Paul Ryan

Beware the false balance

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JDN 2457046 PST 13:47.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What just happened in that election?

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JDN 2456970 PST 11:12.

My head is still spinning from the election results on Tuesday. Republicans gained a net of 12 seats to secure their majority in the House. Even worse, Republicans gained at least 7 seats in the Senate (note that each Senate seat should count for 4.35 House seats because there are 100 Senators and 435 Representatives) and may gain two more depending on how runoffs go. This gives them a majority in both houses of Congress. So people like Republicans then? Maybe they’re fed up with Obama and dissatisfied with his handling of the economy (even though it has actually been spectacular given what he had to work with).
But then when we look at actual ballot proposals, the ones that passed were mostly liberal issues. California passed proposition 47, which will reduce sentences for minor drug and theft crimes and substantially reduce our incidence of incarceration. (There’s no sign of releasing current prisoners, unfortunately; but at least we won’t be adding as many new ones.) Marijuana was legalized—fully legalized, for all purposes—in Alaska, Oregon, and DC, further reducing incarceration. At last, the US may finally stop being the incarceration capitol of the world! We currently hold the title in both per-capita and total incarceration, so there can be no dispute. (Technically the Seychelles has a higher per-capita rate, but come on, they don’t count as a real country; they have a population smaller than Ann Arbor—or for that matter the annual throughput of Riker’s Island.)

The proposals to allow wolf hunting in Michigan failed, for which many wolves would thank you if they could. Minimum wages were raised in five states, four of which are Republican-leaning states. The most extreme minimum wage hike was in San Francisco, where the minimum wage is going to be raised as high as $18 over the next four years. So people basically agree with Democrats on policy, but decided to hand the Senate over to Republicans.

I think the best explanation for what happened is the voting demographics. When we have a Senate election, we aren’t sampling randomly from the American population; we’re pulling from specific states, and specific populations within those states. Geography played a huge role in these election results. So did age; the voting population was much older on average than the general population, because most young people simply didn’t vote. I know some of these young people, who tell me things like “I’m not voting because I won’t be part of that system!” Apparently their level of understanding of social change approaches that of the Lonely Island song “I Threw it on the Ground”. Not voting isn’t rebellion, it’s surrender. (I’m not sure who said that first, but it’s clearly right.) Rebellion would be voting for a radical third-party candidate, or running as one yourself. Rebellion would be leading rallies to gather support—that is, votes—for that candidate. Alternatively, you could say that rebellion is too risky and simply aim for reform, in which case you’d vote for Democrats as I did.

Your failure to vote did not help change that system. On the contrary, it was because of your surrender that we got two houses of Congress controlled by Republicans who have veered so far to the right they are bordering on fascism and feudalism. It is strange living in a society where the “mainstream” has become so extremist. You end up feeling like a radical far-left Marxist when in fact you agree—as I do—with the core policies of FDR or even Eisenhower. You have been told that the right is capitalism and the left is socialism; this is wrong. The left is capitalism; the right is feudalism. When I tell you I want a basic income funded by a progressive income tax, I am agreeing with Milton Friedman.

This must be how it feels to be a secularist in an Islamist theocracy like Iran. Now that Colorado has elected a state legislator who is so extreme that he literally has performed exorcisms to make people not gay or transgender (his name is apparently Gordon Klingenschmitt), I fear we’re dangerously on the verge of a theocracy of our own.

Of course, I shouldn’t just blame the people who didn’t vote; I should also blame the people who did vote, and voted for candidates who are completely insane. Even though it’s just a state legislature, tens of thousands of people voted for that guy in Colorado; tens of thousands of Americans were okay with the fact that he thinks gay and transgender people have demons inside us that need to be removed by exorcism. Even in Iran theocracy is astonishingly popular. People are voting for these candidates, and we must find out why and change their minds. We must show them that the people they are voting for are not going to make good decisions that benefit America, they are going to make selfish decisions that benefit themselves or their corporate cronies, or even just outright bad decisions that hurt everyone. As an example of the latter (which is arguably worse), there is literally no benefit to discrimination against women or racial minorities or LGBT people. It’s just absolute pure deadweight loss that causes massive harm without any benefit at all. It’s deeply, deeply irrational, and one of the central projects of cognitive economics must be figuring out what makes people discriminate and figuring out how to make them stop.

To be fair, some of the candidates that were elected are not so extreme. Tom Cotton of Arkansas (whose name is almost offensively down-homey rural American; I don’t think I could name a character that in a novel without people thinking it was satire) supported the state minimum wage increase and is sponsoring a bill that would ban abortions after 20 weeks, which is actually pretty reasonable, rather than at conception, which is absurd.

Thom Tillis of North Carolina is your standard old rich White male corporate stooge, but I don’t see anything in his platform that is particularly terrifying. David Perdue of Georgia is the same; he’s one of those business owners who thinks he knows how to run the economy because he can own a business while it makes money. (Even if he did have something to do with the profitability of the business—which is not entirely clear—that’s still like a fighter pilot saying he’s a great aerospace engineer.) Cory Gardner is similar (not old, but rich White male corporate stooge), but he’s scary simply because he came from the Colorado state legislature, where they just installed that exorcist guy.

Thad Cochran of Mississippi was re-elected, so he was already there; he generally votes along whatever lines the Republican leadership asks him to, so he is not so much a villain as a henchman. Shelley Moore Capito of West Virginia also seems to basically vote whatever the party says.

Joni Ernst of Iowa is an interesting character; despite being a woman, she basically agrees with all the standard Republican positions, including those that are obviously oppressive of women. She voted for an abortion ban at conception, which is totally different from what Cotton wants. She even takes the bizarre confederalist view of Paul Ryan that a federal minimum wage is “big government” but a state minimum wage is just fine. The one exception is that she supports reform of sexual harassment policy in the military, probably because she experienced it herself.

But I’m supposed to be an economist, so what do I think is going to happen to the economy? (Of course, don’t forget, the economy is made of people. One of the best things that can ever happen to an economy is the empowerment of women, racial minorities, and LGBT people, all of which are now in jeopardy under a Republican Congress.)

The best-case scenario is “not much”; the obstructionism continues, and despite an utterly useless government the market repairs itself as it will always do eventually. Job growth will continue at its slow but steady pace, GDP will get back to potential trend. Inequality will continue to increase as it has been doing for about 30 years now. In a couple years there will be another election and hopefully Republicans will lose their majority.

The worst-case scenario is “Republicans get what they want”. The budget will finally be balanced—by cutting education, infrastructure, and social services. Then they’ll unbalance it again by cutting taxes on the rich and starting a couple more wars, because that kind of government spending doesn’t count. (They are weaponized Keynesians all.) They’ll restrict immigration even though immigration is what the First World needs right now (not to mention the fact that the people coming here need it even more). They’ll impose draconian regulations on abortion, they’ll stop or reverse the legalization of marijuana and same-sex marriage.

Democrats must not cave in to demands for “compromise” and “bipartisanship”. If the Republicans truly believed in those things, they wouldn’t have cost the economy $24 billion and downgraded the credit rating of the US government by their ridiculous ploy to shut down the government. They wouldn’t have refused to deal until the sequester forced nonsensical budget cuts. They wouldn’t make it a central part of their platform to undermine or repeal the universal healthcare system that they invented just so that Democrats can’t take credit for it. They have become so committed to winning political arguments at any cost that they are willing to do real harm to America and its people in order to do it. They are overcome by the tribal paradigm, and we all suffer for it.

No, the Republicans in Congress today are like 3-year-olds who throw a tantrum when they don’t get everything exactly their way. You can’t negotiate with these people, you can’t compromise with them. I wish you could, I really do. I’ve heard of days long gone when Congress actually accomplished things, but I have only vague recollections, for I was young in the Clinton era. (I do remember times under Bush II when Congress did things, but they were mostly bad things.) Maybe if we’re firm enough or persuasive enough some of them will even come around. But the worst thing Democrats could do right now is start caving to Republican demands thinking that it will restore unity to our government—because that unity would come only at the price of destroying people’s lives.

Unfortunately I fear that Democrats will appease Republicans in this way, because they’ve been doing that so far. In the campaign, hardly any of the Democrats mentioned Obama’s astonishing economic record or the numerous benefits of Obamacare—which by the way is quite popular among its users, at least more so than getting rid of it entirely (most people want to fix it, not eliminate it). Most of the Democratic candidates barely ran a campaign deserving of the name.

To be clear: Do not succumb to the tribal paradigm yourself. Do not think that everyone who votes Republican is a bad person—the vast majority are good people who were misled. Do not even assume that every Republican politician is evil; a few obviously are (see also Dick Cheney), but most are actually not so much evil as blinded by the ideology of their tribe. I believe that Paul Ryan and Rand Paul think that what they do is in the best interests of America; the problem is not their intentions but their results and their unwillingness to learn from those results. We do need to find ways to overcome partisanship and restore unity and compromise—but we must not simply bow to their demands in order to do that.

Democrats: Do not give in. Stand up for your principles. Every time you give in to their obstructionism, you are incentivizing that obstructionism. And maybe next election you could actually talk about the good things your party does for people—or the bad things their party does—instead of running away from your own party and apologizing for everything?

 Who are the job creators?

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JDN 2456956 PDT 11:30.

For about 20 years now, conservatives have opposed any economic measures that might redistribute wealth from the rich as hurting “job creators” and thereby damaging the economy. This has become so common that the phrase “job creator” has become a euphemism for “rich person”; indeed, when Paul Ryan was asked to define “rich” he stumbled over himself and ended up with “job creators”. A few years ago, John Boehner gave a speech saying that ‘the job creators are on strike’. During his presidential campaign, Mitt Romney said Obama was ‘waging war on job creators’.

If you get the impression that the “job creator” narrative is used more often now than ever, you’re not imagining things; the term was used almost as many times in a single month of Obama’s presidency than it was in George W. Bush’s entire second term.

This narrative is not just wrong; it’s utterly ludicrous. The vision seems to be something like this: Out there somewhere, beyond the view of ordinary mortals, there lives a race of beings known as Job Creators. Ours is not to judge them, not to influence them; ours is only to appease them so that they might look upon us with favor and bestow upon us our much-needed Jobs. Without these Jobs, we will surely die, and so all other concerns are secondary: We must appease the Job Creators.

Businesses don’t create jobs because they feel like it, or because they love us, or because we have gone through the appropriate appeasement rituals. They don’t create jobs because their taxes are low or because they have extra money lying around. They create jobs because they see profit in it. They create jobs because the marginal revenue of hiring an additional worker exceeds the marginal cost.

And of course they’ll gladly destroy jobs for the exact same reasons; if they think the marginal cost exceeds the marginal revenue, out come the pink slips. If demand for the product has fallen, if the raw materials have become more expensive, or if new technology has allowed some of the labor to be cheaply automated, workers will be laid off in the interests of the company. In fact, sometimes it won’t even be in the interests of the company; corporate executives are lately in the habit of using layoffs and stock buybacks to artificially boost the value of their stock options so they can exercise them, pocket the money, and run away as the company comes crashing to the ground. Because of market deregulation and the ridiculous theory of “shareholder value” (as though shareholders are the only ones who matter!), our stock market has changed from a system of value creation to a system of value extraction.

What actually creates jobs? Demand. If the demand for their product exceeds the company’s capacity to produce it, they will hire more people in order to produce more of the product. The marginal revenue has to go up, or companies will have no reason to hire new workers. (The marginal cost could also go down, but then you get low-paying jobs, which isn’t really what we’re aiming for.) They will continue hiring more people up until the point at which it costs more to hire someone than they’d make from selling the products that person could make for them.

What if they don’t have enough money? They’ll borrow it. As long as they know they are going to make a profit from that worker, they will gladly borrow money in order to hire them. Indeed, corporations do this sort of thing all the time. If banks stop lending, that’s a big problem—it’s called a credit crunch—and it’s a major part of just about any financial crisis. But that isn’t because rich people don’t have enough money, it’s because our banking system is fundamentally defective and corrupt. Yes, fixing the banking system would create jobs in a number of different ways. (The biggest three I can think of: There would be more credit for real businesses to fund investment, more credit for individuals to increase demand, and labor effort that is currently wasted on useless financial speculation would be once again returned to real production.) But that’s not what Paul Ryan and his ilk are talking about—indeed, Paul Ryan seems to think that we should undo the meager reforms we’ve already made. Unless we fundamentally change the financial system, the way to create jobs would be to create demand.

And what decides demand? Well, a lot of things I suppose; preferences, technologies, cultural norms, fads, advertising, and so on. But when you’re looking at short-run changes like the business cycle, the driving factor in most cases is actually quite simple: How much money does the middle class have to spend? The middle class is where most of the consumer spending comes from, and if the middle class has money to spend we will buy products. If we don’t have money to spend—we’re out of work, or we have too much debt to pay—then we won’t buy products. It’s not that we suddenly stopped wanting products; the utility value of those products to us is unchanged. The problem is that we simply can’t afford them anymore. This is what happens in a recession: After some sort of shock to the economy, the middle class stops being able to spend, which reduces demand. That causes corporations to lay off workers, which creates unemployment, which reduces demand even further. To correct for the lost demand, prices are supposed to go down (deflation); but this doesn’t actually work, for two reasons.

First, people absolutely hate seeing their wages go down; even if there is a legitimate economic reason, people still have a sense that they are being exploited by their employers (and sometimes they are). This is called downward nominal wage rigidity.

Second, when prices go down, the real value of debt doesn’t go down; it goes up. Your loans are denominated in dollars, not apples; so reducing the price of apples means that you actually owe more apples than you did before. Since debt is usually one of the big things holding back spending by the middle class in the first place, deflation doesn’t correct the imbalance; it makes it worse. This is called debt deflation. Maybe we shouldn’t call it that, since the problem isn’t the prices, it’s the debt. In 2008, the first thing that happened wasn’t that prices in general went down, which is what we normally mean by “deflation”; it was that housing prices went down, and so suddenly people owed vastly more on their mortgages than they had before, and many of them couldn’t afford to pay. It wasn’t a drop in prices so much as a rise in the real value of debt. (I actually think one of the reasons there is no successful comprehensive theory of the cause of business cycles is that there isn’t a single comprehensive cause of business cycles. It’s usually some form of financial crisis followed by debt deflation—and these are the ones to be worried about, 1929 and 2008—but that isn’t always what happens. In 2001, we actually had an unanticipated negative real economic shock—the 9/11 attacks. In 1973 we had a different kind of real economic shock when OPEC raised oil prices at the same time as the US hit peak oil. We should probably be distinguishing between financial recession and real recession.)

Notice how in this entire discussion of what drives aggregate demand, I have never mentioned rich people getting free money; I haven’t even mentioned tax rates. If you have the simplistic view “taxes are bad” (or the totally insane, yet still common, view “taxation is slavery”), then you’re going to look for excuses to lower taxes whenever you can. If you specifically love rich people more than poor people, you’re going to look for excuses to lower taxes on the rich and raise them on the poor (and there is really no other way to interpret Mitt Romney’s infamous “47%” comments). But none of this has anything to do with aggregate demand and job creation. It is pure ideology and has no basis in economics.

Indeed, there’s little reason to think that a tax on corporate profits or capital income would change hiring decisions at all. When we talk about the potential distortions of income taxes, we really have to be talking about labor income, because labor can actually be disincentivized. Say you’re making $15 an hour and not paying any taxes, but your tax rate is suddenly raised to 40%. You can see that after taxes your real wage is now only $9, and maybe you’ll decide that it’s just not worth it to work those hours. This is because you pay a real cost to work—it’s hard, it’s stressful, it’s frustrating, it takes up time.

Capital income can’t be disincentivized. You can have relative incentives, if you tax certain kinds of capital more than others. But if you tax all capital income at the same rate, the incentives remain exactly as they were before: Seek the highest return on investment. Your only costs were financial, and your only benefits are financial. Yes, you’ll be unhappy that your after-tax return on investment has gone down; but it won’t change your investment decisions. If you previously had the choice between investment A yielding 5% return and investment B yielding a 10% return, you’d choose B. Now you pay a 40% tax on capital income; you now have a choice between a 3% real return on A and a 6% real return on B—you’re still going to choose B. That’s probably why high marginal tax rates on income don’t reduce job growth—because most high incomes are capital incomes of one form or another; even when a CEO reports ordinary income it’s really a due to profits and stock options, it’s not like he was paid a wage for work he did.

To be fair, it does get more complicated when you include borrowing and interest rates (now you have the option of lending your money at interest or borrowing more from someone else, which may be taxed differently), and because it’s so easy to move money across borders you can have a relative incentive even when tax rates within a given nation are all the same. Don’t take this literally as saying that you can do whatever you want with taxes on capital income. But in fact you can do quite a lot, because you can change the real rate of return and have no incentive effect as long as you don’t change the relative rate of return. That’s different from wages, for which the real value of the wage can have a direct effect on employers and employees. (The only way to have the same effect on workers would be to somehow lower the real cost of working—make working easier or more fun—which actually sounds like a great idea if you can do it.) The people who are constantly telling us that workers need to tighten their belts but we mustn’t dare tax the “job creators” have the whole situation exactly backwards.

There’s something else I should bring up as well. In everything I’ve said above, I have taken as given the assumption that we need jobs. For many people, probably most Americans in fact, this is an unquestioned assumption, seemingly so obvious as to be self-evident; of course we need jobs, right? But no, actually, we don’t; what we need is production and distribution of wealth. We need to make food and clothing and houses—those are truly basic needs. We could even say we “need” (or at least want) to make televisions and computers and cars. As individuals and as a society we benefit from having these goods. And in our present capitalist economy, the way that we produce and distribute goods is through a system of jobs—you are paid to make goods, and then you can use that money to buy other goods. Don’t get me wrong; this system works pretty well, and for the most part I want to make small adjustments and reforms around the edges rather than throw the whole thing out. Thus far, other systems have not worked as well; when we have attempted to centrally plan production and distribution, the best-case scenario has been inefficiency and the worst-case scenario has been mass starvation.

But we should also be open to the possibility of other systems that are better than capitalism. We should be open to the possibility of a culture like, well, The Culture (and if you haven’t read any Iain Banks novels you should; I’d probably start with Player of Games), in which artificial intelligence and automation allows central planning to finally achieve efficient production and distribution. We should be open to the possibility of a culture like the Federation (and don’t tell me you haven’t seen Star Trek!), in which resources are so plentiful that anyone can have whatever they want, and people work not because they have to, but because they want to—it gives them meaning and purpose in their lives. Fanciful? Perhaps. But lightspeed worldwide communication and landing robots on other planets would have seemed pretty fanciful a century ago.
Capitalism is really an Industrial Era system. It was designed in, and for, a world in which the most important determinants of production are machines, raw materials, and labor hours. But we don’t live in that world anymore. The most important determinants of production are now ideas; software, research, patents, copyrights. Microsoft, Google, and Amazon don’t make things at all, they make ideas; Sony, IBM, Apple, and Toshiba make things, but those things are primarily for the production and dissemination of ideas. Ideas are just as valuable as things—if not more so—but they obey different rules.

Capitalism was designed for a world of rival, excludable goods with increasing marginal cost. Rival, meaning that if one person has it, someone else can’t have it anymore. We speak of piracy as “stealing”, but that’s totally wrong; if you steal something I have, I don’t have it anymore. If you pirate something I have, I still have it. If I gave you my computer, I wouldn’t have it anymore; but I can give you the ideas in this blog post and then we’ll both have them. Excludable, meaning that there is a way to prevent someone else from getting it if you don’t want them to. And increasing marginal cost, meaning that the more you make, the more it costs to make each one. Under these conditions, you get a very nice equilibrium that is efficient under competition.

But ideas are nonrival, they have nearly zero marginal cost, and we are increasingly finding that they aren’t even very excludable; DRM is astonishingly ineffective. Under these conditions, your nice efficient equilibrium completely evaporates. There can be many different equilibria, or no equilibrium at all; and the results are almost always inefficient. We have shoehorned capitalism onto an economy that it was not designed to deal with. Capitalism was designed for the Industrial Era; but we are now in the Information Era.

Indeed, you can see this in all our neoclassical growth models: K is physical capital—machines—and L is labor, and sometimes it is augmented with N—natural resources. But these typically only explain about 50% of the variation in economic output, so we add an extra term, A, which goes by many names: “productivity”, “efficiency”, “technology”; I think the most informative one is actually “the Solow residual”. It’s the residual; it’s the part we can’t explain, dare I say, the part capitalism isn’t designed to explain. It is, in short, made of ideas. One of my thesis papers is actually about this “total factor productivity”, and how a major component of it is made up of one class of ideas in particular: Corruption. Corruption isn’t a thing, some object in space. It’s a cultural norm, a systemic idea that permeates the thoughts and actions of the whole society. It affects what we do, whom we trust, how the rules are made, and how well we follow those rules. You can even think of capitalism as an idea, a system, a culture—and a good part of “productivity” can be accounted for by “market orientation”, which is to say how capitalist a nation is. I would like to see someday a new model that actually includes these factors as terms in the equation, instead of throwing them all together in the mysterious A that we don’t understand.

With this in mind, we should be asking ourselves whether we need jobs at all, because jobs are a system designed for the production of physical goods in the Industrial Era. Now that we live in the Information Era and most of our production is in the form of ideas, do we still need jobs? Does everyone need a job? If you’re trying to make cars for a million people, it may not take a million people to do it, but it’s going to take thousands. But if you’re trying to design a car for a million people, or make a computer game about cars for a million people to play, that can be done with a lot fewer people. Ideas can be made by a few and then disseminated to the world. General Motors has 200,000 employees (and used to have about twice as many in the 1970s); Blizzard Entertainment has less than 5,000. It’s not because they produce for fewer people; GM sells about 3 million cars a year, and Starcraft sold over 11 million copies. Starcraft came out in 1998, so I added up how many cars GM sold in the US since 1998: 61 million. That’s still 3.28 employees per thousand cars sold, but only 0.45 employees per thousand computer games sold.

Still, I don’t have a detailed account of what this new jobless economic system might look like. For now, it’s probably best if people have jobs. But if we really want to create jobs, we need to increase aggregate demand. That most likely means either reducing debt or giving more money to consumers. It certainly doesn’t have anything to do with tax cuts for the rich.

And really, this is pretty obvious; if you stop and think for a minute about why businesses create jobs, you realize that it has to do with demand for products, not how nice the government treats them or how much extra cash they have laying around. I actually have trouble believing that the people who say “job creators” unironically actually believe the words they are saying. Do they honestly think that rich people create jobs out of sheer brilliance and benevolence, but are constrained by how much money they have and “go on strike” if the government doesn’t kowtow to them?

The only way I can see that they could actually believe this sort of thing would be if they read so much Ayn Rand that it totally infested their brains and rendered them incapable of thinking outside that framework. Perhaps Krugman is right, and Rand Paul really does believe that he is John Galt. Maybe they really do honestly believe that this is how economics works—in which case it’s no wonder that our economy is in trouble. Indeed, the marvel is that it works at all.