job guarantee

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

pnrj ethics, public policy , , , , ,

Apr 28 JDN 2458602

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

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

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

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

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

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

Is a job guarantee better than a basic income?

pnrj ethics, futurism, inequality, macroeconomics, market failure, public policy , , , , , , , , , , , ,

Aug 5 JDN 2458336

In previous posts I’ve written about both the possibilities and challenges involved in creating a universal basic income. Today I’d like to address what I consider the most serious counter-argument against a basic income, an alternative proposal known as a job guarantee.

Whereas a basic income is literally just giving everyone free money, a job guarantee entails offering everyone who wants to work a job paid by the government. They’re not necessarily contradictory, but I’ve noticed a clear pattern: While basic income proponents are generally open to the idea of a job guarantee on the side, job guarantee proponents are often vociferously opposed to a basic income—even calling it “sinister”. I think the reason for this is that we see jobs as irrelevant, so we’re okay with throwing them in if you feel you must, while they see jobs as essential, so they meet any attempt to remove them with overwhelming resistance.

Where a basic income is extremely simple and could be implemented by a single act of the legislature, a job guarantee is considerably more complicated. The usual proposal for a job guarantee involves federal funding but local implementation, which is how most of our social welfare system is implemented—and why social welfare programs are so much better in liberal states like California than in conservative states like Mississippi, because California actually believes in what it’s implementing and Mississippi doesn’t. Anyone who wants a job guarantee needs to take that aspect seriously: In the places where poverty is worst, you’re offering control over the policy to the very governments that made poverty worst—and whether it is by malice or incompetence, what makes you think that won’t continue?

Another argument that I think job guarantee proponents don’t take seriously enough is the concern about “make-work”. They insist that a job guarantee is not “make-work”, but real work that’s just somehow not being done. They seem to think that there are a huge number of jobs that we could just create at the snap of a finger, which would be both necessary and useful on the one hand, and a perfect match for the existing skills of the unemployed population on the other hand. If that were the case, we would already be creating those jobs. It doesn’t even require a particularly strong faith in capitalism to understand this: If there is a profit to be made at hiring people to do something, there is probably already a business hiring people to do that. I don’t think of myself as someone with an overriding faith in capitalism, but a lot of the socialist arguments for job guarantees make me feel that way by comparison: They seem to think that there’s this huge untapped reserve of necessary work that the market is somehow failing to provide, and I’m just not seeing it.

There are public goods projects which aren’t profitable but would still be socially beneficial, like building rail lines and cleaning up rivers. But proponents of a job guarantee don’t seem to understand that these are almost all highly specialized jobs at our level of technology. We don’t need a bunch of people with shovels. We need engineers and welders and ecologists.

If you propose using people with shovels where engineers would be more efficient, that is make-work, whether you admit it or not. If you’re making people work in a less-efficient way in order to create jobs, then the jobs you are creating are fake jobs that aren’t worth creating. The line is often credited to Milton Friedman, but actually said first by William Aberhart in 1935:

Taking up the policy of a public works program as a solution for unemployment, it was criticized as a plan that took no account of the part that machinery played in modern construction, with a road-making machine instanced as an example. He saw, said Mr. Aberhart, work in progress at an airport and was told that the men were given picks and shovels in order to lengthen the work, to which he replied why not give them spoons and forks instead of picks and shovels if the object was to lengthen out the task.

I’m all for spending more on building rail lines and cleaning up rivers, but that’s not an anti-poverty program. The people who need the most help are precisely the ones who are least qualified to work on these projects: Children, old people, people with severe disabilities. Job guarantee proponents either don’t understand this fact or intentionally ignore it. If you aren’t finding jobs for 7-year-olds with autism and 70-year-olds with Parkinson’s disease, this program will not end poverty. And if you are, I find it really hard to believe that these are real, productive jobs and not useless “make-work”. A basic income would let the 7-year-olds stay in school and the 70-year-olds live in retirement homes—and keep them both out of poverty.

Another really baffling argument for a job guarantee over basic income is that a basic income would act as a wage subsidy, encouraging employers to reduce wages. That’s not how a basic income works. Not at all. A basic income would provide a pure income effect, necessarily increasing wage demands. People would not be as desperate for work, so they’d be more comfortable turning down unreasonable wage offers. A basic income would also incentivize some people to leave the labor force by retiring or going back to school; the reduction in labor supply would further increase wages. The Earned Income Tax Credit is in many respects similar to a wage subsidy. While superficially it might seem similar, a basic income would have the exact opposite effect.

One reasonable argument against a basic income is the possibility that it could cause inflation. This is something that can’t really be tested with small-scale experiments, so we really won’t know for sure until we try it. But there is reason to think that the inflation would be small, as the people removed from the labor force will largely be the ones who are least-productive to begin with. There is a growing body of empirical evidence suggesting that inflationary effects of a basic income would be small. For example, data on cash transfer programs in Mexico show only a small inflationary effect despite large reductions in poverty. The whole reason a basic income looks attractive is that automation technology is now so advanced is that we really don’t need everyone to be working anymore. Productivity is so high now that a policy of universal 40-hour work weeks just doesn’t make sense in the 21st century.

Probably the best argument for a job guarantee over a basic income concerns cost. A basic income is very expensive, there’s no doubt about that; and a job guarantee could be much cheaper. That is something I take very seriously: Saving $1.5 trillion a year is absolutely a good reason. Indeed, I don’t really object to this argument; the calculations are correct. I merely think that a basic income is enough better that its higher cost is justifiable. A job guarantee can eliminate unemployment, but not poverty.

But the argument for a job guarantee that most people seem to be find most compelling concerns meaning. The philosopher John Danaher expressed this one most cogently. Unemployment is an extremely painful experience for most people, far beyond what could be explained simply by their financial circumstances. Most people who win large sums of money in the lottery cut back their hours, but continue working—so work itself seems to have some value. What seems to happen is that when people lose the chance to work, they feel that they have lost a vital source of meaning in their lives.

Yet this raises two more questions:

First, would a job guarantee actually solve that problem?
Second, are there ways we could solve it under a basic income?

With regard to the first question, I want to re-emphasize the fact that a large proportion of these guaranteed jobs necessarily cannot be genuinely efficient production. If efficient production would have created these jobs, we would most likely already have created them. Our society does not suffer from an enormous quantity of necessary work that could be done with the skills already possessed by the unemployed population, which is somehow not getting done—indeed, it is essentially impossible for a capitalist economy with a highly-liquid financial system to suffer such a malady. If the work is so valuable, someone will probably take out a loan to hire someone to do it. If that’s not happening, either the unemployed people don’t have the necessary skills, or the work really can’t be all that productive. There are some public goods projects that would be beneficial but aren’t being done, but that’s a different problem, and the match between the public goods projects that need done and the skills of the unemployed population is extremely poor. Displaced coal miners aren’t useful for maintaining automated photovoltaic factories. Truckers who get replaced by robot trucks won’t be much good for building maglev rails.

With this in mind, it’s not clear to me that people would really be able to find much meaning in a guaranteed job. You can’t be fired, so the fact that you have the job doesn’t mean anyone is impressed by the quality of your work. Your work wasn’t actually necessary, or the private sector would already have hired someone to do it. The government went out of its way to find a job that precisely matched what you happen to be good at, regardless of whether that job was actually accomplishing anything to benefit society. How is that any better than not working at all? You are spending hours of drudgery to accomplish… what, exactly? If our goal was simply to occupy people’s time, we could do that with Netflix or video games.

With regard to the second question, note that a basic income is quite different from other social welfare programs in that everyone gets it. So it’s very difficult to attach a social stigma to receiving basic income payments—it would require attaching the stigma to literally everyone. Much of the lost meaning, I suspect, from being unemployed comes from the social stigma attached.

Now, it’s still possible to attach social stigma to people who only get the basic income—there isn’t much we can do to prevent that. But in the worst-case scenario, this means unemployed people get the same stigma as before but more money. Moreover, it’s much harder to detect a basic income recipient than, say, someone who eats at a soup kitchen or buys food using EBT; since it goes in your checking account, all everyone else sees is you spending money from your debit card, just like everyone else. People who know you personally would probably know; but people who know you personally are also less likely to destroy your well-being by imposing a high stigma. Maybe they’ll pressure you to get off the couch and get a job, but they’ll do so because they genuinely want to help you, not because they think you are “one of those lazy freeloaders”.

And, as BIEN points out, think about retired people: They don’t seem to be so unhappy. Being on basic income is more like being retired than like being unemployed. It’s something everyone gets, not some special handout for “those people”. It’s permanent, so it’s not like you need to scramble to get a job before it goes away. You just get money automatically, so you don’t have to navigate a complex bureaucracy to get it. Controlling for income, retired people don’t seem to be any less happy than working people—so maybe work doesn’t actually provide all that much meaning after all.

I guess I can’t rule out the possibility that people need jobs to find meaning in their lives, but I both hope and believe that this is not generally the case. You can find meaning in your family, your friends, your community, your hobbies. You can still work even if you don’t need to work for a living: Build a shed, mow your lawn, tune up your car, upgrade your computer, write a story, learn a musical instrument, or try your hand at painting.

If you need to be taking orders from a corporation five days a week in order to have meaning in your life, you have bigger problems. I think what has happened to many people is that employment has so drained their lives of the real sources of meaning that they cling to it as the only thing they have left. But in fact work is not the cure to your ennui—it is the cause of it. Finally being free of the endless toil that has plagued humanity since the dawn of our species will give you the chance to reconnect with what really matters in life. Show your children that you love them in person, to their faces, instead of in this painfully indirect way of “providing for” them by going to work every day. Find ways to apply your skills in volunteering or creating works of art, instead of in endless drudgery for the profit of some faceless corporation.

Toward an economics of social norms

pnrj critique of neoclassical economics, heuristics and biases , , , , , , , , , , , , , , , , , , ,

Sep 17, JDN 2457649

It is typical in economics to assume that prices are set by perfect competition in markets with perfect information. This is obviously ridiculous, so many economists do go further and start looking into possible distortions of the market, such as externalities and monopolies. But almost always the assumption is still that human beings are neoclassical rational agents, what I call “infinite identical psychopaths”, selfish profit-maximizers with endless intelligence and zero empathy.

What happens when we recognize that human beings are not like this, but in fact are empathetic, social creatures, who care about one another and work toward the interests of (what they perceive to be) their tribe? How are prices really set? What actually decides what is made and sold? What does economics become once you understand sociology? (The good news is that experiments are now being done to find out.)

Presumably some degree of market competition is involved, and no small amount of externalities and monopolies. But one of the very strongest forces involved in setting prices in the real world is almost completely ignored, and that is social norms.

Social norms are tremendously powerful. They will drive us to bear torture, fight and die on battlefields, even detonate ourselves as suicide bombs. When we talk about “religion” or “ideology” motivating people to do things, really what we are talking about is social norms. While some weaker norms can be overridden, no amount of economic incentive can ever override a social norm at its full power. Moreover, most of our behavior in daily life is driven by social norms: How to dress, what to eat, where to live. Even the fundamental structure of our lives is written by social norms: Go to school, get a job, get married, raise a family.

Even academic economists, who imagine themselves one part purveyor of ultimate wisdom and one part perfectly rational agent, are clearly strongly driven by social norms—what problems are “interesting”, which researchers are “renowned”, what approaches are “sensible”, what statistical methods are “appropriate”. If economists were perfectly rational, dynamic stochastic general equilibrium models would be in the dustbin of history (because, like string theory, they have yet to lead to a single useful empirical prediction), research journals would not be filled with endless streams of irrelevant but impressive equations (I recently read one that basically spent half a page of calculus re-deriving the concept of GDP—and computer-generated gibberish has been published, because its math looked so impressive), and instead of frequentist p-values (and often misinterpreted at that), all the statistics would be written in the form of Bayesian logodds.

Indeed, in light of all this, I often like to say that to a first approximation, all human behavior is social norms.

How does this affect buying and selling? Well, first of all, there are some things we refuse to buy and sell, or at least that most of us refuse to buy and sell, and who use social pressure, public humilitation, or even the force of law to prevent. You’re not supposed to sell children. You’re not supposed to sell your vote. You’re not even supposed to sell sexual favors (though every society has always had a large segment of people who do, and more recently people are becoming more open to the idea of at least decriminalizing it). If we were neoclassical rational agents, we would have no such qualms; if we want something and someone is willing to sell it to us, we’ll buy it. But as actual human beings with emotions and social norms, we recognize that there is something fundamentally different about selling your vote as opposed to selling a shirt or a television. It’s not always immediately obvious where to draw the line, which is why sex work can be such a complicated issue (You can’t get paid to have sex… unless someone is filming it?). Different societies may do it differently: Part of the challenge of fighting corruption in Third World countries is that much of what we call corruption—and which actually is harmful to long-run economic development—isn’t perceived as “corruption” by the people involved in it, just as social custom (“Of course I’d hire my cousin! What kind of cousin would I be if I didn’t?”). Yet despite all that, almost everyone agrees that there is a line to be drawn. So there are whole markets that theoretically could exist, but don’t, or only exist as tiny black markets most people never participate in, because we consider selling those things morally wrong. Recently a whole subfield of cognitive economics has emerged studying these repugnant markets.

Even if a transaction is not considered so repugnant as to be unacceptable, there are also other classes of goods that are in some sense unsavory; something you really shouldn’t buy, but you’re not a monster for doing so. These are often called sin goods, and they have always included drugs, alcohol, and gambling—and I do mean always, as every human civilization has had these things—they include prostitution where it is legal, and as social norms change they are now beginning to include oil and coal as well (which can only be good for the future of Earth’s climate). Sin goods are systematically more expensive than they should be for their marginal cost, because most people are unwilling to participate in selling them. As a result, the financial returns for producing sin goods are systematically higher. Actually, this could partially explain why Wall Street banks are so profitable; when the banking system is corrupt as it is—and you’re not imagining that; laundering money for terrorists—then banking becomes a sin good, and good people don’t want to participate in it. Or perhaps the effect runs the other way around: Banking has been viewed as sinful for centuries (in Medieval times, usury was punished much the same way as witchcraft), and as a result only the sort of person who doesn’t care about social and moral norms becomes a banker—and so the banking system becomes horrifically corrupt. Is this a reason for good people to force ourselves to become bankers? Or is there another way—perhaps credit unions?

There are other ways that social norms drive prices as well. We have a concept ofa “fair wage”, which is quite distinct from the economic concept of a “market-clearing wage”. When people ask whether someone’s wage is fair, they don’t look at supply and demand and try to determine whether there are too many or too few people offering that service. They ask themselves what the labor is worth—what value has it added—and how hard that person has worked to do it—what cost it bore. Now, these aren’t totally unrelated to supply and demand (people are less likely to supply harder work, people are more likely to demand higher value), so it’s conceivable that these heuristics could lead us to more or less achieve the market-clearing wage most of the time. But there are also some systematic distortions to consider.

Perhaps the most important way fairness matters in economics is necessities: Basic requirements for human life such as food, housing, and medicine. The structure of our society also makes transportation, education, and Internet access increasingly necessary for basic functioning. From the perspective of an economist, it is a bit paradoxical how angry people get when the price of something important (such as healthcare) is increased: If it’s extremely valuable, shouldn’t you be willing to pay more? Why does it bother you less when something like a Lamborghini or a Rolex rises in price, something that almost certainly wasn’t even worth its previous price? You’re going to buy the necessities anyway, right? Well, as far as most economists are concerned, that’s all that matters—what gets bought and sold. But of course as a human being I do understand why people get angry about these things, and it is because they have to buy them anyway. When someone like Martin Shkreli raises the prices on basic goods, we feel exploited. There’s even a way to make this economically formal: When demand is highly inelastic, we are rightly very sensitive to the possibility of a monopoly, because monopolies under inelastic demand can extract huge profits and cause similarly huge amounts of damage to the welfare of their customers. That isn’t quite how most people would put it, but I think that has something to do with the ultimate reason we evolved that heuristic: It’s dangerous to let someone else control your basic necessities, because that gives them enormous power to exploit you. If they control things that aren’t as important to you, that doesn’t matter so much, because you can always do without if you must. So a norm that keeps businesses from overcharging on necessities is very important—and probably not as strong anymore as it should be.

Another very important way that fairness and markets can be misaligned is talent: What if something is just easier for one person than another? If you achieve the same goal with half the work, should you be rewarded more for being more efficient, or less because you bore less cost? Neoclassical economics doesn’t concern itself with such questions, asking only if supply and demand reached equilibrium. But we as human beings do care about such things; we want to know what wage a person deserves, not just what wage they would receive in a competitive market.

Could we be wrong to do that? Might it be better if we just let the market do its work? In some cases I think that may actually be true. Part of why CEO pay is rising so fast despite being uncorrelated with corporate profitability or even negatively correlated is that CEOs have convinced us (or convinced their boards of directors) that this is fair, that they deserve more stock options. They even convince them that their pay is based on performance, by using highly distorted measures of performance. If boards thought more like economic rational agents, when a CEO asked for more pay they’d ask: “What other company gave you a higher offer?” and if the CEO didn’t have an answer, they’d laugh and refuse the raise. Because in purely economic terms, that is all a salary does: it keeps you from quitting to work somewhere else. The competitive mechanism of the market is supposed to then ensure that your wage aligns with your marginal cost and marginal productivity purely due to that.

On the other hand, there are many groups of people who simply aren’t doing very well in the market: Women, racial minorities, people with disabilities. There are a lot of reasons for this, some of which might go away if markets were made more competitive—the classic argument that competitive markets reward companies that don’t discriminate—but many clearly wouldn’t. Indeed, that argument was never as strong as it at first appears; in a society where social norms are strongly in favor of bigotry, it can be completely economically rational to participate in bigotry to avoid being penalized. When Chick-Fil-A was revealed to have donated to anti-LGBT political groups, many people tried to boycott—but their sales actually increased from the publicity. Honestly it’s a bit baffling that they promised not to donate to such causes anymore; it was apparently a profitable business decision to be revealed as supporters of bigotry. And even when discrimination does hurt economic performance, companies are run by human beings, and they are still quite capable of discriminating regardless. Indeed, the best evidence we have that discrimination is inefficient comes from… businesses that persist in discriminating despite the fact that it is inefficient.

But okay, suppose we actually did manage to make everyone compensated according to their marginal productivity. (Or rather, what Rawls derided: “From each according to his marginal productivity, to each according to his threat advantage.”) The market would then clear and be highly efficient. Would that actually be a good thing? I’m not so sure.

A lot of people are highly unproductive through no fault of their own—particularly children and people with disabilities. Much of this is not discrimination; it’s just that they aren’t as good at providing services. Should we simply leave them to fend for themselves? Then there’s the key point about what marginal means in this case—it means “given what everyone else is doing”. But that means that you can be made obsolete by someone else’s actions, and in this era of rapid technological advancement, jobs become obsolete faster than ever. Unlike a lot of people, I recognize that it makes no sense to keep people working at jobs that can be automated—the machines are better. But still, what do we do with the people whose jobs have been eliminated? Do we treat them as worthless? When automated buses become affordable—and they will; I give it 20 years—do we throw the human bus drivers under them?

One way out is of course a basic income: Let the market wage be what it will, and then use the basic income to provide for what human beings deserve irrespective of their market productivity. I definitely support a basic income, of course, and this does solve the most serious problems like children and quadriplegics starving in the streets.

But as I read more of the arguments by people who favor a job guarantee instead of a basic income, I begin to understand better why they are uncomfortable with the idea: It doesn’t seem fair. A basic income breaks once and for all the link between “a fair day’s work” and “a fair day’s wage”. It runs counter to this very deep-seated intuition most people have that money is what you earn—and thereby deserve—by working, and only by working. That is an extremely powerful social norm, and breaking it will be very difficult; so it’s worth asking: Should we even try to break it? Is there a way to achieve a system where markets are both efficient and fair?

I’m honestly not sure; but I do know that we could make substantial progress from where we currently stand. Most billionaire wealth is pure rent in the economic sense: It’s received by corruption and market distortion, not by efficient market competition. Most poverty is due to failures of institutions, not lack of productivity of workers. As George Monblot famously wrote, “If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire.” Most of the income disparity between White men and others is due to discrimination, not actual skill—and what skill differences there are are largely the result of differences in education and upbringing anyway. So if we do in fact correct these huge inefficiencies, we will also be moving toward fairness at the same time. But still that nagging thought remains: When all that is done, will there come a day where we must decide whether we would rather have an efficient economy or a just society? And if it does, will we decide the right way?

We need to be honest about free trade’s costs, and clearer about its benefits

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

August 6, JDN 2457607

I discussed in a post awhile ago the fact that economists overwhelmingly favor free trade but most people don’t. There are some deep psychological reasons for this, particularly the loss aversion which makes people experience losses about twice as much as they experience gains. Free trade requires change; it creates some jobs and destroys others. Those forced transitions can be baffling and painful.

The good news is that views on trade in the US are actually getting more positive in recent years—which makes Trump that much more baffling. I honestly can’t make much sense of the fact that candidates who are against free trade have been so big in this election (and let’s face it, even Bernie Sanders is largely against free trade!), in light of polls showing that free trade is actually increasingly popular.

Partly this can be explained by the fact that people are generally more positive about free trade in general than they are about particular trade agreements, and understandably so, as free trade agreements often include some really awful provisions that in no way advance free trade. But that doesn’t really explain the whole effect here. Maybe it’s a special interest effect: People who hate trade are much more passionate about hating trade than people who like trade are passionate about liking trade. If that’s the case, then this is what we need to change.

Today I’d like to focus on what we as economists and the economically literate more generally can do to help people understand what free trade is and why it is so important. This means two things:

First, of course, we must be clearer about the benefits of free trade. Many economists seem to think that it is simply so obvious that they don’t even bother to explain it, and end up seeming like slogan-chanting ideologues. “Free trade! Free trade! Free trade!”

Above all, we need to talk about how it was primarily through free trade that global extreme poverty is now at the lowest level it has ever been. This benefit needs to be repeated over and over, and anyone who argues for protectionism needs to be confronted with the millions of people they will throw back into poverty. Most people don’t even realize that global poverty is declining, so first of all, they need to be shown that it is.

American ideas are often credited with fighting global poverty, but that’s not so convincing, since most of the improvement in poverty has happened in China (not exactly a paragon of free markets, much less liberal democracy); what really seems to have made the difference is American dollars, spent in free trade. Imports to the US from China have risen from $3.8 billion in 1985 to $483 billion in 2015. Extreme poverty in China fell from 61% of the population in 1990 to 4% in 2015. Coincidence? I think not. Indeed, that $483 billion is just about $1 per day for every man, woman, and child in China—and the UN extreme poverty line is $1.25 per person per day.

We need to be talking about the jobs that are created by trade—if need be, making TV commercials interviewing workers at factories who make products for export. “Most of our customers are in Japan,” they might say. “Without free trade, I’d be out of a job.” Interview business owners saying things like, “Two years ago we opened up sales to China. Now I need to double my workforce just to keep up with demand.” Unlike a lot of other economic policies where the benefits are diffuse and hard to keep track of, free trade is one where you can actually point to specific people and see that they are now better off because they make more selling exports. From there, we just need to point out that imports and exports are two sides of the same transaction—so if you like exports, you’d better have imports.

We need to make it clear that the economic gains from trade are just as real as the losses from transition, even if they may not be as obvious. William Poole put it very well in this article on attitudes toward free trade:

Economists are sometimes charged with insensitivity over job losses, when in fact most of us are extremely sensitive to such losses. What good economics tells us is that saving jobs in one industry does not save jobs in the economy as a whole. We urge people to be as sensitive to the jobs indirectly lost as a consequence of trade restriction as to those lost as a consequence of changing trade patterns.

Second, just as importantly, we must be honest about the costs of free trade. We need to stop eliding the distinction between net aggregate benefits and benefits for everyone everywhere. There are winners and losers, and we need to face up to that.

For example, we need to stop saying thinks like “Free trade will not send jobs to Mexico and China.” No, it absolutely will, and has, and does—and that is part of what it’s for. Because people in Mexico and China are people, and they deserve to have better jobs just as much as we do. Sending jobs to China is not a bug; it’s a feature. China needs jobs particularly badly.

Then comes the next part: “But if our jobs get sent to China, what will we do?” Better jobs, created here by the economic benefits of free trade. No longer will American workers toil in factories assembling parts; instead they will work in brightly-lit offices designing those parts on CAD software.

Of course this raises another problem: What happens to people who were qualified to toil in factories, but aren’t qualified to design parts on CAD software? Well, they’ll need to learn. And we should be paying for that education (though in large part, we are; altogether US federal, state, and local governments spend over $1 trillion a year on education).

And what if they can’t learn, can’t find another job somewhere else? What if they’re just not cut out for the kind of work we need in a 21st century economy? Then here comes my most radical statement of all: Then they shouldn’t have to.

The whole point of expanding economic efficiency—which free trade most certainly does—is to create more stuff. But if you create more stuff, you then have the opportunity to redistribute that stuff, in such a way that no one is harmed by that transition. This is what we have been failing to do in the United States. We need to set up our unemployment and pension systems so that people who lose their jobs due to free trade are not harmed by it, but instead feel like it is an opportunity to change careers or retire. We should have a basic income so that even people who can’t work at all can still live with dignity. This redistribution will not happen automatically; it is a policy choice we must make.

 

In theory there is a way around it, which is often proposed as an alternative to a basic income; it is called a job guarantee. Simply giving everyone free money for some reason makes people uncomfortable (never could quite fathom why; Donald Trump inherits capital income from his father, that’s fine, but we all inherit shared capital income as a nation, that’s a handout?), so instead we give everyone a job, so they can earn their money!

Well, here’s the thing: They won’t actually be earning it—or else it’s not a job guarantee. If you just want an active labor-market program to retrain workers and match them with jobs, that sounds great; Denmark has had great success with such things, and after all #ScandinaviaIsBetter. But no matter how good your program is, some people are going to not have any employable skills, or have disabilities too severe to do any productive work, or simply be too lazy to actually work. And now you’ve got a choice to make: Do you give those people jobs, or not?

If you don’t, it’s not a job guarantee. If you do, they’re not earning it anymore. Either employment is tied to actual productivity, or it isn’t; if you are guaranteed a certain wage no matter what you do, then some people are going to get that wage for doing nothing. As The Economist put it:

However, there are two alternatives: give people money with no strings attached (through a guaranteed basic income, unemployment insurance, disability payments, and so forth), or just make unemployed people survive on whatever miserable scraps they can cobble together.

If it’s really a job guarantee, we would still need to give jobs to people who can’t work or simply won’t. How is this different from a basic income? Well, it isn’t, except you added all these extra layers of bureaucracy so that you could feel like you weren’t just giving a handout. You’ve added additional costs for monitoring and administration, as well as additional opportunities for people to slip through the cracks. Either you are going to leave some people in poverty, or you are going to give money to people who don’t work—so why not give money to people who don’t work?

Another cost we need to be honest about is ecological. In our rush to open free trade, we are often lax in ensuring that this trade will not accelerate environmental degradation and climate change. This is often justified in the name of helping the world’s poorest people; but they will be hurt far more when their homes are leveled by hurricanes than by waiting a few more years to get the trade agreement right. That’s one where Poole actually loses me:

Few Americans favor a world trading system in which U.S. policies on environmental and other conditions could be controlled by foreign governments through their willingness to accept goods exported by the United States.

Really? You think we should be able to force other countries to accept our goods, regardless of whether they consider them ecologically sustainable? You think most Americans think that? It’s easy to frame it as other people imposing on us, but trade restrictions on ecologically harmful goods are actually a very minimal—indeed, almost certainly insufficient—regulation against environmental harm. Oil can still kill a lot of people even if it never crosses borders (or never crosses in liquid form—part of the point is you can’t stop the gaseous form). We desperately need global standards on ecological sustainability, and while we must balance environmental regulations with economic efficiency, currently that balance is tipped way too far against the environment—and millions will die if it remains this way.

This is the kernel of truth in otherwise economically-ignorant environmentalist diatribes like Naomi Klein’s This Changes Everything; free trade in principle doesn’t say anything about being environmentally unsustainable, but free trade in practice has often meant cutting corners and burning coal. Where we currently have diesel-powered container ships built in coal-powered factories and Klein wants no container ships and perhaps even no factories, what we really need are nuclear-powered container ships and solar-powered factories. Klein points out cases where free trade agreements have shut down solar projects that tried to create local jobs—but neither side seems to realize that a good free trade agreement would expand that solar project to create global jobs. Instead of building solar panels in Canada to sell only in Canada, we’d build solar panels in Canada to sell in China and India—and build ten times as many. That is what free trade could be, if we did it right.