A tale of two storms

Sep 24, JDN 2458021

There were two severe storm events this past week; one you probably heard a great deal about, the other, probably not. The first was Hurricane Irma, which hit the United States and did most of its damage in Florida; the second was Typhoon Doksuri, which hit Southeast Asia and did most of its damage in Vietnam.

You might expect that this post is going to give you more bad news. Well, I have a surprise for you: The news is actually mostly good.

The death tolls from both storms were astonishingly small. The hurricane is estimated to have killed at least 84 people, while the typhoon has killed at least 26. This result is nothing less than heroism. The valiant efforts of thousands of meteorologists and emergency responders around the world has saved thousands of lives, and did so both in the wealthy United States and in impoverished Vietnam.

When I started this post, I had expected to see that the emergency response in Vietnam would be much worse, and fatalities would be far higher; I am delighted to report that nothing of the sort was the case, and Vietnam, despite their per-capita GDP PPP of under $6,000, has made emergency response a sufficiently high priority that they saved their people just about as well as Florida did.

To get a sense of what might have happened without them, consider that 1.5 million homes in Florida were leveled by the hurricane, and over 100,000 homes were damaged by the typhoon. Vietnam is a country of 94 million people. Florida has a population of 20 million. (The reason Florida determines so many elections is that it is by far the most populous swing state.) Without weather forecasting and emergency response, these death figures would have been in the tens of thousands, not the dozens.

Indeed, if you know statistics and demographics well, these figures become even more astonishing: These death rates were almost indistinguishable from statistical noise.

Vietnam’s baseline death rate is about 5.9 per 1,000, meaning that they experience about 560,000 deaths in any given year. This means that over 1500 people die in Vietnam on a normal day.

Florida’s baseline death rate is about 6.6 per 1,000, actually a bit higher than Vietnam’s, because Florida’s population skews so much toward the elderly. Therefore Florida experiences about 130,000 deaths per year, or 360 deaths on a normal day.

In both Vietnam and Florida, this makes the daily death probability for any given person about 0.0017%. A random process with a fixed probability of 0.0017% over a population of n people will result in an average of 0.0017n events, but with some variation around that number. The standard deviation is actually sqrt(p(1-p)n) = 0.004 sqrt(n). When n = 20,000,000 (Florida), this results in a standard deviation of 18. When n = 94,000,000 (Vietnam), this results in a standard deviation of 40.

This means that the 26 additional deaths in Vietnam were within one standard deviation of average! They basically are indistinguishable from statistical noise. There have been over a hundred days in Vietnam where an extra 26 people happened to die, just in the past year. Weather forecasting took what could have been a historic disaster and turned it into just another bad day.

The 84 additional deaths in Florida are over four standard deviations away from average, so they are definitely distinguishable from statistical noise—but this still means that Florida’s total death rate for the year will only tick up by 0.6%.

It is common in such tragedies to point out in grave tones that “one death is too many”, but I maintain that this is not actually moral wisdom but empty platitude. No conceivable policy is ever going to reduce death rates to zero, and the people who died of heart attacks or brain aneurysms are every bit as dead as the people who died from hurricanes or terrorist attacks. Instead of focusing on the handful of people who died because they didn’t heed warnings or simply got extraordinarily unlucky, I think we should be focusing on the thousands of people who survived because our weather forecasters and emergency responders did their jobs so exceptionally well. Of course if we can reduce the numbers even further, we should; but from where I’m sitting, our emergency response system has a lot to be proud of.

Of course, the economic damage of the storms was substantially greater. The losses in destroyed housing and infrastructure in Florida are projected at over $80 billion. Vietnam is much poorer, so there simply isn’t as much infrastructure to destroy; total damage is unlikely to exceed $10 billion. Florida’s GDP is $926 billion, so they are losing 8.6%; while Vietnam’s GDP is $220 billion, so they are still losing 4.5%. And of course the damage isn’t evenly spread across everyone; those hardest hit will lose perhaps their entire net wealth, while others will feel absolutely nothing.

But economic damage is fleeting. Indeed, if we spend the government money we should be, and take the opportunity to rebuild this infrastructure better than it was before, the long-run economic impact could be positive. Even 8.6% of GDP is less than five years of normal economic growth—and there were years in the 1950s where we did it in a single year. The 4.6% that Vietnam lost, they should make back within a year of their current economic growth.

Thank goodness.

What we lose by aggregating

Jun 25, JDN 2457930

One of the central premises of current neoclassical macroeconomics is the representative agent: Rather than trying to keep track of all the thousands of firms, millions of people, and billions of goods and in a national economy, we aggregate everything up into a single worker/consumer and a single firm producing and consuming a single commodity.

This sometimes goes under the baffling misnomer of microfoundations, which would seem to suggest that it carries detailed information about the microeconomic behavior underlying it; in fact what this means is that the large-scale behavior is determined by some sort of (perfectly) rational optimization process as if there were just one person running the entire economy optimally.

First of all, let me say that some degree of aggregation is obviously necessary. Literally keeping track of every single transaction by every single person in an entire economy would require absurd amounts of data and calculation. We might have enough computing power to theoretically try this nowadays, but then again we might not—and in any case such a model would very rapidly lose sight of the forest for the trees.

But it is also clearly possible to aggregate too much, and most economists don’t seem to appreciate this. They cite a couple of famous theorems (like the Gorman Aggregation Theorem) involving perfectly-competitive firms and perfectly-rational identical consumers that offer a thin veneer of justification for aggregating everything into one, and then go on with their work as if this meant everything were fine.

What’s wrong with such an approach?

Well, first of all, a representative agent model can’t talk about inequality at all. It’s not even that a representative agent model says inequality is good, or not a problem; it lacks the capacity to even formulate the concept. Trying to talk about income or wealth inequality in a representative agent model would be like trying to decide whether your left hand is richer than your right hand.

It’s also nearly impossible to talk about poverty in a representative agent model; the best you can do is talk about a country’s overall level of development, and assume (not without reason) that a country with a per-capita GDP of $1,000 probably has a lot more poverty than a country with a per-capita GDP of $50,000. But two countries with the same per-capita GDP can have very different poverty rates—and indeed, the cynic in me wonders if the reason we’re reluctant to use inequality-adjusted measures of development is precisely that many American economists fear where this might put the US in the rankings. The Human Development Index was a step in the right direction because it includes things other than money (and as a result Saudi Arabia looks much worse and Cuba much better), but it still aggregates and averages everything, so as long as your rich people are doing well enough they can compensate for how badly your poor people are doing.

Nor can you talk about oligopoly in a representative agent model, as there is always only one firm, which for some reason chooses to act as if it were facing competition instead of rationally behaving as a monopoly. (This is not quite as nonsensical as it sounds, as the aggregation actually does kind of work if there truly are so many firms that they are all forced down to zero profit by fierce competition—but then again, what market is actually like that?) There is no market share, no market power; all are at the mercy of the One True Price.

You can still talk about externalities, sort of; but in order to do so you have to set up this weird doublethink phenomenon where the representative consumer keeps polluting their backyard and then can’t figure out why their backyard is so darn polluted. (I suppose humans do seem to behave like that sometimes; but wait, I thought you believed people were rational?) I think this probably confuses many an undergrad, in fact; the models we teach them about externalities generally use this baffling assumption that people consider one set of costs when making their decisions and then bear a different set of costs from the outcome. If you can conceptualize the idea that we’re aggregating across people and thinking “as if” there were a representative agent, you can ultimately make sense of this; but I think a lot of students get really confused by it.

Indeed, what can you talk about with a representative agent model? Economic growth and business cycles. That’s… about it. These are not minor issues, of course; indeed, as Robert Lucas famously said:

The consequences for human welfare involved in questions like these [on economic growth] are simply staggering: once one starts to think about them, it is hard to think about anything else.

I certainly do think that studying economic growth and business cycles should be among the top priorities of macroeconomics. But then, I also think that poverty and inequality should be among the top priorities, and they haven’t been—perhaps because the obsession with representative agent models make that basically impossible.

I want to be constructive here; I appreciate that aggregating makes things much easier. So what could we do to include some heterogeneity without too much cost in complexity?

Here’s one: How about we have p firms, making q types of goods, sold to n consumers? If you want you can start by setting all these numbers equal to 2; simply going from 1 to 2 has an enormous effect, as it allows you to at least say something about inequality. Getting them as high as 100 or even 1000 still shouldn’t be a problem for computing the model on an ordinary laptop. (There are “econophysicists” who like to use these sorts of agent-based models, but so far very few economists take them seriously. Partly that is justified by their lack of foundational knowledge in economics—the arrogance of physicists taking on a new field is legendary—but partly it is also interdepartmental turf war, as economists don’t like the idea of physicists treading on their sacred ground.) One thing that really baffles me about this is that economists routinely use computers to solve models that can’t be calculated by hand, but it never seems to occur to them that they could have started at the beginning planning to make the model solvable only by computer, and that would spare them from making the sort of heroic assumptions they are accustomed to making—assumptions that only made sense when they were used to make a model solvable that otherwise wouldn’t be.

You could also assign a probability distribution over incomes; that can get messy quickly, but we actually are fortunate that the constant relative risk aversion utility function and the Pareto distribution over incomes seem to fit the data quite well—as the product of those two things is integrable by hand. As long as you can model how your policy affects this distribution without making that integral impossible (which is surprisingly tricky), you can aggregate over utility instead of over income, which is a lot more reasonable as a measure of welfare.

And really I’m only scratching the surface here. There are a vast array of possible new approaches that would allow us to extend macroeconomic models to cover heterogeneity; the real problem is an apparent lack of will in the community to make such an attempt. Most economists still seem very happy with representative agent models, and reluctant to consider anything else—often arguing, in fact, that anything else would make the model less microfounded when plainly the opposite is the case.

 

Our government just voted to let thousands of people die for no reason

May 14, JDN 2457888

The US House of Representatives just voted to pass a bill that will let thousands of Americans die for no reason. At the time of writing it hasn’t yet passed the Senate, but it may yet do so. And if it does, there can be little doubt that President Trump (a phrase I still feel nauseous saying) will sign it.

Some already call it Trumpcare (or “Trump-doesn’t-care”); but officially they call it the American Health Care Act. I think we should use the formal name, because it is a name which is already beginning to take on a dark irony; yes, only in America would such a terrible health care act be considered. Every other highly-developed country has a universal healthcare system; most of them have single-payer systems (and this has been true for over two decades).
The Congressional Budget Office estimates that the AHCA will increase the number of uninsured Americans by 24 million. Of these, 14 million will be people near the poverty line who lose access to Medicaid.

In 2009, a Harvard study estimated that 45,000 Americans die each year because they don’t have health insurance. This is on the higher end; other studies have estimated more like 20,000. But based on the increases in health insurance rates under Obamacare, somewhere between 5,000 and 10,000 American lives have been saved each year since it was enacted. That reduction came from insuring about 10 million people who weren’t insured before.

Making a linear projection, we can roughly estimate the number of additional Americans who will die every year if this American Health Care Act is implemented. (24 million/10 million)(5,000 to 10,000) = 12,000 to 24,000 deaths per year. For comparison, there are about 14,000 total homicides in the United States each year (and we have an exceptionally high homicide rate for a highly-developed country).
Indeed, morally, it might make sense to count these deaths as homicides (by the principle of “depraved indifference”); Trump therefore intends to double our homicide rate.

Of course, it will not be prosecuted this way. And one can even make an ethical case for why it shouldn’t be, why it would be impossible to make policy if every lawmaker had to face the consequences of every policy choice. (Start a war? A hundred thousand deaths. Fail to start a war in response to a genocide? A different hundred thousand deaths.)

But for once, I might want to make an exception. Because these deaths will not be the result of a complex policy trade-off with merits and demerits on both sides. They will not be the result of honest mistakes or unforeseen disasters. These people will die out of pure depraved indifference.

We had a healthcare bill that was working. Indeed, Obamacare was remarkably successful. It increased insurance rates and reduced mortality rates while still managing to slow the growth in healthcare expenditure.

The only real cost was an increase in taxes on the top 5% (and particularly the top 1%) of the income distribution. But the Republican Party—and make no mistake, the vote was on almost completely partisan lines, and not a single Democrat supported it—has now made it a matter of official policy that they care more about cutting taxes on millionaires than they do about poor people dying from lack of healthcare.

Yet there may be a silver lining in all of this: Once people saw that Obamacare could work, the idea of universal healthcare in the United States began to seem like a serious political position. The Overton Window has grown. Indeed, it may even have shifted to the left for once; the responses to the American Health Care Act have been almost uniformly comprised of shock and outrage, when really what the bill does is goes back to the same awful system we had before. Going backward and letting thousands of people die for no reason should appall people—but I feared that it might not, because it would seem “normal”. We in America have grown very accustomed to letting poor people die in order to slightly increase the profits of billionaires, and I thought this time might be no different—but it was different. Once Obamacare actually passed and began to work, people really saw what was happening—that all this suffering and death wasn’t necessary, it wasn’t an inextricable part of having a functioning economy. And now that they see that, they aren’t willing to go back.

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.

Wrong answers are better than no answer

Nov 6, JDN 2457699

I’ve been hearing some disturbing sentiments from some surprising places lately, things like “Economics is not a science, it’s just an extension of politics” and “There’s no such thing as a true model”. I’ve now met multiple economists who speak this way, who seem to be some sort of “subjectivists” or “anti-realists” (those links are to explanations of moral subjectivism and anti-realism, which are also mistaken, but in a much less obvious way, and are far more common views to express). It is possible to read most of the individual statements in a non-subjectivist way, but in the context of all of them together, it really gives me the general impression that many of these economists… don’t believe in economics. (Nor do they even believe in believing it, or they’d put up a better show.)

I think what has happened is that in the wake of the Second Depression, economists have had a sort of “crisis of faith”. The models we thought were right were wrong, so we may as well give up; there’s no such thing as a true model. The science of economics failed, so maybe economics was never a science at all.

Never really thought I’d be in this position, but in such circumstances actually feel strongly inclined to defend neoclassical economics. Neoclassical economics is wrong; but subjectivism is not even wrong.

If a model is wrong, you can fix it. You can make it right, or at least less wrong. But if you give up on modeling altogether, your theory avoids being disproven only by making itself totally detached from reality. I can’t prove you wrong, but only because you’ve given up on the whole idea of being right or wrong.

As Isaac Asimov wrote, “when people thought the earth was flat, they were wrong. When people thought the earth was spherical, they were wrong. But if you think that thinking the earth is spherical is just as wrong as thinking the earth is flat, then your view is wronger than both of them put together.”

What we might call “folk economics”, what most people seem to believe about economics, is like thinking the Earth is flat—it’s fundamentally wrong, but not so obviously inaccurate on an individual scale that it can’t be a useful approximation for your daily life. Neoclassical economics is like thinking the Earth is spherical—it’s almost right, but still wrong in some subtle but important ways. Thinking that economics isn’t a science is wronger than both of them put together.

The sense in which “there’s no such thing as a true model” is true is a trivial one: There’s no such thing as a perfect model, because by the time you included everything you’d just get back the world itself. But there are better and worse models, and some of our very best models (quantum mechanics, Darwinian evolution) are really good enough that I think it’s quite perverse not to call them simply true. Economics doesn’t have such models yet for more than a handful of phenomena—but we’re working on it (at least, I thought that’s what we were doing!).

Indeed, a key point I like to make about realism—in science, morality, or whatever—is that if you think something can be wrong, you must be a realist. In order for an idea to be wrong, there must be some objective reality to compare it to that it can fail to match. If everything is just subjective beliefs and sociopolitical pressures, there is no such thing as “wrong”, only “unpopular”. I’ve heard many people say things like “Well, that’s just your opinion; you could be wrong.” No, if it’s just my opinion, then I cannot possibly be wrong. So choose a lane! Either you think I’m wrong, or you think it’s just my opinion—but you can’t have it both ways.

Now, it’s clearly true in the real world that there is a lot of very bad and unscientific economics going on. The worst is surely the stuff that comes out of right-wing think-tanks that are paid almost explicitly to come up with particular results that are convenient for their right-wing funders. (As Krugman puts it, “there are liberal professional economists, conservative professional economists, and professional conservative economists.”) But there’s also a lot of really unscientific economics done without such direct and obvious financial incentives. Economists get blinded by their own ideology, they choose what topics to work on based on what will garner the most prestige, they use fundamentally defective statistical techniques because journals won’t publish them if they don’t.

But of course, the same is true of many other fields, particularly in social science. Sociologists also get blinded by their pet theories; psychologists also abuse statistics because the journals make them do it; political scientists are influenced by their funding sources; anthropologists also choose what to work on based on what’s prestigious in the field.

Moreover, natural sciences do this too. String theorists are (almost by definition) blinded by their favorite theory. Biochemists are manipulated by the financial pressures of the pharmaceutical industry. Neuroscientists publish all sorts of statistically nonsensical research. I’d be very surprised if even geologists were immune to the social norms of academia telling them to work on the most prestigious problems. If this is enough reason to abandon a field as a science, it is a reason to abandon science, full stop. That is what you are arguing for here.

And really, this should be fairly obvious, actually. Are workers and factories and televisions actual things that are actually here? Obviously they are. Therefore you can be right or wrong about how they interact. There is an obvious objective reality here that one can have more or less accurate beliefs about.

For socially-constructed phenomena like money, markets, and prices, this isn’t as obvious; if everyone stopped believing in the US Dollar, like Tinkerbell the US Dollar would cease to exist. But there does remain some objective reality (or if you like, intersubjective reality) here: I can be right or wrong about the price of a dishwasher or the exchange rate from dollars to pounds.

So, in order to abandon the possibility of scientifically accurate economics, you have to say that even though there is this obvious physical reality of workers and factories and televisions, we can’t actually study that scientifically, even when it sure looks like we’re studying it scientifically by performing careful observations, rigorous statistics, and even randomized controlled experiments. Even when I perform my detailed Bayesian analysis of my randomized controlled experiment, nope, that’s not science. It doesn’t count, for some reason.

The only at all principled way I can see you could justify such a thing is to say that once you start studying other humans you lose all possibility of scientific objectivity—but notice that by making such a claim you haven’t just thrown out psychology and economics, you’ve also thrown out anthropology and neuroscience. The statements “DNA evidence shows that all modern human beings descend from a common migration out of Africa” and “Human nerve conduction speed is approximately 300 meters per second” aren’t scientific? Then what in the world are they?

Or is it specifically behavioral sciences that bother you? Now perhaps you can leave out biological anthropology and basic neuroscience; there’s some cultural anthropology and behavioral neuroscience you have to still include, but maybe that’s a bullet you’re willing to bite. There is perhaps something intuitively appealing here: Since science is a human behavior, you can’t use science to study human behavior without an unresolvable infinite regress.

But there are still two very big problems with this idea.

First, you’ve got to explain how there can be this obvious objective reality of human behavior that is nonetheless somehow forever beyond our understanding. Even though people actually do things, and we can study those things using the usual tools of science, somehow we’re not really doing science, and we can never actually learn anything about how human beings behave.

Second, you’ve got to explain why we’ve done as well as we have. For some reason, people seem to have this impression that psychology and especially economics have been dismal failures, they’ve brought us nothing but nonsense and misery.

But where exactly do you think we got the lowest poverty rate in the history of the world? That just happened by magic, or by accident while we were doing other things? No, economists did that, on purpose—the UN Millennium Goals were designed, implemented, and evaluated by economists. Against staunch opposition from both ends of the political spectrum, we have managed to bring free trade to the world, and with it, some measure of prosperity.

The only other science I can think of that has been more successful at its core mission is biology; as XCKD pointed out, the biologists killed a Horseman of the Apocalypse while the physicists were busy making a new one. Congratulations on beating Pestilence, biologists; we economists think we finally have Famine on the ropes now. Hey political scientists, how is War going? Oh, not bad, actually? War deaths per capita are near their lowest levels in history? But clearly it would be foolhardy to think that economics and political science are actually sciences!

I can at least see why people might think psychology is a failure, because rates of diagnosis of mental illness keep rising higher and higher; but the key word there is diagnosis. People were already suffering from anxiety and depression across the globe; it’s just that nobody was giving them therapy or medication for it. Some people argue that all we’ve done is pathologize normal human experience—but this wildly underestimates the severity of many mental disorders. Wanting to end your own life for reasons you yourself cannot understand is not normal human experience being pathologized. (And the fact that 40,000 Americans commit suicide every year may make it common, but it does not make it normal. Is trying to keep people from dying of influenza “pathologizing normal human experience”? Well, suicide kills almost as many.) It’s possible there is some overdiagnosis; but there is also an awful lot of real mental illness that previously went untreated—and yes, meta-analysis shows that treatment can and does work.

Of course, we’ve made a lot of mistakes. We will continue to make mistakes. Many of our existing models are seriously flawed in very important ways, and many economists continue to use those models incautiously, blind to their defects. The Second Depression was largely the fault of economists, because it was economists who told everyone that markets are efficient, banks will regulate themselves, leave it alone, don’t worry about it.

But we can do better. We will do better. And we can only do that because economics is a science, it does reflect reality, and therefore we make ourselves less wrong.

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.

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

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.