Just how rich is rich?

May 26 JDN 2458630

I think if there is one single thing I would like more people to know about economics, it is the sheer magnitude of global inequality. Most people seem to have no idea just how rich some people are—and how poor so many others are. They have a vision in their head of what “rich” and “poor” are, and their “rich” is a low-level Wall Street trader making $400,000 a year (the kind of people Gordon Gekko mocks in the film), and “poor” is someone who lives under a bridge in New York City. (They’re both New Yorkers, I guess. New Yorkers seem to be the iconic Americans, which is honestly more representative than you might think—80% of Americans live in urban or suburban areas.)

If we take a global perspective, this is not what “rich” and “poor” truly mean.

In next week’s post I’ll talk about what “poor” means. It’s really appallingly bad. We have to leave the First World in order to find it; many people here are poor, but not that poor. It’s so bad that I think once you really understand it, it can’t but change your whole outlook on the world. But I’m saving that for next week.

This week, I’ll talk about what “rich” really means in today’s world. We needn’t leave the United States, for the top 3 and 6 of the top 10 richest people in the world live here. And they are all White men, by the way, though Carlos Slim and Amancio Ortega are at least Latino.

Going down the list of billionaires ranked by wealth, you have to get down to 15th place before encountering a woman, and it’s really worse than that, because Francoise Bettencourt (15), Alice Walton (17), Jacqueline Mars (33), Yang Huiyan (42), Susan Klatton (46), Laurena Powell-Jobs (54), Abigail Johnson (71), and Iris Fontbona (74) are all heirs. The richest living woman who didn’t simply inherit from her father or husband is actually Gina Rinehart, the 75th richest person in the world. (And note that, while also in some sense an heir, Queen Elizabeth is not on that list; in fact, she’s nowhere near the richest people in the world. She’s not in the top 500.)

You have to get to 20th place before encountering someone non-White (Ma Huateng), and all the way down to 65th before encountering someone not White or East Asian (the Hinduja brothers). Not one of the top 100 richest people is Black.

Just how rich are these people? Well, there’s a meme going around saying that Jeff Bezos could afford to buy every homeless person in the world a house at median market price and still, with just what’s left over, be a multi-billionaire among the top 100 richest people in the world.

And that meme is completely correct. The math checks out.

There are about 554,000 homeless people in the US at any given time.

The median sale price of a currently existing house in the US is about $253,000.

Multiply those two numbers together, and you get $140 billion.

And Jeff Bezos has net wealth of $157 billion.

This means that he would still have $17 billion left after buying all those houses. The 100th richest person in the world has $13 billion, so Jeff Bezos would still be higher than that.

Even $17 billion is enough to spend over $2 million every single day—over $20 per second—and never run out of money as long as the dividends keep paying out.

Jeff Bezos in fact made so much in dividends and capital gains this past quarter that he was taking in as much money as the median Amazon employee’s annual salary—which is more than what I make as a grad student, and only slightly less than the median US individual incomeevery nine seconds. Yes, you read that correctly: Nine (9) seconds. In the time it took you to read this paragraph, Jeff Bezos probably received more in capital gains than you will make this whole year. And if not (because you’re relatively rich or you read quickly), I’m sure he will have in the time it takes you to read this whole post.

When Mitt Romney ran for President, a great deal was made of his net wealth of over $250 million. This is indeed very rich, richer than anyone really needs or probably deserves. But compared to the world’s richest, this is pocket change. Jeff Bezos gets that much in dividends and capital gains every day. Bill Gates could give away that much every day for a year and still not run out of money. (He doesn’t quite give that much, but he does give a lot.)

I grew up in Ann Arbor, Michigan. Ann Arbor is a medium-sized city of about 120,000 people (230th in the US by population), and relatively well-off (median household income about 16% higher than the US median). Nevertheless, if Jeff Bezos wanted to, he could give every single person in Ann Arbor the equivalent of 30 years of their income—over a million dollars each—and still have enough money left to be among the world’s 100 richest people.

Or suppose instead that all the world’s 500 richest people decided to give away all the money they have above $1 billion—so they’d all still be billionaires, but only barely. That $8.7 trillion they have together, minus the $500 billion they’re keeping, would be $8.2 trillion. In fact, let’s say they keep a little more, just to make sure they all have the same ordering: Give each one an extra $1 million for each point they are in the ranking, so that Jeff Bezos would stay on top at $1 B + 500 ($0.001 B) = $1.5 billion, while Bill Gates in second place would have $1 million less, and so on. That would leave us with still over $8 trillion to give away.

How far could that $8 trillion go? Well, suppose we divided it evenly between all 328 million people in the United States. How much would each person receive? Oh, just about $24,000—basically my annual income.

Or suppose instead we spread it out over the entire world: Every single man, woman, and child on the planet Earth gets an equal share. There are 7.7 billion people in the world, so by spreading out $8 trillion between them, each one would get over $1000. For you or I that’s a big enough windfall to feel. For the world’s poorest people, it’s more than they make in several years. It would be life-changing for them. (Actually that’s about what GiveDirectly gives each family—and it is life-changing.)

And let me remind you: This would be leaving them billionaires. They’re just not as much billionaires as before—they only have $1 billion instead of $20 billion or $50 billion or $100 billion. And even $1 billion is obviously enough to live however you want, wherever you want, for the rest of your life, never working another day if you don’t want to. With $1 billion, you can fly in jets (a good one will set you back $20 million), sail in yachts (even a massive 200-footer wouldn’t run much above $200 million), and eat filet mignon at every meal (in fact, at $25 per pound, you can serve it to yourself and a hundred of your friends without breaking a sweat). You can decorate your bedroom with original Jackson Pollock paintings (at $200 million, his most expensive painting is only 20% of your wealth) and bathe in bottles of Dom Perignon (at $400 per liter, a 200-liter bath would cost you about $80,000—even every day that’s only $30 million a year, or maybe half to a third of your capital income). Remember, this is all feasible at just $1 billion—and Jeff Bezos has over a hundred times that. There is no real lifestyle improvement that happens between $1 billion and $157 billion; it’s purely a matter of status and power.

Taking enough to make them mere millionaires would give us another $0.5 trillion to spend (about the GDP of Sweden, one-fourth the GDP of Canada, or 70% of the US military budget).

Do you think maybe these people have too much money?

I’m not saying that we should confiscate all private property. I’m not saying that we should collectivize all industry. I believe in free markets and private enterprise. People should be able to get rich by inventing things and starting businesses.

But should they be able to get that rich? So rich that one man could pay off every mortgage in a whole major city? So rich that the CEO of a company makes what his employees make in a year in less than a minute? So rich that 500 people—enough to fill a large lecture hall—own enough wealth that if it were spread out evenly they could give $1000 to every single person in the world?

If Jeff Bezos had $1.5 million, I’d say he absolutely earned it. Some high-level programmers at Amazon have that much, and they absolutely earned it. If he had $15 million, I’d think maybe he could deserve that, given his contribution to the world. If he had $150 million, I’d find it hard to believe that anyone could really deserve that much, but if it’s part of what we need to make capitalism work, I could live with that.

But Jeff Bezos doesn’t have $1.5 million. He doesn’t have $15 million. He doesn’t have $150 million. He doesn’t have $1.5 billion. He doesn’t even have $15 billion. He has $150 billion. He has over a thousand times the level of wealth at which I was already having to doubt whether any human being could possibly deserve so much money—and once it gets that big, it basically just keeps growing. A stock market crash might drop it down temporarily, but it would come back in a few years.

And it’s not like there’s nothing we could do to spread this wealth around. Some fairly simple changes in how we tax dividends and capital gains would be enough to get a lot of it, and a wealth tax like the one Elizabeth Warren has proposed would help a great deal as well. At the rates people have seriously proposed, these taxes would only really stop their wealth from growing; it wouldn’t meaningfully shrink it.

That could be combined with policy changes about compensation for corporate executives, particularly with regard to stock options, to make it harder to extract such a large proportion of a huge multinational corporation’s wealth into a single individual. We could impose a cap on the ratio between median employee salary (including the entire supply chain!) and total executive compensation (including dividends and capital gains!), say 100 to 1. (Making in 9 seconds what his employees make in a year, Jeff Bezos is currently operating at a ratio of over 3 million to 1.) If you exceed the cap, the remainder is taxed at 100%. This would mean that as a CEO you can still make $100 million a year, but only if your median employee makes $1 million. If your median employee makes $30,000, you’d better keep your own compensation under $3 million, because we’re gonna take the rest.

Is this socialism? I guess maybe it’s democratic socialism, the high-tax, high-spend #ScandinaviaIsBetter welfare state. But it would not be an end to free markets or free enterprise. We’re not collectivizing any industries, let alone putting anyone in guillotines. You could still start a business and make millions or even hundreds of millions of dollars; you’d simply be expected to share that wealth with your employees and our society as a whole, instead of hoarding it all for yourself.

Pinker Propositions

May 19 2458623

What do the following statements have in common?

1. “Capitalist countries have less poverty than Communist countries.

2. “Black men in the US commit homicide at a higher rate than White men.

3. “On average, in the US, Asian people score highest on IQ tests, White and Hispanic people score near the middle, and Black people score the lowest.

4. “Men on average perform better at visual tasks, and women on average perform better on verbal tasks.

5. “In the United States, White men are no more likely to be mass shooters than other men.

6. “The genetic heritability of intelligence is about 60%.

7. “The plurality of recent terrorist attacks in the US have been committed by Muslims.

8. “The period of US military hegemony since 1945 has been the most peaceful period in human history.

These statements have two things in common:

1. All of these statements are objectively true facts that can be verified by rich and reliable empirical data which is publicly available and uncontroversially accepted by social scientists.

2. If spoken publicly among left-wing social justice activists, all of these statements will draw resistance, defensiveness, and often outright hostility. Anyone making these statements is likely to be accused of racism, sexism, imperialism, and so on.

I call such propositions Pinker Propositions, after an excellent talk by Steven Pinker illustrating several of the above statements (which was then taken wildly out of context by social justice activists on social media).

The usual reaction to these statements suggests that people think they imply harmful far-right policy conclusions. This inference is utterly wrong: A nuanced understanding of each of these propositions does not in any way lead to far-right policy conclusions—in fact, some rather strongly support left-wing policy conclusions.

1. Capitalist countries have less poverty than Communist countries, because Communist countries are nearly always corrupt and authoritarian. Social democratic countries have the lowest poverty and the highest overall happiness (#ScandinaviaIsBetter).

2. Black men commit more homicide than White men because of poverty, discrimination, mass incarceration, and gang violence. Black men are also greatly overrepresented among victims of homicide, as most homicide is intra-racial. Homicide rates often vary across ethnic and socioeconomic groups, and these rates vary over time as a result of cultural and political changes.

3. IQ tests are a highly imperfect measure of intelligence, and the genetics of intelligence cut across our socially-constructed concept of race. There is far more within-group variation in IQ than between-group variation. Intelligence is not fixed at birth but is affected by nutrition, upbringing, exposure to toxins, and education—all of which statistically put Black people at a disadvantage. Nor does intelligence remain constant within populations: The Flynn Effect is the well-documented increase in intelligence which has occurred in almost every country over the past century. Far from justifying discrimination, these provide very strong reasons to improve opportunities for Black children. The lead and mercury in Flint’s water suppressed the brain development of thousands of Black children—that’s going to lower average IQ scores. But that says nothing about supposed “inherent racial differences” and everything about the catastrophic damage of environmental racism.

4. To be quite honest, I never even understood why this one shocks—or even surprises—people. It’s not even saying that men are “smarter” than women—overall IQ is almost identical. It’s just saying that men are more visual and women are more verbal. And this, I think, is actually quite obvious. I think the clearest evidence of this—the “interocular trauma” that will convince you the effect is real and worth talking about—is pornography. Visual porn is overwhelmingly consumed by men, even when it was designed for women (e.g. Playgirla majority of its readers are gay men, even though there are ten times as many straight women in the world as there are gay men). Conversely, erotic novels are overwhelmingly consumed by women. I think a lot of anti-porn feminism can actually be explained by this effect: Feminists (who are usually women, for obvious reasons) can say they are against “porn” when what they are really against is visual porn, because visual porn is consumed by men; then the kind of porn that they like (erotic literature) doesn’t count as “real porn”. And honestly they’re mostly against the current structure of the live-action visual porn industry, which is totally reasonable—but it’s a far cry from being against porn in general. I have some serious issues with how our farming system is currently set up, but I’m not against farming.

5. This one is interesting, because it’s a lack of a race difference, which normally is what the left wing always wants to hear. The difference of course is that this alleged difference would make White men look bad, and that’s apparently seen as a desirable goal for social justice. But the data just doesn’t bear it out: While indeed most mass shooters are White men, that’s because most Americans are White, which is a totally uninteresting reason. There’s no clear evidence of any racial disparity in mass shootings—though the gender disparity is absolutely overwhelming: It’s almost always men.

6. Heritability is a subtle concept; it doesn’t mean what most people seem to think it means. It doesn’t mean that 60% of your intelligence is due to your your genes. Indeed, I’m not even sure what that sentence would actually mean; it’s like saying that 60% of the flavor of a cake is due to the eggs. What this heritability figure actually means that when you compare across individuals in a population, and carefully control for environmental influences, you find that about 60% of the variance in IQ scores is explained by genetic factors. But this is within a particular population—here, US adults—and is absolutely dependent on all sorts of other variables. The more flexible one’s environment becomes, the more people self-select into their preferred environment, and the more heritable traits become. As a result, IQ actually becomes more heritable as children become adults, called the Wilson Effect.

7. This one might actually have some contradiction with left-wing policy. The disproportionate participation of Muslims in terrorism—controlling for just about anything you like, income, education, age etc.—really does suggest that, at least at this point in history, there is some real ideological link between Islam and terrorism. But the fact remains that the vast majority of Muslims are not terrorists and do not support terrorism, and antagonizing all the people of an entire religion is fundamentally unjust as well as likely to backfire in various ways. We should instead be trying to encourage the spread of more tolerant forms of Islam, and maintaining the strict boundaries of secularism to prevent the encroach of any religion on our system of government.

8. The fact that US military hegemony does seem to be a cause of global peace doesn’t imply that every single military intervention by the US is justified. In fact, it doesn’t even necessarily imply that any such interventions are justified—though I think one would be hard-pressed to say that the NATO intervention in the Kosovo War or the defense of Kuwait in the Gulf War was unjustified. It merely points out that having a hegemon is clearly preferable to having a multipolar world where many countries jockey for military supremacy. The Pax Romana was a time of peace but also authoritarianism; the Pax Americana is better, but that doesn’t prevent us from criticizing the real harms—including major war crimes—committed by the United States.

So it is entirely possible to know and understand these facts without adopting far-right political views.

Yet Pinker’s point—and mine—is that by suppressing these true facts, by responding with hostility or even ostracism to anyone who states them, we are actually adding fuel to the far-right fire. Instead of presenting the nuanced truth and explaining why it doesn’t imply such radical policies, we attack the messenger; and this leads people to conclude three things:

1. The left wing is willing to lie and suppress the truth in order to achieve political goals (they’re doing it right now).

2. These statements actually do imply right-wing conclusions (else why suppress them?).

3. Since these statements are true, that must mean the right-wing conclusions are actually correct.

Now (especially if you are someone who identifies unironically as “woke”), you might be thinking something like this: “Anyone who can be turned away from social justice so easily was never a real ally in the first place!”

This is a fundamentally and dangerously wrongheaded view. No one—not me, not you, not anyone—was born believing in social justice. You did not emerge from your mother’s womb ranting against colonalist imperialism. You had to learn what you now know. You came to believe what you now believe, after once believing something else that you now think is wrong. This is true of absolutely everyone everywhere. Indeed, the better you are, the more true it is; good people learn from their mistakes and grow in their knowledge.

This means that anyone who is now an ally of social justice once was not. And that, in turn, suggests that many people who are currently not allies could become so, under the right circumstances. They would probably not shift all at once—as I didn’t, and I doubt you did either—but if we are welcoming and open and honest with them, we can gradually tilt them toward greater and greater levels of support.

But if we reject them immediately for being impure, they never get the chance to learn, and we never get the chance to sway them. People who are currently uncertain of their political beliefs will become our enemies because we made them our enemies. We declared that if they would not immediately commit to everything we believe, then they may as well oppose us. They, quite reasonably unwilling to commit to a detailed political agenda they didn’t understand, decided that it would be easiest to simply oppose us.

And we don’t have to win over every person on every single issue. We merely need to win over a large enough critical mass on each issue to shift policies and cultural norms. Building a wider tent is not compromising on your principles; on the contrary, it’s how you actually win and make those principles a reality.

There will always be those we cannot convince, of course. And I admit, there is something deeply irrational about going from “those leftists attacked Charles Murray” to “I think I’ll start waving a swastika”. But humans aren’t always rational; we know this. You can lament this, complain about it, yell at people for being so irrational all you like—it won’t actually make people any more rational. Humans are tribal; we think in terms of teams. We need to make our team as large and welcoming as possible, and suppressing Pinker Propositions is not the way to do that.

You know what? Let’s repeal Obamacare. Here’s my replacement.

Feb 18 JDN 2458168

By all reasonable measures, Obamacare has been a success. Healthcare costs are down but coverage rates are up. It reduced both the federal deficit and after-tax income inequality.

But Republicans have hated it the whole time, and in particular the individual mandate provision has always been unpopular. Under the Trump administration, the individual mandate has now been repealed.

By itself, this can only be disastrous. It threatens to undermine all the successes of the entire Obamacare system. Without the individual mandate, covering pre-existing conditions means that people can simply wait to get insurance until they need it—at which point it’s not insurance anymore. The risks stop being shared and end up concentrated on whoever gets sick, then we go back to people going bankrupt because they were unlucky enough to get cancer. The individual mandate was vital to making Obamacare work.

But I do actually understand why the individual mandate is unpopular: Nobody likes being forced into buying anything.

John Roberts ruled that the individual mandate was Constitutional on the grounds that it is economically equivalent to a tax. This is absolutely correct, and I applaud his sound reasoning.

That said, the individual mandate is not in fact psychologically equivalent to a tax.

Psychologically, being forced to specifically buy something or face punishment feels a lot more coercive than simply owing a certain amount of money that the government will use to buy something. Roberts is right; economically, these two things are equivalent. The same real goods get purchased, at the same people’s expense; the accounts balance in the same way. But it feels different.

And it would feel different to me too, if I were required to actually shop for that particular avionic component on that Apache helicopter my taxes paid for, or if I had to write a check for that particular section of Highway 405 that my taxes helped maintain. Yes, I know that I give the government a certain amount of money that they spent on salaries for US military personnel; but I’d find it pretty weird if they required me to actually hand over the money in cash to some specific Marine. (On the other hand, this sort of thing might actually give people a more visceral feel for the benefits of taxes, much as microfinance agencies like to show you the faces of particular people as you give them loans, whether or not those people are actually the ones getting your money.)

There’s another reason it feels different as well: We have framed the individual mandate as a penalty, as a loss. Human beings are loss averse; losing $10 feels about twice as bad as not getting $10. That makes the mandate more unpleasant, hence more unpopular.

What could we do instead? Well, obviously, we could implement a single-payer healthcare system like we already have in Medicare, like they have in Canada and the UK, or like they have in Scandinavia (#ScandinaviaIsBetter). And that’s really what we should do.

But since that doesn’t seem to be on the table right now, here’s my compromise proposal. Okay, yes, let’s repeal Obamacare. No more individual mandate. No fines for not having health insurance.

Here’s what we would do instead: You get a bonus refundable tax credit for having health insurance.

We top off the income tax rate to adjust so that revenue ends up the same.

Say goodbye to the “individual mandate” and welcome the “health care bonus rebate”.

Most of you reading this are economically savvy enough to realize that’s the same thing. If I tax you $100, then refund $100 if you have health insurance, that’s completely equivalent to charging you a fine of $100 if you don’t have health insurance.

But it doesn’t feel the same to most people. A fine feels like a punishment, like a loss. It hurts more than a mere foregone bonus, and it contains an element of disapproval and public shame.

Whereas, we forgo refundable tax credits all the time. You’ve probably forgone dozens of refundable tax credits you could have gotten, either because you didn’t know about them or because you realized they weren’t worth it to you.

Now instead of the government punishing you for such a petty crime as not having health insurance, the government is rewarding you for the responsible civic choice of having health insurance. We have replaced a mean, vindictive government with a friendly, supportive government.

Positive reinforcement is more reliable anyway. (Any child psychologist will tell you that while punishment is largely ineffective and corporal punishment is outright counterproductive, reward systems absolutely do work.) Uptake of health insurance should be at least as good as before, but the policy will be much more popular.

It’s a very simple change to make. It could be done in a single tax bill. Economically, it makes no difference at all. But psychologically—and politically—it could make all the difference in the world.

Unpaid work and the double burden

Apr 16, JDN 2457860

When we say the word “work”, what leaps to mind is usually paid work in the formal sector—the work people do for employers. When you “go to work” each morning, you are going to do your paid work in the formal sector.

But a large quantity of the world’s labor does not take this form. First, there is the informal sectorwork done for cash “under the table”, where there is no formal employment structure and often no reporting or payment of taxes. Many economists estimate that the majority of the world’s workers are employed in the informal sector. The ILO found that informal employment comprises as much as 70% of employment in some countries. However, it depends how you count: A lot of self-employment could be considered either formal or informal. If you base it on whether you do any work outside an employer-employee relationship, informal sector work is highly prevalent around the world. If you base it on not reporting to the government to avoid taxes, informal sector work is less common. If it must be your primary source of income, whether or not you pay taxes, informal sector work is uncommon. And if you only include informal sector work when it is your primary income source and not reported to the government, informal sector work is relatively rare and largely restricted to underdeveloped countries.

But that’s not really my focus for today, because you at least get paid in the informal sector. Nor am I talking about forced laborthat is, slavery, essentially—which is a serious human rights violation that sadly still goes on in many countries.

No, the unpaid work I want to talk about today is work that people willingly do for free.

I’m also excluding internships and student work, where (at least in theory) the idea is that instead of getting paid you are doing the work in order to acquire skills and experience that will be valuable to you later on. I’m talking about work that you do for its own sake.

Such work can be divided into three major categories.
First there is vocation—the artist who would paint even if she never sold a single canvas; the author who is compelled to write day and night and would give the books away for free. Vocation is work that you do for fun, or because it is fulfilling. It doesn’t even feel like “work” in quite the same sense. For me, writing and research are vocation, at least in part; even if I had $5 million in stocks I would still do at least some writing and research as part of what gives my life meaning.

Second there is volunteering—the soup kitchen, the animal shelter, the protest march. Volunteering is work done out of altruism, to help other people or work toward some greater public goal. You don’t do it for yourself, you do it for others.

Third, and really my main focus for this post, is domestic labor—vacuuming the rug, mopping the floor, washing the dishes, fixing the broken faucet, changing the baby’s diapers. This is generally not work that anyone finds particularly meaningful or fulfilling, nor is it done out of any great sense of altruism (perhaps toward your own family, but that’s about the extent of it). But you also don’t get paid to do it. You do it because it must be done.

There is also considerable overlap, of course: Many people find meaning in their activism or charitable work, and part of what motivates artists and authors is a desire to change the world.

Vocation is ultimately what I would like to see the world move towards. One of the great promises of a basic income is that it might finally free us from the grind of conventional employment that has gripped us ever since we first managed to escape the limitations of subsistence farming—which in turn gripped us ever since we escaped the desperation of hunter-gatherer survival. The fourth great stage in human prosperity might finally be a world where we can work not for food or for pay, but for meaning. A world of musicians and painters, of authors and playwrights, of sculptors and woodcutters, yes; but also a world of cinematographers and video remixers, of 3D modelers and holographers, of VR designers and video game modders. If you ever fret that no work would be done without the constant pressure of the wage incentive, spend some time on Stack Overflow or the Steam Workshop. People will spend hundreds of person-hours at extremely high-skill tasks—I’m talking AI programming and 3D modeling here—not for money but for fun.

Volunteering is frankly kind of overrated; as the Effective Altruism community will eagerly explain to you any chance they get, it’s usually more efficient for you to give money rather than time, because money is fungible while giving your time only makes sense if your skills are actually the ones that the project needs. If this criticism of so much well-intentioned work sounds petty, note that literally thousands of lives would be saved each year if instead of volunteering people donated an equivalent amount of money so that charities could hire qualified workers instead. Unskilled volunteers and donations of useless goods after a disaster typically cause what aid professionals call the “second disaster”. Still, people do find meaning in volunteering, and there is value in that; and also there are times when you really are the best one to do it, particularly when it comes to local politics.

But what should we do with domestic labor?

Some of it can and will be automated away—the Parable of the Dishwasher with literal dishwashers. But it will be awhile before it all can, and right now it’s still a bit expensive. Maybe instead of vacuuming I should buy a Roomba—but $500 feels like a lot of money right now.

Much domestic labor we could hire out to someone else, but we simply choose not to. I could always hire someone to fix my computer, unclog my bathtub, or even mop my floors; I just don’t because it seems too expensive.
From the perspective of an economist, it’s actually a bit odd that it seems too expensive. I might have a comparative advantage in fixing my computer—it’s mine, after all, so I know its ins and outs, and while I’m no hotshot Google admin I am a reasonably competent programmer and debugger in my own right. And while for many people auto repair is a household chore, I do actually hire auto mechanics; I don’t even change my own oil, though partly that’s because my little Smart has an extremely compact design that makes it hard to work on. But I surely have no such comparative advantage in cleaning my floors or unclogging my pipes; so why doesn’t it seem worth it to hire someone else to do that?

Maybe I’m being irrational; hiring a cleaning service isn’t that expensive after all. I could hire a cleaning service to do my whole apartment for something like $80, and if I scheduled a regular maid it would probably be something like that per month. That’s what I would charge for two hours of tutoring, so maybe it would behoove me to hire a maid and spend that extra time tutoring or studying.

Or maybe it’s this grad student budget of mine; money is pretty tight at the moment, as I go through this strange societal ritual where young adults go through a period of near-poverty, overwhelming workload and constant anxiety not in spite but because we are so intelligent and hard-working. Perhaps if and when I get that $70,000 job as a professional economist my marginal utility of wealth will decrease and I will feel more inclined to hire maid services.

There are also transaction costs I save on by doing the work myself. A maid would have to commute here, first of all, reducing the efficiency gains from their comparative advantage in the work; but more than that, there’s a lot of effort I’d have to put in just to prepare for the maid and deal with any problems that might arise. There are scheduling issues, and the work probably wouldn’t get done as quickly unless I were to spend enough to hire a maid on a regular basis. There’s also a psychological cost in comfort and privacy to dealing with a stranger in one’s home, and a small but nontrivial risk that the maid might damage or steal something important.

But honestly it might be as simple as social norms (remember: to a first approximation, all human behavior is social norms). Regardless of whether or not it is affordable, it feels strange to hire a maid. That’s the sort of thing only rich, decadent people do. A responsible middle-class adult is supposed to mop their own floors and do their own laundry. Indeed, while hiring a plumber or an auto mechanic feels like paying for a service, hiring a maid crosses a line and feels like hiring a servant. (I honestly always feel a little awkward around the gardeners hired by our housing development for that reason. I’m only paying them indirectly, but there’s still this vague sense that they are somehow subservient—and surely, we are of quite distinct socioeconomic classes. Maybe it would help if I brushed up on my Spanish and got to know them better?)

And then there’s the gender factor. Being in a same-sex couple household changes the domestic labor dynamic quite a bit relative to the conventional opposite-sex couple household. Even in ostensibly liberal, feminist, egalitarian households, and even when both partners are employed full-time, it usually ends up being the woman who does most of the housework. This is true in the US; it is true in the UK; it is true in Europe; indeed it’s true in most if not all countries around the world, and, unsurprisingly, it is worst in India, where women spend a whopping five hours per day more on housework than men. (I was not surprised by the fact that Japan and China also do poorly, given their overall gender norms; but I’m a bit shocked at how badly Ireland and Italy do on this front.) And yes, while #ScandinaviaIsBetter, still in Sweden and Norway women spend half an hour to an hour more on housework on an average day than men.

Which, of course, supports the social norm theory. Any time you see both an overwhelming global trend against women and considerable cross-country variation within that trend, your first hypothesis should be sexism. Without the cross-country variation, maybe it could be biology—the sex differences in height and upper-body strength, for example, are pretty constant across countries. But women doing half an hour more in Norway but five hours more in India looks an awful lot like sexism.

This is called the double burden: To meet the social norms of being responsible middle-class adults, men are merely expected to work full-time at a high-paying job, but women are expected to do both the full effort of maintaining a household and the full effort of working at a full-time job. This is surely an improvement over the time when women were excluded from the formal workforce, not least because of the financial freedom that full-time work affords many women; but it would be very nice if we could also find a way to share some of that domestic burden as well. There has been some trend toward a less unequal share of housework as more women enter the workforce, but it still has a long way to go, even in highly-developed countries.

So, we can start by trying to shift the social norm that housework is gendered: Women clean the floors and change the diapers, while men fix the car and paint the walls. Childcare in particular is something that should be done equally by all parents, and while it’s plausible that one person may be better or worse at mopping or painting, it strains credulity to think that it’s always the woman who is better at mopping and the man who is better at painting.

Yet perhaps this is a good reason to try to shift away from another social norm as well, the one where only rich people hire maids and maids are servants. Unfortunately, it’s likely that most maids will continue to be women for the foreseeable future—cleaning services are gendered in much the same way that nursing and childcare are gendered. But at least by getting paid to clean, one can fulfill the “job” norm and the “housekeeping” norm in one fell swoop; and then women who are in other professions can carry only one burden instead of two. And if we can begin to think of cleaning services as more like plumbing and auto repair—buying a service, not hiring a servant—this is likely to improve the condition and social status of a great many maids. I doubt we’d ever get to the point where mopping floors is as prestigious as performing neurosurgery, but maybe we can at least get to the point where being a maid is as respectable as being a plumber. Cleaning needs done; it shouldn’t be shameful to be someone who is very good at doing it and gets paid to do so. (That is perhaps the most pernicious aspect of socioeconomic class, this idea that some jobs are “shameful” because they are done by workers with less education or involve more physical labor.)
This also makes good sense in terms of economic efficiency: Your comparative advantage is probably not in cleaning services, or if it is then perhaps you should do that as a career. So by selling your labor at whatever you are good at and then buying the services of someone who is especially good at cleaning, you should, at least in theory, be able to get the same cleaning done and maintain the same standard of living for yourself while also accomplishing more at whatever it is you do in your profession and providing income for whomever you hire to do the cleaning.

So, should I go hire a cleaning service after all? I don’t know, that still sounds pretty expensive.

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.

The high cost of frictional unemployment

Sep 3, JDN 2457635

I had wanted to open this post with an estimate of the number of people in the world, or at least in the US, who are currently between jobs. It turns out that such estimates are essentially nonexistent. The Bureau of Labor Statistics maintains a detailed database of US unemployment; they don’t estimate this number. We have this concept in macroeconomics of frictional unemployment, the unemployment that results from people switching jobs; but nobody seems to have any idea how common it is.

I often hear a ballpark figure of about 4-5%, which is related to a notion that “full employment” should really be about 4-5% unemployment because otherwise we’ll trigger horrible inflation or something. There is almost no evidence for this. In fact, the US unemployment rate has gotten as low as 2.5%, and before that was stable around 3%. This was during the 1950s, the era of the highest income tax rates ever imposed in the United States, a top marginal rate of 92%. Coincidence? Maybe. Obviously there were a lot of other things going on at the time. But it sure does hurt the argument that high income taxes “kill jobs”, don’t you think?

Indeed, it may well be that the rate of frictional unemployment varies all the time, depending on all sorts of different factors. But here’s what we do know: Frictional unemployment is a serious problem, and yet most macroeconomists basically ignore it.

Talk to most macroeconomists about “unemployment”, and they will assume you mean either cyclical unemployment (the unemployment that results from recessions and bad fiscal and monetary policy responses to them), or structural unemployment (the unemployment that results from systematic mismatches between worker skills and business needs). If you specifically mention frictional unemployment, the response is usually that it’s no big deal and there’s nothing we can do about it anyway.

Yet at least when we aren’t in a recession, frictional employment very likely accounts for the majority of unemployment, and thus probably the majority of misery created by unemployment. (Not necessarily, since it probably doesn’t account for much long-term unemployment, which is by far the worst.) And it is quite clear to me that there are things we can do about it—they just might be difficult and/or expensive.

Most of you have probably changed jobs at least once. Many of you have, like me, moved far away to a new place for school or work. Think about how difficult that was. There is the monetary cost, first of all; you need to pay for the travel of course, and then usually leases and paychecks don’t line up properly for a month or two (for some baffling and aggravating reason, UCI won’t actually pay me my paychecks until November, despite demanding rent starting the last week of July!). But even beyond that, you are torn from your social network and forced to build a new one. You have to adapt to living in a new place which may have differences in culture and climate. Bureaucracy often makes it difficult to change over documentation of such as your ID and your driver’s license.

And that’s assuming that you already found a job before you moved, which isn’t always an option. Many people move to new places and start searching for jobs when they arrive, which adds an extra layer of risk and difficulty above and beyond the transition itself.

With all this in mind, the wonder is that anyone is willing to move at all! And this is probably a large part of why people are so averse to losing their jobs even when it is clearly necessary; the frictional unemployment carries enormous real costs. (That and loss aversion, of course.)

What could we do, as a matter of policy, to make such transitions easier?

Well, one thing we could do is expand unemployment insurance, which reduces the cost of losing your job (which, despite the best efforts of Republicans in Congress, we ultimately did do in the Second Depression). We could expand unemployment insurance to cover voluntary quits. Right now, quitting voluntarily makes you forgo all unemployment benefits, which employers pay for in the form of insurance premiums; so an employer is much better off making your life miserable until you quit than they are laying you off. They could also fire you for cause, if they can find a cause (and usually there’s something they could trump up enough to get rid of you, especially if you’re not prepared for the protracted legal battle of a wrongful termination lawsuit). The reasoning of our current system appears to be something like this: Only lazy people ever quit jobs, and why should we protect lazy people? This is utter nonsense and it needs to go. Many states already have no-fault divorce and no-fault auto collision insurance; it’s time for no-fault employment termination.

We could establish a basic income of course; then when you lose your job your income would go down, but to a higher floor where you know you can meet certain basic needs. We could provide subsidized personal loans, similar to the current student loan system, that allow people to bear income gaps without losing their homes or paying exorbitant interest rates on credit cards.

We could use active labor market programs to match people with jobs, or train them with the skills needed for emerging job markets. Denmark has extensive active labor market programs (they call it “flexicurity”), and Denmark’s unemployment rate was 2.4% before the Great Recession, hit a peak of 6.2%, and has now recovered to 4.2%. What Denmark calls a bad year, the US calls a good year—and Greece fantasizes about as something they hope one day to achieve. #ScandinaviaIsBetter once again, and Norway fits this pattern also, though to be fair Sweden’s unemployment rate is basically comparable to the US or even slightly worse (though it’s still nothing like Greece).

Maybe it’s actually all right that we don’t have estimates of the frictional unemployment rate, because the goal really isn’t to reduce the number of people who are unemployed; it’s to reduce the harm caused by unemployment. Most of these interventions would very likely increase the rate frictional unemployment, as people who always wanted to try to find better jobs but could never afford to would now be able to—but they would dramatically reduce the harm caused by that unemployment.

This is a more general principle, actually; it’s why we should basically stop taking seriously this argument that social welfare benefits destroy work incentives. That may well be true; so what? Maximizing work incentives was never supposed to be a goal of public policy, as far as I can tell. Maximizing human welfare is the goal, and the only way a welfare program could reduce work incentives is by making life better for people who aren’t currently working, and thereby reducing the utility gap between working and not working. If your claim is that the social welfare program (and its associated funding mechanism, i.e. taxes, debt, or inflation) would make life sufficiently worse for everyone else that it’s not worth it, then say that (and for some programs that might actually be true). But in and of itself, making life better for people who don’t work is a benefit to society. Your supposed downside is in fact an upside. If there’s a downside, it must be found elsewhere.

Indeed, I think it’s worth pointing out that slavery maximizes work incentives. If you beat or kill people who don’t work, sure enough, everyone works! But that is not even an efficient economy, much less a just society. To be clear, I don’t think most people who say they want to maximize work incentives would actually support slavery, but that is the logical extent of the assertion. (Also, many Libertarians, often the first to make such arguments, do have a really bizarre attitude toward slavery; taxation is slavery, regulation is slavery, conscription is slavery—the last not quite as ridiculous—but actual forced labor… well, that really isn’t so bad, especially if the contract is “voluntary”. Fortunately some Libertarians are not so foolish.) If your primary goal is to make people work as much as possible, slavery would be a highly effective way to achieve that goal. And that really is the direction you’re heading when you say we shouldn’t do anything to help starving children lest their mothers have insufficient incentive to work.

More people not working could have a downside, if it resulted in less overall production of goods. But even in the US, one of the most efficient labor markets in the world, the system of job matching is still so ludicrously inefficient that people have to send out dozens if not hundreds of applications to jobs they barely even want, and there are still 1.4 times as many job seekers as there are openings (at the trough of the Great Recession, the ratio was 6.6 to 1). There’s clearly a lot of space here to improve the matching efficiency, and simply giving people more time to search could make a big difference there. Total output might decrease for a little while during the first set of transitions, but afterward people would be doing jobs they want, jobs they care about, jobs they’re good at—and people are vastly more productive under those circumstances. It’s quite likely that total employment would decrease, but productivity would increase so much that total output increased.

Above all, people would be happier, and that should have been our goal all along.

What Brexit means for you, Britain, and the world

July 6, JDN 2457576

It’s a stupid portmanteau, but it has stuck, so I guess I’ll suck it up and use the word “Brexit” to refer to the narrowly-successful referendum declaring that the United Kingdom will exit the European Union.

In this post I’ll try to answer one of the nagging questions that was the most googled question in the UK after the vote was finished: “What does it mean to leave the EU?”

First of all, let’s answer the second-most googled question: “What is the EU?”

The European Union is one of those awkward international institutions, like the UN, NATO, and the World Bank, that doesn’t really have a lot of actual power, but is meant to symbolize international unity and ultimately work toward forming a more cohesive international government. This is probably how people felt about national government maybe 500 years ago, when feudalism was the main system of government and nation-states hadn’t really established themselves yet. Oh, sure, there’s a King of England and all that; but what does he really do? The real decisions are all made by the dukes and the earls and whatnot. Likewise today, the EU and NATO don’t really do all that much; the real decisions are made by the UK and the US.

The biggest things that the EU does are all economic; it creates a unified trade zone called the single market that is meant to allow free movement of people and goods between countries in Europe with little if any barrier. The ultimate goal was actually to make it as unified as internal trade within the United States, but it never quite made it that far. More realistically, it’s like NAFTA, but more so, and with ten times as many countries (yet, oddly enough, almost exactly the same number of people). Starting in 1999, the EU also created the Euro, a unified national currency, which to this day remains one of the world’s strongest, most stable currencies—right up there with the dollar and the pound.

Wait, the pound? Yes, the pound. While the UK entered the EU, they did not enter the Eurozone, and therefore retained their own national currency rather than joining the Euro. One of the first pieces of fallout from Brexit was a sudden drop in the pound’s value as investors around the world got skittish about the UK’s ability to support its current level of trade.
There are in fact several layers of “EU-ness”, if you will, several levels of commitment to the project of the European Union. The strongest commitment is from the Inner Six, the six founding countries (Belgium, France, the Netherlands, Luxembourg, Italy, and Germany), followed by the aforementioned Eurozone, followed by the Schengen Area (which bans passport controls among citizens of member countries), followed by the EU member states as a whole, followed by candidate states (such as Turkey), which haven’t joined yet but are trying to. The UK was never all that fully committed to the EU to begin with; they aren’t even in the Schengen Area, much less the Eurozone. So by this vote, the UK is essentially saying that they’d dipped their toes in the water, and it was too cold, so they’re going home.

Despite the fear of many xenophobic English people (yes, specifically English—Scotland and Northern Ireland overwhelmingly voted against leaving the EU), the EU already had very little control over the UK. Though I suppose they will now have even less.

Countries in the Eurozone were subject to a lot more control, via the European Central Bank controlling their money supply. The strong Euro is great for countries like Germany and France… and one of the central problems facing countries like Portugal and Greece. Strong currencies aren’t always a good thing—they cause trade deficits. And Greece has so little influence over European monetary policy that it’s essentially as if they were pegged to someone else’s currency. But the UK really can’t use this argument, because they’ve stayed on the pound all along.

The real question is what’s going to happen to the UK’s participation in the single market. I can outline four possible scenarios, from best to worst:

  1. Brexit doesn’t actually happen: Parliament could use (some would say “abuse”) their remaining authority to override the referendum and keep the UK in the EU. After a brief period of uncertainty, everything returns to normal. Probably the best outcome, but fairly unlikely, and rather undemocratic. Probability: 10%
  2. The single market is renegotiated, making Brexit more bark than bite: At this point, a more likely way for the UK to stop the bleeding would be to leave the EU formally, but renegotiate all the associated treaties and trade agreements so that most of the EU rules about free trade, labor standards, environmental regulations, and so on actually remain in force. This would result in a brief recession in the UK as policies take time to be re-established and markets are overwhelmed by uncertainty, but its long-term economic trajectory would remain the same. The result would be similar to the current situation in Norway, and hey, #ScandinaviaIsBetter. Probability: 40%
  3. Brexit is fully carried out, but the UK remains whole: If UKIP attains enough of a mandate and a majority coalition in Parliament, they could really push through their full agenda of withdrawing from European trade. If this happens, the UK would withdraw from the single market and could implement any manner of tariffs, quotas, and immigration restrictions. Hundreds of thousands of Britons living in Europe and Europeans living in Britain would be displaced. Trade between the UK and EU would dry up. Krugman argues that it won’t be as bad as the most alarmist predictions, but it will still be pretty bad—and he definitely should know, since this is the sort of thing he got a Nobel for. The result would be a severe recession, with an immediate fall in UK GDP of somewhere between 2% and 4%, and a loss of long-run potential GDP between 6% and 8%. (For comparison, the Great Recession in the US was a loss of about 5% of GDP over 2 years.) The OECD has run a number of models on this, and the Bank of England is especially worried because they have little room to lower interest rates to fight such a recession. Their best bet would probably be to print an awful lot of pounds, but with the pound already devalued and so much national pride wrapped up in the historical strength of the pound, that seems unlikely. The result would therefore be a loss of about $85 billion in wealth immediately and more like $200 billion per year in the long run—for basically no reason. Sadly, this is the most likely scenario. Probability: 45%
  4. Balkanization of the UK: As I mentioned earlier, Scotland and Northern Ireland overwhelmingly voted against Brexit, and want no part of it. As a result, they have actually been making noises about leaving the UK if the UK decides to leave the EU. The First Minister of Scotland has proposed an “independence referendum” on Scotland leaving the UK in order to stay in the EU, and a grassroots movement in Northern Ireland is pushing for unification of all of Ireland in order to stay in the EU with the Republic of Ireland. This sort of national shake-up is basically unprecedented; parts of one state breaking off in order to stay in a larger international union? The closest example I can think of is West Germany and East Germany splitting to join NATO and the Eastern Bloc respectively, and I think we all know how well that went for East Germany. But really this is much more radical than that. NATO was a military alliance, not an economic union; nuclear weapons understandably make people do drastic things. Moreover, Germany hadn’t unified in the first place until Bismark in 1871, and thus was less than a century old when it split again. Scotland joined England to form the United Kingdom in 1707, three centuries ago, at a time when the United States didn’t even exist—indeed, George Washington hadn’t even been born. Scotland leaving the UK to stay with the EU would be like Texas leaving the US to stay in NAFTA—nay, more like Massachusetts doing that, because Scotland was a founding member of the UK and Texas didn’t become a state until 1845. While Scotland might actually be better off this way than if they go along with Brexit (and England of course even worse), this Balkanization would cast a dark shadow over all projects of international unification for decades to come, at a level far beyond what any mere Brexit could do. It would essentially mean declaring that all national unity is up for grabs, there is no such thing as a permanently unified state. I never thought I would see such a policy even being considered, much less passed; but I can’t be sure it won’t happen. My best hope is that Scotland can use this threat to keep the UK in the EU, or at least in the single market—but what if UKIP calls their bluff? Probability: 5%

Options 2 and 3 are the most likely, and actually there are intermediate cases between them; they could only implement immigration restrictions but not tariffs, for example, and that would lessen the economic fallout but still displace hundreds of thousands of people. They could only remove a few of the most stringent EU regulations, but still keep most of the good ones; that wouldn’t be so bad. Or they could be idiots and remove the good regulations (like environmental sustainability and freedom of movement) while keeping the more questionable ones (like the ban on capital controls).

Only time will tell, and the most important thing to keep in mind here is that trade is nonzero-sum. If and when England loses that $200 billion per year in trade, where will it go? Nowhere. It will disappear. That wealth—about enough to end world hunger—will simply never be created, because xenophobia reintroduced inefficiencies into the global market. Yes, it might not all disappear—Europe’s scramble for import sources and export markets could lead to say $50 billion per year in increased US trade, for example, because we’re the obvious substitute—but the net effect on the whole world will almost certainly be negative. The world will become poorer, and Britain will feel it the most.

Still, like most economists there is another emotion I’m feeling besides “What have they done!? This is terrible!”; there’s another part of my brain saying, “Wow, this is an amazing natural experiment in free trade!” Maybe the result will be bad enough to make people finally wake up about free trade, but not bad enough to cause catastrophic damage. If nothing else, it’ll give economists something to work on for years.