paying bonuses, which could basically be as simple as removing the deductions placed during the Clinton administration (in a few years are we going to have to say “the first Clinton administration”?) that exempt “performance-based pay” from most forms of income tax. All pay is performance-based, or supposed to be. There should be no special exemption for bonuses and stock options.

Stiglitz also proposes a “bank rescue fund” which would be something like an expansion of the FDIC insurance that banks are already required to have, but designed as catastrophe insurance for the whole macroeconomy. Instead of needing bailed out from general government funds, banks would only be bailed out from a pool of insurance funds they paid in themselves. This could work, but honestly I think I’d rather reduce the moral hazard even more by saying that we will never again bail out banks directly, but instead bail out consumers and real businesses. This would probably save banks anyway (most people don’t default on debts if they can afford to pay them), and if it doesn’t, I don’t see why we should care. The only reason banks exist is to support the real economy; if we can support the real economy without them, they deserve to die. That basic fact seems to have been lost somewhere along the way, and we keep talking about how to save or stabilize the financial system as if it were valuable unto itself.

Stiglitz also proposes much stricter regulations on credit cards, which would require them to charge much lower transaction fees and also pay a portion of their transaction revenue in taxes. I think it’s fair to ask whether we need credit cards at all, or if there’s some alternative banking system that would allow people to make consumer purchases without paying 20% annual interest. (It seems like there ought to be, doesn’t it?)

Next Stiglitz gets to his proposal to reform the corporate income tax. Like many of us, he is sick of corporations like Apple and GE with ten and eleven-figure profits paying little or no taxes by exploiting a variety of loopholes. He points out some of the more egregious ones, like the “step up of basis at death” which allows inherited capital to avoid taxation (personally, I think both morally and economically the optimal inheritance tax rate is 100%!), as well as the various loopholes on offshore accounting which allow corporations to design and sell their products in the US, even manufacture them here, and pay taxes as if all their work were done in the Cayman Islands. He also points out that the argument that corporate taxes disincentivize investment is ridiculous, because most investment is financed by corporate bonds which are tax-deductible.

Stiglitz departs from most other economists in that he actually proposes raising the corporate tax rate itself. Most economists favor cutting the rate on paper, then closing the loopholes to ensure that the new rate is actually paid. Stiglitz says this is not enough, and we must both close the loopholes and increase the rate.

I’m actually not sure I agree with him on this; the incidence of corporate taxes is not very well-understood, and I think there’s a legitimate worry that taxing Apple will make iPhones more expensive without actually taking any money from Tim Cook. I think it would be better to get rid of the corporate tax entirely and then dramatically raise the marginal rates on personal income, including not only labor income but also all forms of capital income. Instead of taxing Apple hoping it will pass through to Tim Cook, I say we just tax Tim Cook. Directly tax his $4 million salary and $70 million in stock options.

Stiglitz does have an interesting proposal to introduce “rent-seeking” taxes that specifically apply to corporations which exercise monopoly or oligopoly power. If you can actually get this to work, it’s very clever; you could actually create a market incentive for corporations to support their own competition—and not in the sense of collusion but in the sense of actually trying to seek out more competitive markets in order to avoid the monopoly tax. Unfortunately, Stiglitz is a little vague on how we’d actually pull that off.

One thing I do agree with Stiglitz on is the use of refundable tax credits to support real investment. Instead of this weird business about not taxing dividends and capital gains in the hope that maybe somehow this will support real investment, we actually give tax credits specifically to companies that build factories or hire more workers.

Stiglitz also does a good job of elucidating the concept of “corporate welfare”, officially called “tax expenditures”, in which subsidies for corporations are basically hidden in the tax code as rebates or deductions. This is actually what Obama was talking about when he said “spending in the tax code”, (he did not invent the concept of tax expenditures), but since he didn’t explain himself well even Jon Stewart accused him of Orwellian Newspeak. Economically a refundable tax rebate of $10,000 is exactly the same thing as a subsidy of $10,000. There are some practical and psychological differences, but there are no real economic differences. If you’re still confused about tax expenditures, the Center for American Progress has a good policy memo on the subject.

Stiglitz also has some changes to make to the personal income tax, all of which I think are spot-on. First we increase the marginal rates, particularly at the very top. Next we equalize rates on all forms of income, including capital income. Next, we remove most, if not all, of the deductions that allow people to avoid paying the rate it says on paper. Finally, we dramatically simplify the tax code so that the majority of people can file a simplified return which basically just says, “This is my income. This is the tax rate for that income. This is what I owe.” You wouldn’t have to worry about itemizing your student loans or mortgage payments or whatever else; just tally up your income and look up your rate. As he points out, this would save a lot of people a lot of stress and also remove a lot of economic distortions.

He talks about how we can phase out the mortgage-interest deduction in particular, because it’s clearly inefficient and regressive but it’s politically popular and dropping it suddenly could lead to another crisis in housing prices.

Stiglitz has a deorbit for anyone who thinks capital income should not be taxed:

“There is, moreover, no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.”

By equalizing rates on labor and capital income, he estimates we could raise an additional $130 billion per year—just shy of what it would take to end world hunger. (Actually some estimates say it would be more than enough, others that it would be about half what we need. It’s definitely in the ballpark, however.)

Stiglitz actually proposes making a full deduction of gross household income at $100,000, meaning that the vast majority of Americans would pay no income tax at all. This is where he begins to lose me, because it necessarily means we aren’t going to raise enough revenue by income taxes alone.

He proposes to make up the shortfall by introducing a value-added tax, a VAT. I have to admit a lot of countries have these (including most of Europe) and seem to do all right with them; but I never understood why they are so popular among economists. They are basically sales taxes, and it’s very hard to make any kind of sales tax meaningfully progressive. In fact, they are typically regressive, because rich people spend a smaller proportion of their income than poor people do. Unless we specifically want to disincentivize buying things (and a depression is not the time to do that!), I don’t see why we would want to switch to a sales tax.

At the end of the paper Stiglitz talks about the vital difference between short-term spending cuts and long-term fiscal sustainability:

“Thus, policies that promote output and employment today also contribute to future growth – particularly if they lead to more investment. Thus, austerity measures that take the form of cutbacks in spending on infrastructure, technology, or education not only weaken the economy today, but weaken it in the future, both directly (through the obvious impacts, for example, on the capital stock) but also indirectly, through the diminution in human capital that arises out of employment or educational experience. […] Mindless “deficit fetishism” is likely to be counterproductive. It will weaken the economy and prove counterproductive to raising revenues because the main reason that we are in our current fiscal position is the weak economy.”

It amazes me how many people fail to grasp this. No one would say that paying for college is fiscally irresponsible, because we know that all that student debt will be repaid by your increased productivity and income later on; yet somehow people still think that government subsidies for education are fiscally irresponsible. No one would say that it is a waste of money for a research lab to buy new equipment in order to have a better chance at making new discoveries, yet somehow people still think it is a waste of money for the government to fund research. The most legitimate form of this argument is “crowding-out”, the notion that the increased government spending will be matched by an equal or greater decrease in private spending; but the evidence shows that many public goods—like education, research, and infrastructure—are currently underfunded, and if there is any crowding-out, it is much smaller than the gain produced by the government investment. Crowding-out is theoretically possible but empirically rare.

Above all, now is not the time to fret about deficits. Now is the time to fret about unemployment. We need to get more people working; we need to create jobs for those who are already seeking them, better jobs for those who have them but want more, and opportunities for people who have given up searching for work to keep trying. To do that, we need spending, and we will probably need deficits. That’s all right; once the economy is restored to full capacity then we can adjust our spending to balance the budget (or we may not even need to, if we devise taxes correctly).

Of course, I fear that most of these policies will fall upon deaf ears; but Stiglitz calls us to action:

“We can reform our tax system in ways that will strengthen the economy today, address current economic and social problems, and strengthen our economy for the future. The economic agenda is clear. The question is, will the vested interests which have played such a large role in creating the current distorted system continue to prevail? Do we have the political will to create a tax system that is fair and serves the interests of all Americans?”

Beware the false balance

JDN 2457046 PST 13:47.

I am now back in Long Beach, hence the return to Pacific Time. Today’s post is a little less economic than most, though it’s certainly still within the purview of social science and public policy. It concerns a question that many academic researchers and in general reasonable, thoughtful people have to deal with: How do we remain unbiased and nonpartisan?

This would not be so difficult if the world were as the most devoted “centrists” would have you believe, and it were actually the case that both sides have their good points and bad points, and both sides have their scandals, and both sides make mistakes or even lie, so you should never take the side of the Democrats or the Republicans but always present both views equally.

Sadly, this is not at all the world in which we live. While Democrats are far from perfect—they are human beings after all, not to mention politicians—Republicans have become completely detached from reality. As Stephen Colbert has said, “Reality has a liberal bias.” You know it’s bad when our detractors call us the reality-based community. Treating both sides as equal isn’t being unbiased—it’s committing a balance fallacy.

Don’t believe me? Here is a list of objective, scientific facts that the Republican Party (and particularly its craziest subset, the Tea Party) has officially taken political stances against:

  1. Global warming is a real problem, and largely caused by human activity. (The Republican majority in the Senate voted down a resolution acknowledging this.)
  2. Human beings share a common ancestor with chimpanzees. (48% of Republicans think that we were created in our present form.)
  3. Animals evolve over time due to natural selection. (Only 43% of Republicans believe this.)
  4. The Earth is approximately 4.5 billion years old. (Marco Rubio said he thinks maybe the Earth was made in seven days a few thousand years ago.)
  5. Hydraulic fracturing can trigger earthquakes.(Republican in Congress are trying to nullify local regulations on fracking because they insist it is so safe we don’t even need to keep track.)
  6. Income inequality in the United States is the worst it has been in decades and continues to rise. (Mitt Romney said that the concern about income inequality is just “envy”.)
  7. Progressive taxation reduces inequality without adversely affecting economic growth. (Here’s a Republican former New York Senator saying that the President “should be ashamed” for raising taxes on—you guessed it—”job creators”.)
  8. Moderate increases in the minimum wage do not yield significant losses in employment. (Republicans consistently vote against even small increases in the minimum wage, and Democrats consistently vote in favor.)
  9. The United States government has no reason to ever default on its debt. (John Boehner, now Speaker of the House, once said that “America is broke” and if we don’t stop spending we’ll never be able to pay the national debt.)
  10. Human embryos are not in any way sentient, and fetuses are not sentient until at least 17 weeks of gestation, probably more like 30 weeks. (Yet if I am to read it in a way that would make moral sense, “Life begins at conception”—which several Republicans explicitly endorsed at the National Right to Life Convention—would have to imply that even zygotes are sentient beings. If you really just meant “alive”, then that would equally well apply to plants or even bacteria. Sentience is the morally relevant category.)

And that’s not even counting the Republican Party’s association with Christianity and all of the objectively wrong scientific claims that necessarily entails—like the existence of an afterlife and the intervention of supernatural forces. Most Democrats also self-identify as Christian, though rarely with quite the same fervor (the last major Democrat I can think of who was a devout Christian was Jimmy Carter), probably because most Americans self-identify as Christian and are hesitant to elect an atheist President (despite the fact that 93% of the National Academy of Sciences is comprised of atheists and the higher your IQ the more likely you are to be an atheist; we wouldn’t want to elect someone who agrees with smart people, now would we?).

It’s true, there are some other crazy ideas out there with a left-wing slant, like the anti-vaccination movement that has wrought epidemic measles upon us, the anti-GMO crowd that rejects basic scientific facts about genetics, and the 9/11 “truth” movement that refuses to believe that Al Qaeda actually caused the attacks. There are in fact far-left Marxists out there who want to tear down the whole capitalist system by glorious revolution and replace it with… er… something (they’re never quite clear on that last point). But none of these things are the official positions of standing members of Congress.

The craziest belief by a standing Democrat I can think of is Dennis Kucinich’s belief that he saw an alien spacecraft. And to be perfectly honest, alien spacecraft are about a thousand times more plausible than Christianity in general, let alone Creationism. There almost certainly are alien spacecraft somewhere in the universe—just most likely so far away we’ll need FTL to encounter them. Moreover, this is not Kucinich’s official position as a member of Congress and it’s not something he has ever made policy based upon.

Indeed, if you’re willing to include the craziest individuals with no real political power who identify with a particular side of the political spectrum, then we should include on the right-wing side people like the Bundy militia in Nevada, neo-Nazis in Detroit, and the dozens of KKK chapters across the US. Not to mention this pastor who wants to murder all gay people in the world (because he truly believes what Leviticus 20:13 actually and clearly says).

If you get to include Marxists on the left, then we get to include Nazis on the right. Or, we could be reasonable and say that only the official positions of elected officials or mainstream pundits actually count, in which case Democrats have views that are basically accurate and reasonable while the majority of Republicans have views that are still completely objectively wrong.

There’s no balance here. For every Democrat who is wrong, there is a Republicans who is totally delusional. For every Democrat who distorts the truth, there is a Republican who blatantly lies about basic facts. Not to mention that for every Democrat who has had an ill-advised illicit affair there is a Republican who has committed war crimes.

Actually war crimes are something a fair number of Democrats have done as well, but the difference still stands out in high relief: Barack Obama has ordered double-tap drone strikes that are in violation of the Geneva Convention, but George W. Bush orchestrated a worldwide mass torture campaign and launched pointless wars that slaughtered hundreds of thousands of people. Bill Clinton ordered some questionable CIA operations, but George H.W. Bush was the director of the CIA.

I wish we had two parties that were equally reasonable. I wish there were two—or three, or four—proposals on the table in each discussion, all of which had merits and flaws worth considering. Maybe if we somehow manage to get the Green Party a significant seat in power, or the Social Democrat party, we can actually achieve that goal. But that is not where we are right now. Right now, we have the Democrats, who have some good ideas and some bad ideas; and then we have the Republicans, who are completely out of their minds.

There is an important concept in political science called the Overton window; it is the range of political ideas that are considered “reasonable” or “mainstream” within a society. Things near the middle of the Overton window are considered sensible, even “nonpartisan” ideas, while things near the edges are “partisan” or “political”, and things near but outside the window are seen as “extreme” and “radical”. Things far outside the window are seen as “absurd” or even “unthinkable”.

Right now, our Overton window is in the wrong place. Things like Paul Ryan’s plan to privatize Social Security and Medicare are seen as reasonable when they should be considered extreme. Progressive income taxes of the kind we had in the 1960s are seen as extreme when they should be considered reasonable. Cutting WIC and SNAP with nothing to replace them and letting people literally starve to death are considered at most partisan, when they should be outright unthinkable. Opposition to basic scientific facts like climate change and evolution is considered a mainstream political position—when in terms of empirical evidence Creationism should be more intellectually embarrassing than being a 9/11 truther or thinking you saw an alien spacecraft. And perhaps worst of all, military tactics like double-tap strikes that are literally war crimes are considered “liberal”, while the “conservative” position involves torture, worldwide surveillance and carpet bombing—if not outright full-scale nuclear devastation.

I want to restore reasonable conversation to our political system, I really do. But that really isn’t possible when half the politicians are totally delusional. We have but one choice: We must vote them out.

I say this particularly to people who say “Why bother? Both parties are the same.” No, they are not the same. They are deeply, deeply different, for all the reasons I just outlined above. And if you can’t bring yourself to vote for a Democrat, at least vote for someone! A Green, or a Social Democrat, or even a Libertarian or a Socialist if you must. It is only by the apathy of reasonable people that this insanity can propagate in the first place.

Yes, but what about the next 5000 years?

JDN 2456991 PST 1:34.

This week’s post will be a bit different: I have a book to review. It’s called Debt: The First 5000 Years, by David Graeber. The book is long (about 400 pages plus endnotes), but such a compelling read that the hours melt away. “The First 5000 Years” is an incredibly ambitious subtitle, but Graeber actually manages to live up to it quite well; he really does tell us a story that is more or less continuous from 3000 BC to the present.

So who is this David Graeber fellow, anyway? None will be surprised that he is a founding member of Occupy Wall Street—he was in fact the man who coined “We are the 99%”. (As I’ve studied inequality more, I’ve learned he made a mistake; it really should be “We are the 99.99%”.) I had expected him to be a historian, or an economist; but in fact he is an anthropologist. He is looking at debt and its surrounding institutions in terms of a cultural ethnography—he takes a step outside our own cultural assumptions and tries to see them as he might if he were encountering them in a foreign society. This is what gives the book its freshest parts; Graeber recognizes, as few others seem willing to, that our institutions are not the inevitable product of impersonal deterministic forces, but decisions made by human beings.

(On a related note, I was pleasantly surprised to see in one of my economics textbooks yesterday a neoclassical economist acknowledging that the best explanation we have for why Botswana is doing so well—low corruption, low poverty by African standards, high growth—really has to come down to good leadership and good policy. For once they couldn’t remove all human agency and mark it down to grand impersonal ‘market forces’. It’s odd how strong the pressure is to do that, though; I even feel it in myself: Saying that civil rights progressed so much because Martin Luther King was a great leader isn’t very scientific, is it? Well, if that’s what the evidence points to… why not? At what point did ‘scientific’ come to mean ‘human beings are helplessly at the mercy of grand impersonal forces’? Honestly, doesn’t the link between science and technology make matters quite the opposite?)

Graeber provides a new perspective on many things we take for granted: in the introduction there is one particularly compelling passage where he starts talking—with a fellow left-wing activist—about the damage that has been done to the Third World by IMF policy, and she immediately interjects: “But surely one has to pay one’s debts.” The rest of the book is essentially an elaboration on why we say that—and why it is absolutely untrue.

Graeber has also made me think quite a bit differently about Medieval society and in particular Medieval Islam; this was certainly the society in which the writings of Socrates were preserved and algebra was invented, so it couldn’t have been all bad. But in fact, assuming that Graeber’s account is accurate, Muslim societies in the 14th century actually had something approaching the idyllic fair and free market to which all neoclassicists aspire. They did so, however, by rejecting one of the core assumptions of neoclassical economics, and you can probably guess which one: the assumption that human beings are infinite identical psychopaths. Instead, merchants in Medieval Muslim society were held to high moral standards, and their livelihood was largely based upon the reputation they could maintain as upstanding good citizens. Theoretically they couldn’t even lend at interest, though in practice they had workarounds (like payment in installments that total slightly higher than the original price) that amounted to low rates of interest. They did not, however, have anything approaching the levels of interest that we have today in credit cards at 29% or (it still makes me shudder every time I think about it) payday loans at 400%. Paying on installments to a Muslim merchant would make you end up paying about a 2% to 4% rate of interest—which sounds to me almost exactly what it should be, maybe even a bit low because we’re not taking inflation into account. In any case, the moral standards of society kept people from getting too poor or too greedy, and as a result there was little need for enforcement by the state. In spite of myself I have to admit that may not have been possible without the theological enforcement provided by Islam.
Graeber also avoids one of the most common failings of anthropologists, the cultural relativism that makes them unwilling to criticize any cultural practice as immoral even when it obviously is (except usually making exceptions for modern Western capitalist imperialism). While at times I can see he was tempted to go that way, he generally avoids it; several times he goes out of his way to point out how women were sold into slavery in hunter-gatherer tribes and how that contributed to the institutions of chattel slavery that developed once Western powers invaded.

Anthropologists have another common failing that I don’t think he avoids as well, which is a primitivist bent in which anthropologists speak of ancient societies as idyllic and modern societies as horrific. That’s part of why I said ‘if Graber’s account is accurate,’ because I’m honestly not sure it is. I’ll need to look more into the history of Medieval Islam to be sure. Graeber spends a great deal of time talking about how our current monetary system is fundamentally based on threats of violence—but I can tell you that I have honestly never been threatened with violence over money in my entire life. Not by the state, not by individuals, not by corporations. I haven’t even been mugged—and that’s the sort of the thing the state exists to prevent. (Not that I’ve never been threatened with violence—but so far it’s always been either something personal, or, more often, bigotry against LGBT people.) If violence is the foundation of our monetary system, then it’s hiding itself extraordinarily well. Granted, the violence probably pops up more if you’re near the very bottom, but I think I speak for most of the American middle class when I say that I’ve been through a lot of financial troubles, but none of them have involved any guns pointed at my head. And you can’t counter this by saying that we theoretically have laws on the books that allow you to be arrested for financial insolvency—because that’s always been true, in fact it’s less true now than any other point in history, and Graeber himself freely admits this. The important question is how many people actually get violence enforced upon them, and at least within the United States that number seems to be quite small.

Graeber describes the true story of the emergence of money historically, as the result of military conquest—a way to pay soldiers and buy supplies when in an occupied territory where nobody trusts you. He demolishes the (always fishy) argument that money emerged as a way of mediating a barter system: If I catch fish and he makes shoes and I want some shoes but he doesn’t want fish right now, why not just make a deal to pay later? This is of course exactly what they did. Indeed Graeber uses the intentionally provocative word communism to describe the way that resources are typically distributed within families and small villages—because it basically is “from each according to his ability, to each according to his need”. (I would probably use the less-charged word “community”, but I have to admit that those come from the same Latin root.) He also describes something I’ve tried to explain many times to neoclassical economists to no avail: There is equally a communism of the rich, a solidarity of deal-making and collusion that undermines the competitive market that is supposed to keep the rich in check. Graeber points out that wine, women and feasting have been common parts of deals between villages throughout history—and yet are still common parts of top-level business deals in modern capitalism. Even as we claim to be atomistic rational agents we still fall back on the community norms that guided our ancestors.

Another one of my favorite lines in the book is on this very subject: “Why, if I took a free-market economic theorist out to an expensive dinner, would that economist feel somewhat diminished—uncomfortably in my debt—until he had been able to return the favor? Why, if he were feeling competitive with me, would he be inclined to take me someplace even more expensive?” That doesn’t make any sense at all under the theory of neoclassical rational agents (an infinite identical psychopath would just enjoy the dinner—free dinner!—and might never speak to you again), but it makes perfect sense under the cultural norms of community in which gifts form bonds and generosity is a measure of moral character. I also got thinking about how introducing money directly into such exchanges can change them dramatically: For instance, suppose I took my professor out to a nice dinner with drinks in order to thank him for writing me recommendation letters. This seems entirely appropriate, right? But now suppose I just paid him $30 for writing the letters. All the sudden it seems downright corrupt. But the dinner check said $30 on it! My bank account debit is the same! He might go out and buy a dinner with it! What’s the difference? I think the difference is that the dinner forms a relationship that ties the two of us together as individuals, while the cash creates a market transaction between two interchangeable economic agents. By giving my professor cash I would effectively be saying that we are infinite identical psychopaths.

While Graeber doesn’t get into it, a similar argument also applies to gift-giving on holidays and birthdays. There seriously is—I kid you not—a neoclassical economist who argues that Christmas is economically inefficient and should be abolished in favor of cash transfers. He wrote a book about it. He literally does not understand the concept of gift-giving as a way of sharing experiences and solidifying relationships. This man must be such a joy to have around! I can imagine it now: “Will you play catch with me, Daddy?” “Daddy has to work, but don’t worry dear, I hired a minor league catcher to play with you. Won’t that be much more efficient?”

This sort of thing is what makes Debt such a compelling read, and Graeber does make some good points and presents a wealth of historical information. So now it’s time to talk about what’s wrong with the book, the things Graeber gets wrong.

First of all, he’s clearly quite ignorant about the state-of-the-art in economics, and I’m not even talking about the sort of cutting-edge cognitive economics experiments I want to be doing. (When I read what Molly Crockett has been working on lately in the neuroscience of moral judgments, I began to wonder if I should apply to University College London after all.)

No, I mean Graeber is ignorant of really basic stuff, like the nature of government debt—almost nothing of what I said in that post is controversial among serious economists; the equations certainly aren’t, though some of the interpretation and application might be. (One particularly likely sticking point called “Ricardian equivalence” is something I hope to get into in a future post. You already know the refrain: Ricardian equivalence only happens if you live in a world of infinite identical psychopaths.) Graeber has internalized the Republican talking points about how this is money our grandchildren will owe to China; it’s nothing of the sort, and most of it we “owe” to ourselves. In a particularly baffling passage Graeber talks about how there are no protections for creditors of the US government, when creditors of the US government have literally never suffered a single late payment in the last 200 years. There are literally no creditors in the world who are more protected from default—and only a few others that reach the same level, such as creditors to the Bank of England.

In an equally-bizarre aside he also says in one endnote that “mainstream economists” favor the use of the gold standard and are suspicious of fiat money; exactly the opposite is the case. Mainstream economists—even the neoclassicists with whom I have my quarrels—are in almost total agreement that a fiat monetary system managed by a central bank is the only way to have a stable money supply. The gold standard is the pet project of a bunch of cranks and quacks like Peter Schiff. Like most quacks, the are quite vocal; but they are by no means supported by academic research or respected by top policymakers. (I suppose the latter could change if enough Tea Party Republicans get into office, but so far even that hasn’t happened and Janet Yellen continues to manage our fiat money supply.) In fact, it’s basically a consensus among economists that the gold standard caused the Great Depression—that in addition to some triggering event (my money is on Minsky-style debt deflation—and so is Krugman’s), the inability of the money supply to adjust was the reason why the world economy remained in such terrible shape for such a long period. The gold standard has not been a mainstream position among economists since roughly the mid-1980s—before I was born.

He makes this really bizarre argument about how because Korea, Japan, Taiwan, and West Germany are major holders of US Treasury bonds and became so under US occupation—which is indisputably true—that means that their development was really just some kind of smokescreen to sell more Treasury bonds. First of all, we’ve never had trouble selling Treasury bonds; people are literally accepting negative interest rates in order to have them right now. More importantly, Korea, Japan, Taiwan, and West Germany—those exact four countries, in that order—are the greatest economic success stories in the history of the human race. West Germany was rebuilt literally from rubble to become once again a world power. The Asian Tigers were even more impressive, raised from the most abject Third World poverty to full First World high-tech economy status in a few generations. If this is what happens when you buy Treasury bonds, we should all buy as many Treasury bonds as we possibly can. And while that seems intuitively ridiculous, I have to admit, China’s meteoric rise also came with an enormous investment in Treasury bonds. Maybe the secret to economic development isn’t physical capital or exports or institutions; nope, it’s buying Treasury bonds. (I don’t actually believe this, but the correlation is there, and it totally undermines Graeber’s argument that buying Treasury bonds makes you some kind of debt peon.)

Speaking of correlations, Graeber is absolutely terrible at econometrics; he doesn’t even seem to grasp the most basic concepts. On page 366 he shows this graph of the US defense budget and the US federal debt side by side in order to argue that the military is the primary reason for our national debt. First of all, he doesn’t even correct for inflation—so most of the exponential rise in the two curves is simply the purchasing power of the dollar declining over time. Second, he doesn’t account for GDP growth, which is most of what’s left after you account for inflation. He has two nonstationary time-series with obvious exponential trends and doesn’t even formally correlate them, let alone actually perform the proper econometrics to show that they are cointegrated. I actually think they probably are cointegrated, and that a large portion of national debt is driven by military spending, but Graeber’s graph doesn’t even begin to make that argument. You could just as well graph the number of murders and the number of cheesecakes sold, each on an annual basis; both of them would rise exponentially with population, thus proving that cheesecakes cause murder (or murders cause cheesecakes?).

And then where Graeber really loses me is when he develops his theory of how modern capitalism and the monetary and debt system that go with it are fundamentally corrupt to the core and must be abolished and replaced with something totally new. First of all, he never tells us what that new thing is supposed to be. You’d think in 400 pages he could at least give us some idea, but no; nothing. He apparently wants us to do “not capitalism”, which is an infinite space of possible systems, some of which might well be better, but none of which can actually be implemented without more specific ideas. Many have declared that Occupy has failed—I am convinced that those who say this appreciate neither how long it takes social movements to make change, nor how effective Occupy has already been at changing our discourse, so that Capital in the Twenty-First Century can be a bestseller and the President of the United States can mention income inequality and economic mobility in his speeches—but insofar as Occupy has failed to achieve its goals, it seems to me that this is because it was never clear just what Occupy’s goals were to begin with. Now that I’ve read Graeber’s work, I understand why: He wanted it that way. He didn’t want to go through the hard work (which is also risky: you could be wrong) of actually specifying what this new economic system would look like; instead he’d prefer to find flaws in the current system and then wait for someone else to figure out how to fix them. That has always been the easy part; any human system comes with flaws. The hard part is actually coming up with a better system—and Graeber doesn’t seem willing to even try.

I don’t know exactly how accurate Graeber’s historical account is, but it seems to check out, and even make sense of some things that were otherwise baffling about the sketchy account of the past I had previously learned. Why were African tribes so willing to sell their people into slavery? Well, because they didn’t think of it as their people—they were selling captives from other tribes taken in war, which is something they had done since time immemorial in the form of slaves for slaves rather than slaves for goods. Indeed, it appears that trade itself emerged originally as what Graeber calls a “human economy”, in which human beings are literally traded as a fungible commodity—but always humans for humans. When money was introduced, people continued selling other people, but now it was for goods—and apparently most of the people sold were young women. So much of the Bible makes more sense that way: Why would Job be all right with getting new kids after losing his old ones? Kids are fungible! Why would people sell their daughters for goats? We always sell women! How quickly do we flirt with the unconscionable, when first we say that all is fungible.

One of Graeber’s central points is that debt came long before money—you owed people apples or hours of labor long before you ever paid anybody in gold. Money only emerged when debt became impossible to enforce, usually because trade was occurring between soldiers and the villages they had just conquered, so nobody was going to trust anyone to pay anyone back. Immediate spot trades were the only way to ensure that trades were fair in the absence of trust or community. In other words, the first use of gold as money was really using it as collateral. All of this makes a good deal of sense, and I’m willing to believe that’s where money originally came from.

But then Graeber tries to use this horrific and violent origin of money—in war, rape, and slavery, literally some of the worst things human beings have ever done to one another—as an argument for why money itself is somehow corrupt and capitalism with it. This is nothing short of a genetic fallacy: I could agree completely that money had this terrible origin, and yet still say that money is a good thing and worth preserving. (Indeed, I’m rather strongly inclined to say exactly that.) The fact that it was born of violence does not mean that it is violence; we too were born of violence, literally millions of years of rape and murder. It is astronomically unlikely that any one of us does not have a murderer somewhere in our ancestry. (Supposedly I’m descended from Julius Caesar, hence my last name Julius—not sure I really believe that—but if so, there you go, a murderer and tyrant.) Are we therefore all irredeemably corrupt? No. Where you come from does not decide what you are or where you are going.

In fact, I could even turn the argument around: Perhaps money was born of violence because it is the only alternative to violence; without money we’d still be trading our daughters away because we had no other way of trading. I don’t think I believe that either; but it should show you how fragile an argument from origin really is.

This is why the whole book gives this strange feeling of non sequitur; all this history is very interesting and enlightening, but what does it have to do with our modern problems? Oh. Nothing, that’s what. The connection you saw doesn’t make any sense, so maybe there’s just no connection at all. Well all right then. This was an interesting little experience.

This is a shame, because I do think there are important things to be said about the nature of money culturally, philosophically, morally—but Graeber never gets around to saying them, seeming to think that merely pointing out money’s violent origins is a sufficient indictment. It’s worth talking about the fact that money is something we made, something we can redistribute or unmake if we choose. I had such high expectations after I read that little interchange about the IMF: Yes! Finally, someone gets it! No, you don’t have to repay debts if that means millions of people will suffer! But then he never really goes back to that. The closest he veers toward an actual policy recommendation is at the very end of the book, a short section entitled “Perhaps the world really does owe you a living” in which he very briefly suggests—doesn’t even argue for, just suggests—that perhaps people do deserve a certain basic standard of living even if they aren’t working. He could have filled 50 pages arguing the ins and outs of a basic income with graphs and charts and citations of experimental data—but no, he just spends a few paragraphs proposing the idea and then ends the book. (I guess I’ll have to write that chapter myself; I think it would go well in The End of Economics, which I hope to get back to writing in a few months—while I also hope to finally publish my already-written book The Mathematics of Tears and Joy.)

If you want to learn about the history of money and debt over the last 5000 years, this is a good book to do so—and that is, after all, what the title said it would be. But if you’re looking for advice on how to improve our current economic system for the benefit of all humanity, you’ll need to look elsewhere.

And so in the grand economic tradition of reducing complex systems into a single numeric utility value, I rate Debt: The First 5000 Years a 3 out of 5.