Think of this as a moral recession

August 27, JDN 2457993

The Great Depression was, without doubt, the worst macroeconomic event of the last 200 years. Over 30 million people became unemployed. Unemployment exceeded 20%. Standard of living fell by as much as a third in the United States. Political unrest spread across the world, and the collapsing government of Germany ultimately became the Third Reich and triggered the Second World War If we ignore the world war, however, the effect on mortality rates was surprisingly small. (“Other than that, Mrs. Lincoln, how was the play?”)

And yet, how long do you suppose it took for economic growth to repair the damage? 80 years? 50 years? 30 years? 20 years? Try ten to fifteen. By 1940, the US, US, Germany, and Japan all had a per-capita GDP at least as high as in 1930. By 1945, every country in Europe had a per-capita GDP at least as high as they did before the Great Depression.

The moral of this story is this: Recessions are bad, and can have far-reaching consequences; but ultimately what really matters in the long run is growth.

Assuming the same growth otherwise, a country that had a recession as large as the Great Depression would be about 70% as rich as one that didn’t.

But over 100 years, a country that experienced 3% growth instead of 2% growth would be over two and a half times richer.

Therefore, in terms of standard of living only, if you were given the choice between having a Great Depression but otherwise growing at 3%, and having no recessions but growing at 2%, your grandchildren will be better off if you chose the former. (Of course, given the possibility of political unrest or even war, the depression could very well end up worse.)

With that in mind, I want you to think of the last few years—and especially the last few months—as a moral recession. Donald Trump being President of the United States is clearly a step backward for human civilization, and it seems to have breathed new life into some of the worst ideologies our society has ever harbored, from extreme misogyny, homophobia, right-wing nationalism, and White supremacism to outright Neo-Nazism. When one of the central debates in our public discourse is what level of violence is justifiable against Nazis under what circumstances, something has gone terribly, terribly wrong.

But much as recessions are overwhelmed in the long run by economic growth, there is reason to be confident that this moral backslide is temporary and will be similarly overwhelmed by humanity’s long-run moral progress.

What moral progress, you ask? Let’s remind ourselves.

Just 100 years ago, women could not vote in the United States.

160 years ago, slavery was legal in 15 US states.

Just 3 years ago, same-sex marriage was illegal in 14 US states. Yes, you read that number correctly. I said three. There are gay couples graduating high school and getting married now who as freshmen didn’t think they would be allowed to get married.

That’s just the United States. What about the rest of the world?

100 years ago, almost all of the world’s countries were dictatorships. Today, half of the world’s countries are democracies. Indeed, thanks to India, the majority of the world’s population now lives under democracy.

35 years ago, the Soviet Union still ruled most of Eastern Europe and Northern Asia with an iron fist (or should I say “curtain”?).

30 years ago, the number of human beings in extreme poverty—note I said number, not just rate; the world population was two-thirds what it is today—was twice as large as it is today.

Over the last 65 years, the global death rate due to war has fallen from 250 per million to just 10 per million.

The global literacy rate has risen from 40% to 80% in just 50 years.

World life expectancy has increased by 6 years in just the last 20 years.

We are living in a golden age. Do not forget that.

Indeed, if there is anything that could destroy all these astonishing achievements, I think it would be our failure to appreciate them.

If you listen to what these Neo-Nazi White supremacists say about their grievances, they sound like the spoiled children of millionaires (I mean, they elected one President, after all). They are outraged because they only get 90% of what they want instead of 100%—or even outraged not because they didn’t get what they wanted but because someone else they don’t know also did.

If you listen to the far left, their complaints don’t make much more sense. If you didn’t actually know any statistics, you’d think that life is just as bad for Black people in America today as it was under Jim Crow or even slavery. Well, it’s not even close. I’m not saying racism is gone; it’s definitely still here. But the civil rights movement has made absolutely enormous strides, from banning school segregation and housing redlining to reforming prison sentences and instituting affirmative action programs. Simply the fact that “racist” is now widely considered a terrible thing to be is a major accomplishment in itself. A typical Black person today, despite having only about 60% of the income of a typical White person, is still richer than a typical White person was just 50 years ago. While the 71% high school completion rate Black people currently have may not sound great, it’s much higher than the 50% rate that the whole US population had as recently as 1950.

Yes, there are some things that aren’t going very well right now. The two that I think are most important are climate change and income inequality. As both the global mean temperature anomaly and the world top 1% income share continue to rise, millions of people will suffer and die needlessly from diseases of poverty and natural disasters.

And of course if Neo-Nazis manage to take hold of the US government and try to repeat the Third Reich, that could be literally the worst thing that ever happened. If it triggered a nuclear war, it unquestionably would be literally the worst thing that ever happened. Both these events are unlikely—but not nearly as unlikely as they should be. (Five Thirty Eight interviewed several nuclear experts who estimated a probability of imminent nuclear war at a horrifying five percent.) So I certainly don’t want to make anyone complacent about these very grave problems.

But I worry also that we go too far the other direction, and fail to celebrate the truly amazing progress humanity has made thus far. We hear so often that we are treading water, getting nowhere, or even falling backward, that we begin to feel as though the fight for moral progress is utterly hopeless. If all these centuries of fighting for justice really had gotten us nowhere, the only sensible thing to do at this point would be to give up. But on the contrary, we have made enormous progress in an incredibly short period of time. We are on the verge of finally winning this fight. The last thing we want to do now is give up.

Why “marginal productivity” is no excuse for inequality

May 28, JDN 2457902

In most neoclassical models, workers are paid according to their marginal productivity—the additional (market) value of goods that a firm is able to produce by hiring that worker. This is often used as an excuse for inequality: If someone can produce more, why shouldn’t they be paid more?

The most extreme example of this is people like Maura Pennington writing for Forbes about how poor people just need to get off their butts and “do something”; but there is a whole literature in mainstream economics, particularly “optimal tax theory”, arguing based on marginal productivity that we should tax the very richest people the least and never tax capital income. The Chamley-Judd Theorem famously “shows” (by making heroic assumptions) that taxing capital just makes everyone worse off because it reduces everyone’s productivity.

The biggest reason this is wrong is that there are many, many reasons why someone would have a higher income without being any more productive. They could inherit wealth from their ancestors and get a return on that wealth; they could have a monopoly or some other form of market power; they could use bribery and corruption to tilt government policy in their favor. Indeed, most of the top 0.01% do literally all of these things.

But even if you assume that pay is related to productivity in competitive markets, the argument is not nearly as strong as it may at first appear. Here I have a simple little model to illustrate this.

Suppose there are 10 firms and 10 workers. Suppose that firm 1 has 1 unit of effective capital (capital adjusted for productivity), firm 2 has 2 units, and so on up to firm 10 which has 10 units. And suppose that worker 1 has 1 unit of so-called “human capital”, representing their overall level of skills and education, worker 2 has 2 units, and so on up to worker 10 with 10 units. Suppose each firm only needs one worker, so this is a matching problem.

Furthermore, suppose that productivity is equal to capital times human capital: That is, if firm 2 hired worker 7, they would make 2*7 = $14 of output.

What will happen in this market if it converges to equilibrium?

Well, first of all, the most productive firm is going to hire the most productive worker—so firm 10 will hire worker 10 and produce $100 of output. What wage will they pay? Well, they need a wage that is high enough to keep worker 10 from trying to go elsewhere. They should therefore pay a wage of $90—the next-highest firm productivity times the worker’s productivity. That’s the highest wage any other firm could credibly offer; so if they pay this wage, worker 10 will not have any reason to leave.

Now the problem has been reduced to matching 9 firms to 9 workers. Firm 9 will hire worker 9, making $81 of output, and paying $72 in wages.

And so on, until worker 1 at firm 1 produces $1 and receives… $0. Because there is no way for worker 1 to threaten to leave, in this model they actually get nothing. If I assume there’s some sort of social welfare system providing say $0.50, then at least worker 1 can get that $0.50 by threatening to leave and go on welfare. (This, by the way, is probably the real reason firms hate social welfare spending; it gives their workers more bargaining power and raises wages.) Or maybe they have to pay that $0.50 just to keep the worker from starving to death.

What does inequality look like in this society?
Well, the most-productive firm only has 10 times as much capital as the least-productive firm, and the most-educated worker only has 10 times as much skill as the least-educated worker, so we might think that incomes would vary only by a factor of 10.

But in fact they vary by a factor of over 100.

The richest worker makes $90, while the poorest worker makes $0.50. That’s a ratio of 180. (Still lower than the ratio of the average CEO to their average employee in the US, by the way.) The worker is 10 times as productive, but they receive 180 times as much income.

The firm profits vary along a more reasonable scale in this case; firm 1 makes a profit of $0.50 while firm 10 makes a profit of $10. Indeed, except for firm 1, firm n always makes a profit of $n. So that’s very nearly a linear scaling in productivity.

Where did this result come from? Why is it so different from the usual assumptions? All I did was change one thing: I allowed for increasing returns to scale.

If you make the usual assumption of constant returns to scale, this result can’t happen. Multiplying all the inputs by 10 should just multiply the output by 10, by assumption—since that is the definition of constant returns to scale.

But if you look at the structure of real-world incomes, it’s pretty obvious that we don’t have constant returns to scale.

If we had constant returns to scale, we should expect that wages for the same person should only vary slightly if that person were to work in different places. In particular, to have a 2-fold increase in wage for the same worker you’d need more than a 2-fold increase in capital.

This is a bit counter-intuitive, so let me explain a bit further. If a 2-fold increase in capital results in a 2-fold increase in wage for a given worker, that’s increasing returns to scale—indeed, it’s precisely the production function I assumed above.
If you had constant returns to scale, a 2-fold increase in wage would require something like an 8-fold increase in capital. This is because you should get a 2-fold increase in total production by doubling everything—capital, labor, human capital, whatever else. So doubling capital by itself should produce a much weaker effect. For technical reasons I’d rather not get into at the moment, usually it’s assumed that production is approximately proportional to capital to the one-third power—so to double production you need to multiply capital by 2^3 = 8.

I wasn’t able to quickly find really good data on wages for the same workers across different countries, but this should at least give a rough idea. In Mumbai, the minimum monthly wage for a full-time worker is about $80. In Shanghai, it is about $250. If you multiply out the US federal minimum wage of $7.25 per hour by 40 hours by 4 weeks, that comes to $1160 per month.

Of course, these are not the same workers. Even an “unskilled” worker in the US has a lot more education and training than a minimum-wage worker in India or China. But it’s not that much more. Maybe if we normalize India to 1, China is 3 and the US is 10.

Likewise, these are not the same jobs. Even a minimum wage job in the US is much more capital-intensive and uses much higher technology than most jobs in India or China. But it’s not that much more. Again let’s say India is 1, China is 3 and the US is 10.

If we had constant returns to scale, what should the wages be? Well, for India at productivity 1, the wage is $80. So for China at productivity 3, the wage should be $240—it’s actually $250, close enough for this rough approximation. But the US wage should be $800—and it is in fact $1160, 45% larger than we would expect by constant returns to scale.

Let’s try comparing within a particular industry, where the differences in skill and technology should be far smaller. The median salary for a software engineer in India is about 430,000 INR, which comes to about $6,700. If that sounds rather low for a software engineer, you’re probably more accustomed to the figure for US software engineers, which is $74,000. That is a factor of 11 to 1. For the same job. Maybe US software engineers are better than Indian software engineers—but are they that much better? Yes, you can adjust for purchasing power and shrink the gap: Prices in the US are about 4 times as high as those in India, so the real gap might be 3 to 1. But these huge price differences themselves need to be explained somehow, and even 3 to 1 for the same job in the same industry is still probably too large to explain by differences in either capital or education, unless you allow for increasing returns to scale.

In most industries, we probably don’t have quite as much increasing returns to scale as I assumed in my simple model. Workers in the US don’t make 100 times as much as workers in India, despite plausibly having both 10 times as much physical capital and 10 times as much human capital.

But in some industries, this model might not even be enough! The most successful authors and filmmakers, for example, make literally thousands of times as much money as the average author or filmmaker in their own country. J.K. Rowling has almost $1 billion from writing the Harry Potter series; this is despite having literally the same amount of physical capital and probably not much more human capital than the average author in the UK who makes only about 11,000 GBP—which is about $14,000. Harry Potter and the Philosopher’s Stone is now almost exactly 20 years old, which means that Rowling made an average of $50 million per year, some 3500 times as much as the average British author. Is she better than the average British author? Sure. Is she three thousand times better? I don’t think so. And we can’t even make the argument that she has more capital and technology to work with, because she doesn’t! They’re typing on the same laptops and using the same printing presses. Either the return on human capital for British authors is astronomical, or something other than marginal productivity is at work here—and either way, we don’t have anything close to constant returns to scale.

What can we take away from this? Well, if we don’t have constant returns to scale, then even if wage rates are proportional to marginal productivity, they aren’t proportional to the component of marginal productivity that you yourself bring. The same software developer makes more at Microsoft than at some Indian software company, the same doctor makes more at a US hospital than a hospital in China, the same college professor makes more at Harvard than at a community college, and J.K. Rowling makes three thousand times as much as the average British author—therefore we can’t speak of marginal productivity as inhering in you as an individual. It is an emergent property of a production process that includes you as a part. So even if you’re entirely being paid according to “your” productivity, it’s not really your productivity—it’s the productivity of the production process you’re involved in. A myriad of other factors had to snap into place to make your productivity what it is, most of which you had no control over. So in what sense, then, can we say you earned your higher pay?

Moreover, this problem becomes most acute precisely when incomes diverge the most. The differential in wages between two welders at the same auto plant may well be largely due to their relative skill at welding. But there’s absolutely no way that the top athletes, authors, filmmakers, CEOs, or hedge fund managers could possibly make the incomes they do by being individually that much more productive.

Tax plan possibilities

Mar 26, JDN 2457839

Recently President Trump (that phrase may never quite feel right) began presenting his new tax plan. To be honest, it’s not as ridiculous as I had imagined it might be. I mean, it’s still not very good, but it’s probably better than Reagan’s tax plan his last year in office, and it’s not nearly as absurd as the half-baked plan Trump originally proposed during the campaign.

But it got me thinking about the incredible untapped potential of our tax system—the things we could achieve as a nation, if we were willing to really commit to them and raise taxes accordingly.

A few years back I proposed a progressive tax system based upon logarithmic utility. I now have a catchy name for that tax proposal; I call it the logtax. It depends on two parameters—a poverty level, at which the tax rate goes to zero; and what I like to call a metarate—the fundamental rate that sets all the actual tax rates by the formula.

For the poverty level, I suggest we use the highest 2-household poverty level set by the Department of Health and Human Services: Because of Alaska’s high prices, that’s the Alaska poverty level, and the resulting figure is $20,290—let’s round to $20,000.

I would actually prefer to calculate taxes on an individual basis—I see no reason to incentivize particular household arrangements—but as current taxes are calculated on a household basis, I’m going to use that for now.

The metarate can be varied, and in the plans below I will compare different options for the metarate.

I will compare six different tax plans:

  1. Our existing tax plan, set under the Obama administration
  2. Trump’s proposed tax plan
  3. A flat rate of 30% with a basic income of $12,000, replacing welfare programs and Medicaid
  4. A flat rate of 40% with a basic income of $15,000, replacing welfare programs and Medicaid
  5. A logtax with a metarate of 20%, all spending intact
  6. A logtax with a metarate of 25% and a basic income of $12,000, replacing welfare programs and Medicaid
  7. A logtax with a metarate of 35% and a basic income of $15,000, cutting military spending by 50% and expanding Medicare to the entire population while eliminating Medicare payroll taxes

To do a proper comparison, I need estimates of the income distribution in the United States, in order to properly estimate the revenue from each type of tax. For that I used US Census data for most of the income data, supplementing with the World Top Incomes database for the very highest income brackets. The household data is broken up into brackets of $5,000 and only goes up to $250,000, so it’s a rough approximation to use the average household income for each bracket, but it’s all I’ve got.

The current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These are actually marginal rates, not average rates, which makes the calculation a lot more complicated. I did it properly though; for example, when you start paying the marginal rate of 28%, your average rate is really only 20.4%.

Worst of all, I used static scoring—that is, I ignored the Laffer Effect by which increasing taxes changes incentives and can change pre-tax incomes. To really do this analysis properly, one should use dynamic scoring, taking these effects into account—but proper dynamic scoring is an enormous undertaking, and this is a blog post, not my dissertation.

Still, I was able to get pretty close to the true figures. The actual federal budget shows total revenue net of payroll taxes to be $2.397 trillion, whereas I estimated $2.326 trillion; the true deficit is $608 billion and I estimated $682 billion.

Under Trump’s tax plan, almost all rates are cut. He also plans to remove some deductions, but all reports I could find on the plan were vague as to which ones, and with data this coarse it’s very hard to get any good figures on deduction amounts anyway. I also want to give him credit where it’s due: It was a lot easier to calculate the tax rates under Trump’s plan (but still harder than under mine…). But in general what I found was the following:

Almost everyone pays less income tax under Trump’s plan, by generally about 4-5% of their income. The poor benefit less or are slightly harmed; the rich benefit a bit more.

For example, a household in poverty making $12,300 would pay $1,384 currently, but $1,478 under Trump’s plan, losing $94 or 0.8% of their income. An average household making $52,000 would pay $8,768 currently but only $6,238 under Trump’s plan, saving $2,530 or about 4.8% of their income. A household making $152,000 would pay $35,580 currently but only $28,235 under Trump’s plan, saving $7,345 or again about 4.8%. A top 1% household making $781,000 would pay $265,625 currently, but only $230,158 under Trump’s plan, saving $35,467 or about 4.5%. A top 0.1% household making $2,037,000 would pay $762,656 currently, but only $644,350 under Trump’s plan, saving $118,306 or 5.8% of their income. A top 0.01% household making $9,936,000 would pay $3,890,736 currently, but only $3,251,083 under Trump’s plan, saving $639,653 or 6.4% of their income.

Because taxes are cut across the board, Trump’s plan would raise less revenue. My static scoring will exaggerate this effect, but only moderately; my estimate says we would lose over $470 billion in annual revenue, while the true figure might be $300 billion. In any case, Trump will definitely increase the deficit substantially unless he finds a way to cut an awful lot of spending elsewhere—and his pet $54 billion increase to the military isn’t helping in that regard. My estimate of the new deficit under Trump’s plan is $1.155 trillion—definitely not the sort of deficit you should be running during a peacetime economic expansion.

Let’s see what we might have done instead.

If we value simplicity and ease of calculation, it’s hard to beat a flat tax plus basic income. With a flat tax of 30% and a basic income of $12,000 per household, the poor do much better off because of the basic income, while the rich do a little better because of the flat tax, and the middle class feels about the same because the two effects largely cancel. Calculating your tax liability now couldn’t be easier; multiply your income by 3, remove a zero—that’s what you owe in taxes. And how much do you get in basic income? The same as everyone else, $12,000.

Using the same comparison households: The poor household making $12,300 would now receive $8,305—increasing their income by $9,689 or 78.8% relative to the current system. The middle-class household making $52,000 would pay $3,596, saving $5,172 or 10% of their income. The upper-middle-class household making $152,000 would now pay $33,582, saving only $1998 or 1.3% of their income. The top 1% household making $782,000 would pay $234,461, saving $31,164 or 4.0%. The top 0.1% household making $2,037,000 would pay $611,000, saving $151,656 or 7.4%. Finally, the top 0.01% household making $9,936,000 would pay $2,980,757, saving $910,000 or 9.1%.

Thus, like Trump’s plan, the tax cut almost across the board results in less revenue. However, because of the basic income, we can now justify cutting a lot of spending on social welfare programs. I estimated we could reasonably save about $630 billion by cutting Medicaid and other social welfare programs, while still not making poor people worse off because of the basic income. The resulting estimated deficit comes in at $1.085 trillion, which is still too large—but less than what Trump is proposing.

If I raise the flat rate to 40%—just as easy to calculate—I can bring that deficit down, even if I raise the basic income to $15,000 to compensate. The poverty household now receives $10,073, and the other representative households pay $5,974; $45,776; $297,615; $799,666; and $3,959,343 respectively. This means that the poor are again much better off, the middle class are about the same, and the rich are now substantially worse off. But what’s our deficit now? $180 billion—that’s about 1% of GDP, the sort of thing you can maintain indefinitely with a strong currency.

Can we do better than this? I think we can, with my logtax.

I confess that the logtax is not quite as easy to calculate as the flat tax. It does require taking exponents, and you can’t do it in your head. But it’s actually still easier than the current system, because there are no brackets to keep track of, no discontinuous shifts in the marginal rate. It is continuously progressive for all incomes, and the same formula can be used for all incomes from zero to infinity.
The simplest plan just replaces the income tax with a logtax of 20%. The poor household now receives $1,254, just from the automatic calculation of the tax—no basic income was added. The middle-class household pays $9,041, slightly more than what they are currently paying. Above that, people start paying more for sure: $50,655; $406,076; $1,228,795; and $7,065,274 respectively.

This system is obviously more progressive, but does it raise sufficient revenue? Why, as a matter of fact it removes the deficit entirely. The model estimates that the budget would now be at surplus of $110 billion. This is probably too optimistic; under dynamic scoring the distortions are probably going to cut the revenue a little. But it would almost certainly reduce the deficit, and very likely eliminate it altogether—without any changes in spending.

The next logtax plan adds a basic income of $12,000. To cover this, I raised the metarate to 25%. Now the poor household is receiving $11,413, the middle-class household is paying a mere $1,115, and the other households are paying $50,144; $458,140; $1,384,475; and $7,819,932 respectively. That top 0.01% household isn’t going to be happy, as they are now paying 78% of their income where in our current system they would pay only 39%. But their after-tax income is still over $2 million.

How does the budget look now? As with the flat tax plan, we can save about $630 billion by cutting redundant social welfare programs. So we are once again looking at a surplus, this time of about $63 billion. Again, the dynamic scoring might show some deficit, but definitely not a large one.

Finally, what if I raise the basic income to $15,000 and raise the metarate to 35%? The poor household now receives $14,186, while the median household pays $2,383. The richer households of course foot the bill, paying $64,180; $551,031; $1,618,703; and $8,790,124 respectively. Oh no, the top 0.01% household will have to make do with only $1.2 million; how will they survive!?

This raises enough revenue that it allows me to do some even more exciting things. With a $15,000 basic income, I can eliminate social welfare programs for sure. But then I can also cut military spending, say in half—still leaving us the largest military in the world. I can move funds around to give Medicare to every single American, an additional cost of about twice what we currently pay for Medicare. Then Medicaid doesn’t just get cut; it can be eliminated entirely, folded into Medicare. Assuming that the net effect on total spending is zero, the resulting deficit is estimated at only $168 billion, well within the range of what can be sustained indefinitely.

And really, that’s only the start. Once you consider all the savings on healthcare spending—an average of $4000 per person per year, if switching to single-payer brings us down to the average of other highly-developed countries. This is more than what the majority of the population would be paying in taxes under this plan—meaning that once you include the healthcare benefits, the majority of Americans would net receive money from the government. Compared to our current system, everyone making under about $80,000 would be better off. That is what we could be doing right now—free healthcare for everyone, a balanced budget (or close enough), and the majority of Americans receiving more from the government than they pay in taxes.

These results are summarized in the table below. (I also added several more rows of representative households—though still not all the brackets I used!) I’ve color-coded who would be paying less in tax in green and who would be more in tax in red under each plan, compared to our current system. This color-coding is overly generous to Trump’s plan and the 30% flat tax plan, because it doesn’t account for the increased government deficit (though I did color-code those as well, again relative to the current system). And yet, over 50% of households make less than $51,986, putting the poorest half of Americans in the green zone for every plan except Trump’s. For the last plan, I also color-coded those between $52,000 and $82,000 who would pay additional taxes, but less than they save on healthcare, thus net saving money in blue. Including those folks, we’re benefiting over 69% of Americans.

Household

pre-tax income

Current tax system Trump’s tax plan Flat 30% tax with $12k basic income Flat 40% tax with $15k basic income Logtax 20% Logtax 25% with $12k basic income Logtax 35% with $15k basic income, single-payer healthcare
$1,080 $108 $130 -$11,676 -$14,568 -$856 -$12,121 -$15,173
$12,317 $1,384 $1,478 -$8,305 -$10,073 -$1,254 -$11,413 -$14,186
$22,162 $2,861 $2,659 -$5,351 -$6,135 $450 -$9,224 -$11,213
$32,058 $4,345 $3,847 -$2,383 -$2,177 $2,887 -$6,256 -$7,258
$51,986 $8,768 $6,238 $3,596 $5,794 $9,041 $1,115 $2,383
$77,023 $15,027 $9,506 $11,107 $15,809 $18,206 $11,995 $16,350
$81,966 $16,263 $10,742 $12,590 $17,786 $20,148 $14,292 $17,786
$97,161 $20,242 $14,540 $17,148 $23,864 $26,334 $21,594 $28,516
$101,921 $21,575 $15,730 $18,576 $27,875 $30,571 $23,947 $31,482
$151,940 $35,580 $28,235 $33,582 $45,776 $50,655 $50,144 $64,180
$781,538 $265,625 $230,158 $222,461 $297,615 $406,076 $458,140 $551,031
$2,036,666 $762,656 $644,350 $599,000 $799,666 $1,228,795 $1,384,475 $1,618,703
$9,935,858 $3,890,736 $3,251,083 $2,968,757 $3,959,343 $7,065,274 $7,819,932 $8,790,124
Change in federal spending $0 $0 -$630 billion -$630 billion $0 -$630 billion $0
Estimated federal surplus -$682 billion -$1,155 billion -$822 billion -$180 billion $110 billion $63 billion -$168 billion

The urban-rural divide runs deep

Feb 5, JDN 2457790

Are urban people worth less than rural people?

That probably sounds like a ridiculous thing to ask; of course not, all people are worth the same (other things equal of course—philanthropists are worth more than serial murderers). But then, if you agree with that, you’re probably an urban person, as I’m sure most of my readers are (and as indeed most people in highly-developed countries are).

A disturbing number of rural people, however, honestly do seem to believe this. They think that our urban lifestyles (whatever they imagine those to be) devalue us as citizens and human beings.

That is the key subtext to understand in the terrifying phenomenon that is Donald Trump. Most of the people who voted for him can’t possibly have thought he was actually trustworthy, and many probably didn’t actually support his policies of bigotry and authoritarianism (though he was very popular among bigots and authoritarians). From speaking with family members and acquaintances who proudly voted for Trump, one thing came through very clearly: This was a gigantic middle finger pointed at cities. They didn’t even really want Trump; they just knew we didn’t, and so they voted for him out of spite as much as anything else. They also have really confused views about free trade, so some of them voted for him because he promised to bring back jobs lost to trade (that weren’t lost to trade, can’t be brought back, and shouldn’t be even if they could). Talk with a Trump voter for a few minutes, and sneers of “latte-sipping liberal” (I don’t even like coffee) and “coastal elite” (I moved here to get educated; I wasn’t born here) are sure to follow.

There has always been some conflict between rural and urban cultures, for as long as there have been urban cultures for rural cultures to be in conflict with. It is found not just in the US, but in most if not all countries around the world. It was relatively calm during the postwar boom in the 20th century, as incomes everywhere (or at least everywhere within highly-developed countries) were improving more or less in lockstep. But the 21st century has brought us much more unequal growth, concentrated on particular groups of people and particular industries. This has brought more resentment. And that divide, above all else, is what brought us Trump; the correlation between population density and voting behavior is enormous.

Of course, “urban” is sometimes a dog-whistle for “Black”; but sometimes I think it actually really means “urban”—and yet there’s still a lot of hatred embedded in it. Indeed, perhaps that’s why the dog-whistle works; a White man from a rural town can sneer at “urban” people and it’s not entirely clear whether he’s being racist or just being anti-urban.

The assumption that rural lifestyles are superior runs so deep in our culture that even in articles by urban people (like this one from the LA Times) supposedly reflecting about how to resolve this divide, there are long paeans to the world of “hard work” and “sacrifice” and “autonomy” of rural life, and mocking “urban elites” for their “disproportionate” (by which you can only mean almost proportionate) power over government.

Well, guess what? If you want to live in a rural area, go live in a rural area. Don’t pine for it. Don’t tell me how great farm life is. If you want to live on a farm, go live on a farm. I have nothing against it; we need farmers, after all. I just want you to shut up about how great it is, especially if you’re not going to actually do it. Pining for someone else’s lifestyle when you could easily take on that lifestyle if you really wanted it just shows that you think the grass is greener on the other side.

Because the truth is, farm living isn’t so great for most people. The world’s poorest people are almost all farmers. 70% of people below the UN poverty line live in rural areas, even as more and more of the world’s population moves into cities. If you use a broader poverty measure, as many as 85% of the world’s poor live in rural areas.

The kind of “autonomy” that means defending your home with a shotgun is normally what we would call anarchy—it’s a society that has no governance, no security. (Of course, in the US that’s pure illusion; crime rates in general are low and falling, and lower in rural areas than urban areas. But in some parts of the world, that anarchy is very real.) One of the central goals of global economic development is to get people away from subsistence farming into far more efficient manufacturing and service jobs.

At least in the US, farm life is a lot better than it used to be, now that agricultural technology has improved so that one farmer can now do the work of hundreds. Despite increased population and increased food consumption per person, the number of farmers in the US is now the smallest it has been since before the Civil War. The share of employment devoted to agriculture has fallen from over 80% in 1800 to under 2% today. Even just since the 1960s labor productivity of US farms has more than tripled.

But the reason that some 80% of Americans have chosen to live in cities—and yes, I can clearly say “chosen”, because cities are more expensive and therefore urban living is a voluntary activity. Most people who live in the city right now could move to the country if we really wanted to. We choose not to, because we know our life would be worse if we did.

Indeed, I dare say that a lot of the hatred of city-dwellers has got to be envy. Our (median) incomes are higher and our (mean) lifespans are longer. Fewer of our children are in poverty. Life is better here—we know it, and deep down, they know it too.

We also have better Internet access, unsurprisingly—though rural areas are only a few years behind, and the technology improves so rapidly that twice as many rural homes in the US have Internet access than urban homes did in 1998.

Now, a rational solution to this problem would be either to improve the lives of people in rural areas or else move everyone to urban areas—and both of those things have been happening, not only in the US but around the world. But in order to do that, you need to be willing to change things. You have to give up the illusion that farm life is some wonderful thing we should all be emulating, rather than the necessary toil that humanity was forced to go through for centuries until civilization could advance beyond it. You have to be willing to replace farmers with robots, so that people who would have been farmers can go do something better with their lives. You need to give up the illusion that there is something noble or honorable about hard labor on a farm—indeed, you need to give up the illusion that there is anything noble or honorable about hard work in general. Work is not a benefit; work is a cost. Work is what we do because we have to—and when we no longer have to do it, we should stop. Wanting to escape toil and suffering doesn’t make you lazy or selfish—it makes you rational.

We could surely be more welcoming—but cities are obviously more welcoming to newcomers than rural areas are. Our housing is too expensive, but that’s in part because so many people want to live here—supply hasn’t been able to keep up with demand.

I may seem to be presenting this issue as one-sided; don’t urban people devalue rural people too? Sometimes. Insults like “hick” and “yokel” and “redneck” do of course exist. But I’ve never heard anyone from a city seriously argue that people who live in rural areas should have votes that systematically count for less than those of people who live in cities—yet the reverse is literally what people are saying when they defend the Electoral College. If you honestly think that the Electoral College deserves to exist in anything like its present form, you must believe that some Americans are worth more than others, and the people who are worth more are almost all in rural areas while the people who are worth less are almost all in urban areas.

No, National Review, the Electoral College doesn’t “save” America from California’s imperial power; it gives imperial power to a handful of swing states. The only reason California would be more important than any other state is that more Americans live here. Indeed, a lot of Republicans in California are disenfranchised, because they know that their votes will never overcome the overwhelming Democratic majority for the state as a whole and the system is winner-takes-all. Indeed, about 30% of California votes Republican (well, not in the last election, because that was Trump—Orange County went Democrat for the first time in decades), so the number of disenfranchised Republicans alone in California is larger than the population of Michigan, which in turn is larger than the population of Wyoming, North Dakota, South Dakota, Montana, Nebraska, West Virginia, and Kansas combined. Indeed, there are more people in California than there are in Canada. So yeah, I’m thinking maybe we should get a lot of votes?

But it’s easy for you to drum up fear over “imperial rule” by California in particular, because we’re so liberal—and so urban, indeed an astonishing 95% urban, the most of any US state (or frankly probably any major regional entity on the planet Earth! To beat that you have to be something like Singapore, which literally just is a single city).

In fact, while insults thrown at urban people get thrown at basically all of us regardless of what we do, most of the insults that are thrown at rural people are mainly thrown at uneducated rural people. (And statistically, while many people in rural areas are educated and many people in urban areas are not, there’s definitely a positive correlation between urbanization and education.) It’s still unfair in many ways, not least because education isn’t entirely a choice, not in a society where tuition at an average private university costs more than the median individual income. Many of the people we mock as being stupid were really just born poor. It may not be their fault, but they can’t believe that the Earth is only 10,000 years old and not have some substantial failings in their education. I still don’t think mockery is the right answer; it’s really kicking them while they’re down. But clearly there is something wrong with our society when 40% of people believe something so obviously ludicrous—and those beliefs are very much concentrated in the same Southern states that have the most rural populations. “They think we’re ignorant just because we believe that God made the Earth 6,000 years ago!” I mean… yes? I’m gonna have to own up to that one, I guess. I do in fact think that people who believe things that were disproven centuries ago are ignorant.

So really this issue is one-sided. We who live in cities are being systematically degraded and disenfranchised, and when we challenge that system we are accused of being selfish or elitist or worse. We are told that our lifestyles are inferior and shameful, and when we speak out about the positive qualities of our lives—our education, our acceptance of diversity, our flexibility in the face of change—we are again accused of elitism and condescension.

We could simply stew in that resentment. But we can do better. We can reach out to people in rural areas, show them not just that our lives are better—as I said, they already know this—but that they can have these lives too. And we can make policy so that this really can happen for people. Envy doesn’t automatically lead to resentment; that only happens when combined with a lack of mobility. The way urban people pine for the countryside is baffling, since we could go there any time; but the way that country people long for the city is perfectly understandable, as our lives really are better but our rent is too high for them to afford. We need to bring that rent down, not just for the people already living in cities, but also for the people who want to but can’t.

And of course we don’t want to move everyone to cities, either. Many people won’t want to live in cities, and we need a certain population of farmers to make our food after all. We can work to improve infrastructure in rural areas—particularly when it comes to hospitals, which are a basic necessity that is increasingly underfunded. We shouldn’t stop using cost-effectiveness calculations, but we need to compare against the right things. If that hospital isn’t worth building, it should be because there’s another, better hospital we could make for the same amount or cheaper—not because we think that this town doesn’t deserve to have a hospital. We can expand our public transit systems over a wider area, and improve their transit speeds so that people can more easily travel to the city from further away.

We should seriously face up to the costs that free trade has imposed upon many rural areas. We can’t give up on free trade—but that doesn’t mean we need to keep our trade policy exactly as it is. We can do more to ensure that multinational corporations don’t have overwhelming bargaining power against workers and small businesses. We can establish a tax system that would redistribute more of the gains from free trade to the people and places most hurt by the transition. Right now, poor people in the US are often the most fiercely opposed to redistribution of wealth, because somehow they perceive that wealth will be redistributed from them when it would in fact be redistributed to them. They are in a scarcity mindset, their whole worldview shaped by the fact that they struggle to get by. They see every change as a threat, every stranger as an enemy.

Somehow we need to fight that mindset, get them to see that there are many positive changes that can be made, many things that we can achieve together that none of us could achieve along.

Student debt crisis? What student debt crisis?

Dec 18, JDN 2457741
As of this writing, I have over $99,000 in student loans. This is a good thing. It means that I was able to pay for my four years of college, and two years of a master’s program, in order to be able to start this coming five years of a PhD. When I have concluded these eleven years of postgraduate education and incurred six times the world per-capita income in debt, what then will become of me? Will I be left to live on the streets, destitute and overwhelmed by debt?

No. I’ll have a PhD. The average lifetime income of individuals with PhDs in the United States is $3.4 million. Indeed, the median annual income for economists in the US is almost exactly what I currently owe in debt—so if I save well, I could very well pay it off in just a few years. With an advanced degree in economics like mine, or similarly high-paying fields such as physics, medicine, and law one can expect the higher end of that scale, $4 million or more; with a degree in a less-lucrative field such as art, literature, history, or philosophy, one would have to settle for “only” say $3 million. The average lifetime income in the US for someone without any college education is only $1.2 million. So even in literature or history, a PhD is worth about $2 million in future income.

On average, an additional year of college results in a gain in lifetime future earnings of about 15% to 20%. Even when you adjust for interest rates and temporal discounting, this is a rate of return that would make any stock trader envious.

Fitting the law of diminishing returns, the rates of return on education in poor countries are even larger, often mind-bogglingly huge; the increase in lifetime income from a year of college education in Botswana was estimated at 38%. This implies that someone who graduates from college in Botswana earns four times as much money as someone who only finished high school.

We who pay $100,000 to receive an additional $2 to $3 million can hardly be called unfortunate.

Indeed, we are mind-bogglingly fortunate; we have been given an opportunity to better ourselves and the society we live in that is all but unprecedented in human history granted only to a privileged few even today. Right now, only about half of adults in the most educated countries in the world (Canada, Russia, Israel, Japan, Luxembourg, South Korea, and the United States) ever go to college. Only 30% of Americans ever earn a bachelor’s degree, and as recently as 1975 that figure was only 20%. Worldwide, the majority of people never graduate from high school. The average length of schooling in developing countries today is six yearsthat is, sixth grade—and this is an enormous improvement from the two years of average schooling found in developing countries in 1950.

If we look a bit further back in history, the improvements in education are even more staggering. In the United States in 1910, only 13.5% of people graduated high school, and only 2.7% completed a bachelor’s degree. There was no student debt crisis then, to be sure—because there were no college students.

Indeed, I have been underestimating the benefits of education thus far, because education is both a public and private good. The figures I’ve just given have been only the private financial return on education—the additional income received by an individual because they went to college. But there is also a non-financial return, such as the benefits of working in a more appealing or exciting career and the benefits of learning for its own sake. The reason so many people do go into history and literature instead of economics and physics very likely has to do with valuing these other aspects of education as highly as or even more highly than financial income, and it is entirely rational for people to do so. (An interesting survey question I’ve alas never seen asked: “How much money would we have to give you right now to convince you to quit working in philosophy for the rest of your life?”)

Yet even more important is the public return on education, the increased productivity and prosperity of our society as a result of greater education—and these returns are enormous. For every $1 spent on education in the US, the economy grows by an estimated $1.50. Public returns on college education worldwide are on the order of 10%-20% per year of education. This is over and above the 15-20% return already being made by the individuals going to school. This means that raising the average level of education in a country by just one year raises that country’s income by between 25% and 40%.

Indeed, perhaps the simplest way to understand the enormous social benefits of education is to note the strong correlation between education level and income level. This graph comes from the UN Human Development Report Data Explorer; it plots the HDI education index (which ranges from 0, least educated, to 1, most educated) and the per-capita GDP at purchasing power parity (on a log scale, so that each increment corresponds to a proportional increase in GDP); as you can see, educated countries tend to be rich countries, and vice-versa.

hdi_education_income_labeled

Of course, income drives education just as education drives income. But more detailed econometric studies generally (though not without some controversy) show the same basic result: The more educated a country’s people become, the richer that country becomes.

And indeed, the United States is a spectacularly rich country. The figure of “$1 trillion in college debt” sounds alarming (and has been used to such effect in many a news article, ranging from the New York Daily News, Slate, and POLITICO to USA Today and CNN all the way to Bloomberg, MarketWatch, and Business Insider, and even getting support from the Consumer Financial Protection Bureau and The Federal Reserve Bank of New York).

But the United States has a total GDP of over $18.6 trillion, and total net wealth somewhere around $84 trillion. Is it really so alarming that our nation’s most important investment would result in debt of less than two percent of our total nation’s wealth? Democracy Now asks who is getting rich off of $1.3 trillion in student debt? All of us—the students especially.

In fact, the probability of defaulting on student loans is inversely proportional to the amount of loans a student has. Students with over $100,000 in student debt default only 18% of the time, while students with less than $5,000 in student debt default 34% of the time. This should be shocking to those who think that we have a crisis of too much student debt; if student debt were an excess burden that is imposed upon us for little gain, default rates should rise as borrowing amounts increase, as we observe, for example, with credit cards: there is a positive correlation between carrying higher balances and being more likely to default. (This also raises doubts about the argument that higher debt loads should carry higher interest rates—why, if the default rate doesn’t go up?) But it makes perfect sense if you realize that college is an investment—indeed, almost certainly both the most profitable and the most socially responsible investment most people will ever have the opportunity to make. More debt means you had access to more credit to make a larger investment—and therefore your payoff was greater and you were more likely to be able to repay the debt.

Yes, job prospects were bad for college graduates right after the Great Recession—because it was right after the Great Recession, and job prospects were bad for everyone. Indeed, the unemployment rate for people with college degrees was substantially lower than for those without college degrees, all the way through the Second Depression. The New York Times has a nice little gadget where you can estimate the unemployment rate for college graduates; my hint for you is that I just said it’s lower, and I still guessed too high. There was variation across fields, of course; unsurprisingly computer science majors did extremely well and humanities majors did rather poorly. Underemployment was a big problem, but again, clearly because of the recession, not because going to college was a mistake. In fact, unemployment for college graduates (about 9%) has always been so much lower than unemployment for high school dropouts that the maximum unemployment rate for young college graduates is less than the minimum unemployment rate for young high school graduates (10%) over the entire period since the year 2000. Young high school dropouts have fared even worse; their minimum unemployment rate since 2000 was 18%, while their maximum was a terrifying Great Depression-level of 32%. Education isn’t just a good investment—it’s an astonishingly good investment.

There are a lot of things worth panicking about, now that Trump has been elected President. But student debt isn’t one of them. This is a very smart investment, made with a reasonable portion of our nation’s wealth. If you have student debt like I do, make sure you have enough—or otherwise you might not be able to pay it back.

Sometimes people have to lose their jobs. This isn’t a bad thing.

Oct 8, JDN 2457670

Eleizer Yudkowsky (founder of the excellent blog forum Less Wrong) has a term he likes to use to distinguish his economic policy views from either liberal, conservative, or even libertarian: “econoliterate”, meaning the sort of economic policy ideas one comes up with when one actually knows a good deal about economics.

In general I think Yudkowsky overestimates this effect; I’ve known some very knowledgeable economists who disagree quite strongly over economic policy, and often following the conventional political lines of liberal versus conservative: Liberal economists want more progressive taxation and more Keynesian monetary and fiscal policy, while conservative economists want to reduce taxes on capital and remove regulations. Theoretically you can want all these things—as Miles Kimball does—but it’s rare. Conservative economists hate minimum wage, and lean on the theory that says it should be harmful to employment; liberal economists are ambivalent about minimum wage, and lean on the empirical data that shows it has almost no effect on employment. Which is more reliable? The empirical data, obviously—and until more economists start thinking that way, economics is never truly going to be a science as it should be.

But there are a few issues where Yudkowsky’s “econoliterate” concept really does seem to make sense, where there is one view held by most people, and another held by economists, regardless of who is liberal or conservative. One such example is free trade, which almost all economists believe in. A recent poll of prominent economists by the University of Chicago found literally zero who agreed with protectionist tariffs.

Another example is my topic for today: People losing their jobs.

Not unemployment, which both economists and almost everyone else agree is bad; but people losing their jobs. The general consensus among the public seems to be that people losing jobs is always bad, while economists generally consider it a sign of an economy that is run smoothly and efficiently.

To be clear, of course losing your job is bad for you; I don’t mean to imply that if you lose your job you shouldn’t be sad or frustrated or anxious about that, particularly not in our current system. Rather, I mean to say that policy which tries to keep people in their jobs is almost always a bad idea.

I think the problem is that most people don’t quite grasp that losing your job and not having a job are not the same thing. People not having jobs who want to have jobs—unemployment—is a bad thing. But losing your job doesn’t mean you have to stay unemployed; it could simply mean you get a new job. And indeed, that is what it should mean, if the economy is running properly.

Check out this graph, from FRED:

hires_separations

The red line shows hires—people getting jobs. The blue line shows separations—people losing jobs or leaving jobs. During a recession (the most recent two are shown on this graph), people don’t actually leave their jobs faster than usual; if anything, slightly less. Instead what happens is that hiring rates drop dramatically. When the economy is doing well (as it is right now, more or less), both hires and separations are at very high rates.

Why is this? Well, think about what a job is, really: It’s something that needs done, that no one wants to do for free, so someone pays someone else to do it. Once that thing gets done, what should happen? The job should end. It’s done. The purpose of the job was not to provide for your standard of living; it was to achieve the task at hand. Once it doesn’t need done, why keep doing it?

We tend to lose sight of this, for a couple of reasons. First, we don’t have a basic income, and our social welfare system is very minimal; so a job usually is the only way people have to provide for their standard of living, and they come to think of this as the purpose of the job. Second, many jobs don’t really “get done” in any clear sense; individual tasks are completed, but new ones always arise. After every email sent is another received; after every patient treated is another who falls ill.

But even that is really only true in the short run. In the long run, almost all jobs do actually get done, in the sense that no one has to do them anymore. The job of cleaning up after horses is done (with rare exceptions). The job of manufacturing vacuum tubes for computers is done. Indeed, the job of being a computer—that used to be a profession, young women toiling away with slide rules—is very much done. There are no court jesters anymore, no town criers, and very few artisans (and even then, they’re really more like hobbyists). There are more writers now than ever, and occasional stenographers, but there are no scribes—no one powerful but illiterate pays others just to write things down, because no one powerful is illiterate (and even few who are not powerful, and fewer all the time).

When a job “gets done” in this long-run sense, we usually say that it is obsolete, and again think of this as somehow a bad thing, like we are somehow losing the ability to do something. No, we are gaining the ability to do something better. Jobs don’t become obsolete because we can’t do them anymore; they become obsolete because we don’t need to do them anymore. Instead of computers being a profession that toils with slide rules, they are thinking machines that fit in our pockets; and there are plenty of jobs now for software engineers, web developers, network administrators, hardware designers, and so on as a result.

Soon, there will be no coal miners, and very few oil drillers—or at least I hope so, for the sake of our planet’s climate. There will be far fewer auto workers (robots have already done most of that already), but far more construction workers who install rail lines. There will be more nuclear engineers, more photovoltaic researchers, even more miners and roofers, because we need to mine uranium and install solar panels on rooftops.

Yet even by saying that I am falling into the trap: I am making it sound like the benefit of new technology is that it opens up more new jobs. Typically it does do that, but that isn’t what it’s for. The purpose of technology is to get things done.

Remember my parable of the dishwasher. The goal of our economy is not to make people work; it is to provide people with goods and services. If we could invent a machine today that would do the job of everyone in the world and thereby put us all out of work, most people think that would be terrible—but in fact it would be wonderful.

Or at least it could be, if we did it right. See, the problem right now is that while poor people think that the purpose of a job is to provide for their needs, rich people think that the purpose of poor people is to do jobs. If there are no jobs to be done, why bother with them? At that point, they’re just in the way! (Think I’m exaggerating? Why else would anyone put a work requirement on TANF and SNAP? To do that, you must literally think that poor people do not deserve to eat or have homes if they aren’t, right now, working for an employer. You can couch that in cold economic jargon as “maximizing work incentives”, but that’s what you’re doing—you’re threatening people with starvation if they can’t or won’t find jobs.)

What would happen if we tried to stop people from losing their jobs? Typically, inefficiency. When you aren’t allowed to lay people off when they are no longer doing useful work, we end up in a situation where a large segment of the population is being paid but isn’t doing useful work—and unlike the situation with a basic income, those people would lose their income, at least temporarily, if they quit and tried to do something more useful. There is still considerable uncertainty within the empirical literature on just how much “employment protection” (laws that make it hard to lay people off) actually creates inefficiency and reduces productivity and employment, so it could be that this effect is small—but even so, likewise it does not seem to have the desired effect of reducing unemployment either. It may be like minimum wage, where the effect just isn’t all that large. But it’s probably not saving people from being unemployed; it may simply be shifting the distribution of unemployment so that people with protected jobs are almost never unemployed and people without it are unemployed much more frequently. (This doesn’t have to be based in law, either; while it is made by custom rather than law, it’s quite clear that tenure for university professors makes tenured professors vastly more secure, but at the cost of making employment tenuous and underpaid for adjuncts.)

There are other policies we could make that are better than employment protection, active labor market policies like those in Denmark that would make it easier to find a good job. Yet even then, we’re assuming that everyone needs jobs–and increasingly, that just isn’t true.

So, when we invent a new technology that replaces workers, workers are laid off from their jobs—and that is as it should be. What happens next is what we do wrong, and it’s not even anybody in particular; this is something our whole society does wrong: All those displaced workers get nothing. The extra profit from the more efficient production goes entirely to the shareholders of the corporation—and those shareholders are almost entirely members of the top 0.01%. So the poor get poorer and the rich get richer.

The real problem here is not that people lose their jobs; it’s that capital ownership is distributed so unequally. And boy, is it ever! Here are some graphs I made of the distribution of net wealth in the US, using from the US Census.

Here are the quintiles of the population as a whole:

net_wealth_us

And here are the medians by race:

net_wealth_race

Medians by age:

net_wealth_age

Medians by education:

net_wealth_education

And, perhaps most instructively, here are the quintiles of people who own their homes versus renting (The rent is too damn high!)

net_wealth_rent

All that is just within the US, and already they are ranging from the mean net wealth of the lowest quintile of people under 35 (-$45,000, yes negative—student loans) to the mean net wealth of the highest quintile of people with graduate degrees ($3.8 million). All but the top quintile of renters are poorer than all but the bottom quintile of homeowners. And the median Black or Hispanic person has less than one-tenth the wealth of the median White or Asian person.

If we look worldwide, wealth inequality is even starker. Based on UN University figures, 40% of world wealth is owned by the top 1%; 70% by the top 5%; and 80% by the top 10%. There is less total wealth in the bottom 80% than in the 80-90% decile alone. According to Oxfam, the richest 85 individuals own as much net wealth as the poorest 3.7 billion. They are the 0.000,001%.

If we had an equal distribution of capital ownership, people would be happy when their jobs became obsolete, because it would free them up to do other things (either new jobs, or simply leisure time), while not decreasing their income—because they would be the shareholders receiving those extra profits from higher efficiency. People would be excited to hear about new technologies that might displace their work, especially if those technologies would displace the tedious and difficult parts and leave the creative and fun parts. Losing your job could be the best thing that ever happened to you.

The business cycle would still be a problem; we have good reason not to let recessions happen. But stopping the churn of hiring and firing wouldn’t actually make our society better off; it would keep people in jobs where they don’t belong and prevent us from using our time and labor for its best use.

Perhaps the reason most people don’t even think of this solution is precisely because of the extreme inequality of capital distribution—and the fact that it has more or less always been this way since the dawn of civilization. It doesn’t seem to even occur to most people that capital income is a thing that exists, because they are so far removed from actually having any amount of capital sufficient to generate meaningful income. Perhaps when a robot takes their job, on some level they imagine that the robot is getting paid, when of course it’s the shareholders of the corporations that made the robot and the corporations that are using the robot in place of workers. Or perhaps they imagine that those shareholders actually did so much hard work they deserve to get paid that money for all the hours they spent.

Because pay is for work, isn’t it? The reason you get money is because you’ve earned it by your hard work?

No. This is a lie, told to you by the rich and powerful in order to control you. They know full well that income doesn’t just come from wages—most of their income doesn’t come from wages! Yet this is even built into our language; we say “net worth” and “earnings” rather than “net wealth” and “income”. (Parade magazine has a regular segment called “What People Earn”; it should be called “What People Receive”.) Money is not your just reward for your hard work—at least, not always.

The reason you get money is that this is a useful means of allocating resources in our society. (Remember, money was created by governments for the purpose of facilitating economic transactions. It is not something that occurs in nature.) Wages are one way to do that, but they are far from the only way; they are not even the only way currently in use. As technology advances, we should expect a larger proportion of our income to go to capital—but what we’ve been doing wrong is setting it up so that only a handful of people actually own any capital.

Fix that, and maybe people will finally be able to see that losing your job isn’t such a bad thing; it could even be satisfying, the fulfillment of finally getting something done.

No, Scandinavian countries aren’t parasites. They’re just… better.

Oct 1, JDN 2457663

If you’ve been reading my blogs for awhile, you likely have noticed me occasionally drop the hashtag #ScandinaviaIsBetter; I am in fact quite enamored of the Scandinavian (or Nordic more generally) model of economic and social policy.

But this is not a consensus view (except perhaps within Scandinavia itself), and I haven’t actually gotten around to presenting a detailed argument for just what it is that makes these countries so great.

I was inspired to do this by discussion with a classmate of mine (who shall remain nameless) who emphatically disagreed; he actually seems to think that American economic policy is somewhere near optimal (and to be fair, it might actually be near optimal, in the broad space of all possible economic policies—we are not Maoist China, we are not Somalia, we are not a nuclear wasteland). He couldn’t disagree with the statistics on how wealthy and secure and happy Scandinavian countries are, so instead he came up with this: “They are parasites.”

What he seemed to mean by this is that somehow Scandinavian countries achieve their success by sapping wealth from other countries, perhaps the rest of Europe, perhaps the world more generally. On this view, it’s not that Norway and Denmark aren’t rich because they economic policy basically figured out; no, they are somehow draining those riches from elsewhere.

This could scarcely be further from the truth.

But first, consider a couple of countries that are parasites, at least partially: Luxembourg and Singapore.

Singapore has an enormous trade surplus: 5.5 billion SGD per month, which is $4 billion per month, so almost $50 billion per year. They also have a positive balance of payments of $61 billion per year. Singapore’s total GDP is about $310 billion, so these are not small amounts. What does this mean? It means that Singapore is taking in a lot more money than they are spending out. They are effectively acting as mercantilists, or if you like as a profit-seeking corporation.

Moreover, Singapore is totally dependent on trade: their exports are over $330 billion per year, and their imports are over $280 billion. You may recognize each of these figures as comparable to the entire GDP of the country. Yes, their total trade is 200% of GDP. They aren’t really so much a country as a gigantic trading company.

What about Luxembourg? Well, they have a trade deficit of 420 million Euros per month, which is about $560 million per year. Their imports total about $2 billion per year, and their exports about $1.5 billion. Since Luxembourg’s total GDP is $56 billion, these aren’t unreasonably huge figures (total trade is about 6% of GDP); so Luxembourg isn’t a parasite in the sense that Singapore is.

No, what makes Luxembourg a parasite is the fact that 36% of their GDP is due to finance. Compare the US, where 12% of our GDP is finance—and we are clearly overfinancialized. Over a third of Luxembourg’s income doesn’t involve actually… doing anything. They hold onto other people’s money and place bets with it. Even insofar as finance can be useful, it should be only very slightly profitable, and definitely not more than 10% of GDP. As Stiglitz and Krugman agree (and both are Nobel Laureate economists), banking should be boring.

Do either of these arguments apply to Scandinavia? Let’s look at trade first. Denmark’s imports total about 42 billion DKK per month, which is about $70 billion per year. Their exports total about $90 billion per year. Denmark’s total GDP is $330 billion, so these numbers are quite reasonable. What are their main sectors? Manufacturing, farming, and fuel production. Notably, not finance.

Similar arguments hold for Sweden and Norway. They may be small countries, but they have diversified economies and strong production of real economic goods. Norway is probably overly dependent on oil exports, but they are specifically trying to move away from that right now. Even as it is, only about $90 billion of their $150 billion exports are related to oil, and exports in general are only about 35% of GDP, so oil is about 20% of Norway’s GDP. Compare that to Saudi Arabia, of which has 90% of its exports related to oil, accounting for 45% of GDP. If oil were to suddenly disappear, Norway would lose 20% of their GDP, dropping their per-capita GDP… all the way to the same as the US. (Terrifying!) But Saudi Arabia would suffer a total economic collapse, and their per capita-GDP would fall from where it is now at about the same as the US to about the same as Greece.

And at least oil actually does things. Oil exporting countries aren’t parasites so much as they are drug dealers. The world is “rolling drunk on petroleum”, and until we manage to get sober we’re going to continue to need that sweet black crude. Better we buy it from Norway than Saudi Arabia.

So, what is it that makes Scandinavia so great? Why do they have the highest happiness ratings, the lowest poverty rates, the best education systems, the lowest unemployment rates, the best social mobility and the highest incomes? To be fair, in most of these not literally every top spot is held by a Scandinavian country; Canada does well, Germany does well, the UK does well, even the US does well. Unemployment rates in particular deserve further explanation, because a lot of very poor countries report surprisingly low unemployment rates, such as Cambodia and Laos.

It’s also important to recognize that even great countries can have serious flaws, and the remnants of the feudal system in Scandinavia—especially in Sweden—still contribute to substantial inequality of wealth and power.

But in general, I think if you assembled a general index of overall prosperity of a country (or simply used one that already exists like the Human Development Index), you would find that Scandinavian countries are disproportionately represented at the very highest rankings. This calls out for some sort of explanation.

Is it simply that they are so small? They are certainly quite small; Norway and Denmark each have fewer people than the core of New York City, and Sweden has slightly more people than the Chicago metropolitan area. Put them all together, add in Finland and Iceland (which aren’t quite Scandinavia), and all together you have about the population of the New York City Combined Statistical Area.

But some of the world’s smallest countries are also its poorest. Samoa and Kiribati each have populations comparable to the city of Ann Arbor and per-capita GDPs 1/10 that of the US. Eritrea is the same size as Norway, and 70 times poorer. Burundi is slightly larger than Sweden, and has a per-capita GDP PPP of only $3.14 per day.

There’s actually a good statistical reason to expect that the smallest countries should vary the most in their incomes; you’re averaging over a smaller sample so you get more variance in the estimate. But this doesn’t explain why Norway is rich and Eritrea is poor. Incomes aren’t assigned randomly. This might be a reason to try comparing Norway to specifically New York City or Los Angeles rather than to the United States as a whole (Norway still does better, in case you were wondering—especially compared to LA); but it’s not a reason to say that Norway’s wealth doesn’t really count.

Is it because they are ethnically homogeneous? Yes, relatively speaking; but perhaps not as much as you imagine. 14% of Sweden’s population is immigrants, of which 64% are from outside the EU. 10% of Denmark’s population is comprised of immigrants, of which 66% came from non-Western countries. Immigrants are 13% of Norway’s population, of which half are from non-Western countries.

That’s certainly more ethnically homogeneous than the United States; 13% of our population is immigrants, which may sound comparable, but almost all non-immigrants in Scandinavia are of indigenous Nordic descent, all “White” by the usual classification. Meanwhile the United States is 64% non-Hispanic White, 16% Hispanic, 12% Black, 5% Asian, and 1% Native American or Pacific Islander.

Scandinavian countries are actually by some measures less homogeneous than the US in terms of religion, however; only 4% of Americans are not Christian (78.5%), atheist (16.1%), or Jewish (1.7%), and only 0.6% are Muslim. As much as In Sweden, on the other hand, 60% of the population is nominally Lutheran, but 80% is atheist, and 5% of the population is Muslim. So if you think of Christian/Muslim as the sharp divide (theologically this doesn’t make a whole lot of sense, but it seems to be the cultural norm in vogue), then Sweden has more religious conflict to worry about than the US does.

Moreover, there are some very ethnically homogeneous countries that are in horrible shape. North Korea is almost completely ethnically homogeneous, for example, as is Haiti. There does seem to be a correlation between higher ethnic diversity and lower economic prosperity, but Canada and the US are vastly more diverse than Japan and South Korea yet significantly richer. So clearly ethnicity is not the whole story here.

I do think ethnic homogeneity can partly explain why Scandinavian countries have the good policies they do; because humans are tribal, ethnic homogeneity engenders a sense of unity and cooperation, a notion that “we are all in this together”. That egalitarian attitude makes people more comfortable with some of the policies that make Scandinavia what it is, which I will get into at the end of this post.

What about culture? Is there something about Nordic ideas, those Viking traditions, that makes Scandinavia better? Miles Kimball has argued this; he says we need to import “hard work, healthy diets, social cohesion and high levels of trust—not Socialism”. And truth be told, it’s hard to refute this assertion, since it’s very difficult to isolate and control for cultural variables even though we know they are important.

But this difficulty in falsification is a reason to be cautious about such a hypothesis; it should be a last resort when all the more testable theories have been ruled out. I’m not saying culture doesn’t matter; it clearly does. But unless you can test it, “culture” becomes a theory that can explain just about anything—which means that it really explains nothing.

The “social cohesion and high levels of trust” part actually can be tested to some extent—and it is fairly well supported. High levels of trust are strongly correlated with economic prosperity. But we don’t really need to “import” that; the US is already near the top of the list in countries with the highest levels of trust.

I can’t really disagree with “good diet”, except to say that almost everywhere eats a better diet than the United States. The homeland of McDonald’s and Coca-Cola is frankly quite dystopian when it comes to rates of heart disease and diabetes. Given our horrible diet and ludicrously inefficient healthcare system, the only reason we live as long as we do is that we are an extremely rich country (so we can afford to pay the most for healthcare, for certain definitions of “afford”), and almost no one here smokes anymore. But good diet isn’t so much Scandinavian as it is… un-American.

But as for “hard work”, he’s got it backwards; the average number of work hours per week is 33 in Denmark and Norway, compared to 38 in the US. Among full-time workers in the US, the average number of hours per week is a whopping 47. Working hours in the US are much more intensive than anywhere in Europe, including Scandinavia. Though of course we are nowhere near the insane work addiction suffered by most East Asian countries; lately South Korea and Japan have been instituting massive reforms to try to get people to stop working themselves to death. And not surprisingly, work-related stress is a leading cause of death in the United States. If anything, we need to import some laziness, or at least a sense of work-life balance. (Indeed, I’m fairly sure that the only reason he said “hard work” is that it’s a cultural Applause Light in the US; being against hard work is like being against the American Flag or homemade apple pie. At this point, “we need more hard work” isn’t so much an assertion as it is a declaration of tribal membership.)

But none of these things adequately explains why poverty and inequality is so much lower in Scandinavia than it is in the United States, and there’s really a quite simple explanation.

Why is it that #ScandinaviaIsBetter? They’re not afraid to make rich people pay higher taxes so they can help poor people.

In the US, this idea of “redistribution of wealth” is anathema, even taboo; simply accusing a policy of being “redistributive” or “socialist” is for many Americans a knock-down argument against that policy. In Denmark, “socialist” is a meaningful descriptor; some policies are “socialist”, others “capitalist”, and these aren’t particularly weighted terms; it’s like saying here that a policy is “Keynesian” or “Monetarist”, or if that’s too obscure, saying that it’s “liberal” or “conservative”. People will definitely take sides, and it is a matter of political importance—but it’s inside the Overton Window. It’s not almost unthinkable as it is here.

If culture has an effect here, it likely comes from Scandinavia’s long traditions of egalitarianism. Going at least back to the Vikings, in theory at least (clearly not always in practice), people—or at least fellow Scandinavians—were considered equal participants in society, no one “better” or “higher” than anyone else. Even today, it is impolite in Denmark to express pride at your own accomplishments; there’s a sense that you are trying to present yourself as somehow more deserving than others. Honestly this attitude seems unhealthy to me, though perhaps preferable to the unrelenting narcissism of American society; but insofar as culture is making Scandinavia better, it’s almost certainly because this thoroughgoing sense of egalitarianism underlies all their economic policy. In the US, the rich are brilliant and the poor are lazy; in Denmark, the rich are fortunate and the poor are unlucky. (Which theory is more accurate? Donald Trump. I rest my case.)

To be clear, Scandinavia is not communist; and they are certainly not Stalinist. They don’t believe in total collectivization of industry, or complete government control over the economy. They don’t believe in complete, total equality, or even a hard cap on wealth: Stefan Persson is an 11-figure billionaire. Does he pay high taxes, living in Sweden? Yes he does, considerably higher than he’d pay in the US. He seems to be okay with that. Why, it’s almost like his marginal utility of wealth is now negligible.

Scandinavian countries also don’t try to micromanage your life in the way often associated with “socialism”–in fact I’d say they do it less than we do in the US. Here we have Republicans who want to require drug tests for food stamps even though that literally wastes money and helps no one; there they just provide a long list of government benefits for everyone free of charge. They just held a conference in Copenhagen to discuss the possibility of transitioning many of these benefits into a basic income; and basic income is the least intrusive means of redistributing wealth.

In fact, because Scandinavian countries tax differently, it’s not necessarily the case that people always pay higher taxes there. But they pay more transparent taxes, and taxes with sharper incidence. Denmark’s corporate tax rate is only 22% compared to 35% in the US; but their top personal income tax bracket is 59% while ours is only 39.6% (though it can rise over 50% with some state taxes). Denmark also has a land value tax and a VAT, both of which most economists have clamored for for generations. (The land value tax I totally agree with; the VAT I’m a little more ambivalent about.) Moreover, filing your taxes in Denmark is not a month-long stress marathon of gathering paperwork, filling out forms, and fearing that you’ll get something wrong and be audited as it is in the US; they literally just send you a bill. You can contest it, but most people don’t. You just pay it and you’re done.

Now, that does mean the government is keeping track of your income; and I might think that Americans would never tolerate such extreme surveillance… and then I remember that PRISM is a thing. Apparently we’re totally fine with the NSA reading our emails, but God forbid the IRS just fill out our 1040s for us (that they are going to read anyway). And there’s no surveillance involved in requiring retail stores to incorporate sales tax into listed price like they do in Europe instead of making us do math at the cash register like they do here. It’s almost like Americans are trying to make taxes as painful as possible.

Indeed, I think Scandanavian socialism is a good example of how high taxes are a sign of a free society, not an authoritarian one. Taxes are a minimal incursion on liberty. High taxes are how you fund a strong government and maintain extensive infrastructure and public services while still being fair and following the rule of law. The lowest tax rates in the world are in North Korea, which has ostensibly no taxes at all; the government just confiscates whatever they decide they want. Taxes in Venezuela are quite low, because the government just owns all the oil refineries (and also uses multiple currency exchange rates to arbitrage seigniorage). US taxes are low by First World standards, but not by world standards, because we combine a free society with a staunch opposition to excessive taxation. Most of the rest of the free world is fine with paying a lot more taxes than we do. In fact, even using Heritage Foundation data, there is a clear positive correlation between higher tax rates and higher economic freedom:
Graph: Heritage Foundation Economic Freedom Index and tax burden

What’s really strange, though, is that most Americans actually support higher taxes on the rich. They often have strange or even incoherent ideas about what constitutes “rich”; I have extended family members who have said they think $100,000 is an unreasonable amount of money for someone to make, yet somehow are totally okay with Donald Trump making $300,000,000. The chant “we are the 99%” has always been off by a couple orders of magnitude; the plutocrat rentier class is the top 0.01%, not the top 1%. The top 1% consists mainly of doctors and lawyers and engineers; the top 0.01%, to a man—and they are nearly all men, in fact White men—either own corporations or work in finance. But even adjusting for all this, it seems like at least a bare majority of Americans are all right with “redistributive” “socialist” policies—as long as you don’t call them that.

So I suppose that’s sort of what I’m trying to do; don’t think of it as “socialism”. Think of it as #ScandinaviaIsBetter.