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.

Should we give up on growth?

JDN 2457572

Recently I read this article published by the Post Carbon Institute, “How to Shrink the Economy without Crashing It”, which has been going around environmentalist circles. (I posted on Facebook that I’d answer it in more detail, so here goes.)

This is the far left view on climate change, which is wrong, but not nearly as wrong as even the “mainstream” right-wing view that climate change is not a serious problem and we should continue with business as usual. Most of the Republicans who ran for President this year didn’t believe in using government action to fight climate change, and Donald Trump doesn’t even believe it exists.
This core message of the article is clearly correct:

We know this because Global Footprint Network, which methodically tracks the relevant data, informs us that humanity is now using 1.5 Earths’ worth of resources.

We can temporarily use resources faster than Earth regenerates them only by borrowing from the future productivity of the planet, leaving less for our descendants. But we cannot do this for long.

To be clear, “using 1.5 Earths” is not as bad as it sounds; spending is allow to exceed income at times, as long as you have reason to think that future income will exceed future spending, and this is true not just of money but also of natural resources. You can in fact “borrow from the future”, provided you do actually have a plan to pay it back. And indeed there has been some theoretical work by environmental economists suggesting that we are rightly still in the phase of net ecological dissaving, and won’t enter the phase of net ecological saving until the mid-21st century when our technology has made us two or three times as productive. This optimal path is defined by a “weak sustainability” condition where total real wealth never falls over time, so any natural wealth depleted is replaced by at least as much artificial wealth.

Of course some things can’t be paid back; while forests depleted can be replanted, if you drive species to extinction, only very advanced technology could restore them. And we are driving thousands of species to extinction every single year. Even if we should be optimally dissaving, we are almost certainly depleting natural resources too fast, and depleting natural resources that will be difficult if not impossible to later restore. In that sense, the Post Carbon Institute is right: We must change course toward ecological sustainability.

Unfortunately, their specific ideas of how to do so leave much to be desired. Beyond ecological sustainability, they really argue for two propositions: one is radical but worth discussing, but the other is totally absurd.

The absurd claim is that we should somehow force the world to de-urbanize and regress into living in small farming villages. To show this is a bananaman and not a strawman, I quote:

8. Re-localize. One of the difficulties in the transition to renewable energy is that liquid fuels are hard to substitute. Oil drives nearly all transportation currently, and it is highly unlikely that alternative fuels will enable anything like current levels of mobility (electric airliners and cargo ships are non-starters; massive production of biofuels is a mere fantasy). That means communities will be obtaining fewer provisions from far-off places. Of course trade will continue in some form: even hunter-gatherers trade. Re-localization will merely reverse the recent globalizing trade trend until most necessities are once again produced close by, so that we—like our ancestors only a century ago—are once again acquainted with the people who make our shoes and grow our food.

9. Re-ruralize. Urbanization was the dominant demographic trend of the 20th century, but it cannot be sustained. Indeed, without cheap transport and abundant energy, megacities will become increasingly dysfunctional. Meanwhile, we’ll need lots more farmers. Solution: dedicate more societal resources to towns and villages, make land available to young farmers, and work to revitalize rural culture.

First of all: Are electric cargo ships non-starters? The Ford-class aircraft carrier is electric, specifically nuclear. Nuclear-powered cargo ships would raise a number of issues in terms of practicality, safety, and regulation, but they aren’t fundamentally infeasible. Massive efficient production of biofuels is a fantasy as long as the energy to do it is provided by coal power, but not if it’s provided by nuclear. Perhaps this author’s concept of “infeasible” really just means “infeasible if I can’t get over my irrational fear of nuclear power”. Even electric airliners are not necessarily out of the question; NASA has been experimenting with electric aircraft.

The most charitable reading I can give of this (in my terminology of argument “men”, I’m trying to make a banana out of iron), is as promoting slightly deurbanizing and going back to more like say the 1950s United States, with 64% of people in cities instead of 80% today. Even then this makes less than no sense, as higher urbanization is associated with lower per-capita ecological impact, which frankly shouldn’t even be surprising because cities have such huge economies of scale. Instead of everyone needing a car to get around in the suburbs, we can all share a subway system in the city. If that subway system is powered by a grid of nuclear, solar, and wind power, it could produce essentially zero carbon emissions—which is absolutely impossible for rural or suburban transportation. Urbanization is also associated with slower population growth (or even population decline), and indeed the reason population growth is declining is that rising standard of living and greater urbanization have reduced birth rates and will continue to do so as poor countries reach higher levels of development. Far from being a solution to ecological unsustainability, deurbanization would make it worse.

And that’s not even getting into the fact that you would have to force urban white-collar workers to become farmers, because if we wanted to be farmers we already would be (the converse is not as true), and now you’re actually talking about some kind of massive forced labor-shift policy like the Great Leap Forward. Normally I’m annoyed when people accuse environmentalists of being totalitarian communists, but in this case, I think the accusation might be onto something.

Moving on, the radical but not absurd claim is that we must turn away from economic growth and even turn toward economic shrinkage:

One way or another, the economy (and here we are talking mostly about the economies of industrial nations) must shrink until it subsists on what Earth can provide long-term.

[…]

If nothing is done deliberately to reverse growth or pre-adapt to inevitable economic stagnation and contraction, the likely result will be an episodic, protracted, and chaotic process of collapse continuing for many decades or perhaps centuries, with innumerable human and non-human casualties.

I still don’t think this is right, but I understand where it’s coming from, and like I said it’s worth talking about.

The biggest mistake here lies in assuming that GDP is directly correlated to natural resource depletion, so that the only way to reduce natural resource depletion is to reduce GDP. This is not even remotely true; indeed, countries vary almost as much in their GDP-per-carbon-emission ratio as they do in their per-capita GDP. As usual, #ScandinaviaIsBetter; Norway and Sweden produce about $8,000 in GDP per ton of carbon, while the US produces only about $2,000 per ton. Both poor and rich countries can be found among both the inefficient and the efficient. Saudi Arabia is very rich and produces about $900 per ton, while Liberia is exceedingly poor and produces about $800 per ton. I already mentioned how Norway produces $8,000 per ton, and they are as rich as Saudi Arabia. Yet above them is Mali, which produces almost $11,000 per ton, and is as poor as Liberia. Other notable facts: France is head and shoulders above the UK and Germany at almost $6000 per ton instead of $4300 and $3600 respectively—because France runs almost entirely on nuclear power.

So the real conclusion to draw from this is not that we need to shrink GDP, but that we need to make GDP more like how they do it in Norway or at least how they do it in France, rather than how we do in the US, and definitely not how they do it in Saudi Arabia. Total world emissions are currently about 36 billion tons per year, producing about $108 trillion in GDP, averaging about $3,000 of GDP per ton of carbon emissions. If we could raise the entire world to the ecological efficiency of Norway, we could double world GDP and still be producing less CO2 than we currently are. Turning the entire planet into a bunch of Norways would indeed raise CO2 output, by about a factor of 2; but it would raise standard of living by a factor of 5, and indeed bring about a utopian future with neither war nor hunger. Compare this to the prospect of cutting world GDP in half, but producing it as inefficiently as in Saudi Arabia: This would actually increase global CO2 emissions, almost as much as turning every country into Norway.

But ultimately we will in fact need to slow down or even end economic growth. I ran a little model for you, which shows a reasonable trajectory for global economic growth.

This graph shows the growth rate in productivity slowly declining, along with a much more rapidly declining GDP growth:

Solow_growth

This graph shows the growth trajectory for total real capital and GDP:

Solow_capital

And finally, this is the long-run trend for GDP graphed on a log scale:

Solow_logGDP

The units are arbitrary, though it’s not unreasonable to imagine them as being years and hundreds of dollars in per-capita GDP. If that is indeed what you imagine them to be, my model shows us the Star Trek future: In about 300 years, we rise from a per-capita GDP of $10,000 to one of $165,000—from a world much like today to a world where everyone is a millionaire.

Notice that the growth rate slows down a great deal fairly quickly; by the end of 100 years (i.e., the end of the 21st century), growth has slowed from its peak over 10% to just over 2% per year. By the end of the 300-year period, the growth rate is a crawl of only 0.1%.

Of course this model is very simplistic, but I chose it for a very specific reason: This is not a radical left-wing environmentalist model involving “limits to growth” or “degrowth”. This is the Solow-Swan model, the paradigm example of neoclassical models of economic growth. It is sometimes in fact called simply “the neoclassical growth model”, because it is that influential. I made one very small change from the usual form, which was to assume that the rate of productivity growth would decline exponentially over time. Since productivity growth is exogenous to the model, this is a very simple change to make; it amounts to saying that productivity-enhancing technology is subject to diminishing returns, which fits recent data fairly well but could be totally wrong if something like artificial intelligence or neural enhancement ever takes off.

I chose this because many environmentalists seem to think that economists have this delusional belief that we can maintain a rate of economic growth equal to today indefinitely. David Attenborough famously said “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad – or an economist.”

Another physicist argued that if we increase energy consumption 2.3% per year for 400 years, we’d literally boil the Earth. Yes, we would, and no economist I know of believes that this is what will happen. Economic growth doesn’t require energy growth, and we do not think growth can or should continue indefinitely—we just think it can and should continue a little while longer. We don’t think that a world standard of living 1000 times as good as Norway is going to happen; we think that a world standard of living equal to Norway is worth fighting for.

Indeed, we are often the ones trying to explain to leaders that they need to adapt to slower growth rates—this is particularly a problem in China, where nationalism and groupthink seems to have convinced many people in China that 7% annual growth is the result of some brilliant unique feature of the great Chinese system, when it is in fact simply the expected high growth rate for an economy that is very poor and still catching up by establishing a capital base. (It’s not so much what they are doing right now, as what they were doing wrong before. Just as you feel a lot better when you stop hitting yourself in the head, countries tend to grow quite fast after they transition out of horrifically terrible economic policy—and it doesn’t get much more terrible than Mao.) Even a lot of the IMF projections are now believed to be too optimistic, because they didn’t account for how China was fudging the numbers and rapidly depleting natural resources.

Some of the specific policies recommended in the article are reasonable, while others go to far.

1. Energy: cap, reduce, and ration it. Energy is what makes the economy go, and expanded energy consumption is what makes it grow. Climate scientists advocate capping and reducing carbon emissions to prevent planetary disaster, and cutting carbon emissions inevitably entails reducing energy from fossil fuels. However, if we aim to shrink the size of the economy, we should restrain not just fossil energy, but all energy consumption. The fairest way to do that would probably be with tradable energy quotas.

I strongly support cap-and-trade on fossil fuels, but I can’t support it on energy in general, unless we get so advanced that we’re seriously concerned about significantly altering the entropy of the universe. Solar power does not have negative externalities, and therefore should not be taxed or capped.

The shift to renewable energy sources is a no-brainer, and I know of no ecologist and few economists who would disagree.

This one is rich, coming from someone who goes on to argue for nonsensical deurbanization:

However, this is a complicated process. It will not be possible merely to unplug coal power plants, plug in solar panels, and continue with business as usual: we have built our immense modern industrial infrastructure of cities, suburbs, highways, airports, and factories to take advantage of the unique qualities and characteristics of fossil fuels.

How will we make our industrial infrastructure run off a solar grid? Urbanization. When everything is in one place, you can use public transportation and plug everything into the grid. We could replace the interstate highway system with a network of maglev lines, provided that almost everyone lived in major cities that were along those lines. We can’t do that if people move out of cities and go back to being farmers.

Here’s another weird one:

Without continued economic growth, the market economy probably can’t function long. This suggests we should run the transformational process in reverse by decommodifying land, labor, and money.

“Decommodifying money”? That’s like skinning leather or dehydrating water. The whole point of money is that it is a maximally fungible commodity. I support the idea of a land tax to provide a basic income, which could go a long way to decommodifying land and labor; but you can’t decommodify money.

The next one starts off sounding ridiculous, but then gets more reasonable:

4. Get rid of debt. Decommodifying money means letting it revert to its function as an inert medium of exchange and store of value, and reducing or eliminating the expectation that money should reproduce more of itself. This ultimately means doing away with interest and the trading or manipulation of currencies. Make investing a community-mediated process of directing capital toward projects that are of unquestioned collective benefit. The first step: cancel existing debt. Then ban derivatives, and tax and tightly regulate the buying and selling of financial instruments of all kinds.

No, we’re not going to get rid of debt. But should we regulate it more? Absolutely. A ban on derivatives is strong, but shouldn’t be out of the question; it’s not clear that even the most useful derivatives (like interest rate swaps and stock options) bring more benefit than they cause harm.

The next proposal, to reform our monetary system so that it is no longer based on debt, is one I broadly agree with, though you need to be clear about how you plan to do that. Positive Money’s plan to make central banks democratically accountable, establish full-reserve banking, and print money without trying to hide it in arcane accounting mechanisms sounds pretty good to me. Going back to the gold standard or something would be a terrible idea. The article links to a couple of “alternative money theorists”, but doesn’t explain further.

Sooner or later, we absolutely will need to restructure our macroeconomic policy so that 4% or even 2% real growth is no longer the expectation in First World countries. We will need to ensure that constant growth isn’t necessary to maintain stability and full employment.

But I believe we can do that, and in any case we do not want to stop global growth just yet—far from it. We are now on the verge of ending world hunger, and if we manage to do it, it will be from economic growth above all else.

What is socialism?

JDN 2457265 EDT 10:47

Last night I was having a political discussion with some friends (as I am wont to do), and it became a little heated, though never uncongenial. A key point of contention was the fact that Bernie Sanders is a socialist, and what exactly that entails.

One of my friends was arguing that this makes him far-left, and thus it is fair when the news media often likes to make a comparison between Sanders on the left and Trump on the right. Donald Trump is actually oddly liberal on some issues, but his attitudes on racial purity, nativism, military unilateralism, and virtually unlimited executive power are literally fascist. Even his “liberal” views are more like the kind of populism that fascists have often used to win support in the past: Don’t you hate being disenfranchised? Give me absolute power and I’ll fix everything for you! Don’t like how our democracy has become corrupt? Don’t worry, I’ll get rid of it! (The democracy, that is.) While he certainly doesn’t align well with the Republican Party platform, I think it’s quite fair to say that Donald Trump is a far-right candidate.

Bernie Sanders, however, is not a far-left candidate. He is a center-left candidate. His views are basically consonant with the Labour Party of the UK and the Social Democratic Party of Germany. He has spoken often about the Scandinavian model (because, well, #Scandinaviaisbetter—Denmark, Sweden, and Norway are some of the happiest places on Earth). When we talk about Bernie Sanders we aren’t talking about following Cuba and the Soviet Union; we’re talking about following Norway and Sweden. As Jon Stewart put it, he isn’t a “crazy-pants cuckoo bird” as some would have you think.

But he’s a socialist, right? Well… sort of—we have to be very clear what that means.

The word “socialism” has been used to mean many things; it has been a cover for genocidal fascism (“National Socialism”) and tyrannical Communism (“Union of Soviet Socialist Republics”). It has become a pejorative thrown at Social Security, Medicare, banking regulations—basically any policy left of Milton Friedman. So apparently it means something between Medicare and the Holocaust.

Social democracy is often classified as a form of socialism—but one can actually make a pretty compelling case that social democracy is not socialism, but in fact a form of capitalism.

If we want a simple, consistent definition of “socialism”, I think I would put it thus: Socialism is a system in which the majority of economic activity is directly controlled by the government. Most, if not all, industries are nationalized; production and distribution are handled by centrally-planned quotas instead of market supply and demand. Under this definition, the USSR, Venezuela, Cuba, and (at least until recently) China are socialist—and under this definition, socialism is a very bad idea. The best-case scenario is inefficiency; the worst-case scenario is mass murder.

Social democracy, the position that Bernie Sanders espouses (and I basically agree wit), is as follows: Social democracy is a system in which markets are taxed and regulated by a democratically-elected government to ensure that they promote general welfare, public goods are provided by the government, and transfer programs are used to reduce poverty and inequality.

Let’s also try to define “capitalism”: Capitalism is a system in which the majority of economic activity is handled by private sector markets.

Under the Scandinavian model, the majority of economic activity is handled by private sector markets, which are in turn regulated and taxed to promote the general welfare—that is, at least on these definitions, Scandinavia is both capitalist and social democratic.

In fact, so is the United States; while our taxes are lower and our regulations weaker, we still have substantial taxes and regulations. We do have transfer programs like WIC, SNAP, and Social Security that attempt to redistribute wealth and reduce poverty.

We could define “socialism” more broadly to mean any government intervention in the economy, in which case Bernie Sander is a socialist and so is… almost everyone else, including most economists.

The majority of the most eminent American economists are in favor of social democracy. I don’t intend this as an argument from authority, but rather to give a sense of the scientific consensus. The consensus in economics is by no means as strong as that in biology or physics (or climatology, ahem), but there is still broad agreement on many issues.

In a survey of 264 members of the American Economics Association [pdf link], 77% opposed government ownership of enterprise (14% mixed feelings, 8% favor) but 71% favored redistribution of wealth in some form (7% mixed feelings, 20% opposed). That’s social democracy is a nutshell. 67% favored public schools (14% mixed feelings, 17% opposed); 75% favored Keynesian monetary policy (12% mixed feelings, 12% opposed); 51% favored Keynesian fiscal policy (19% mixed feelings, 30% opposed). 58% opposed tighter immigration restrictions (16% mixed feelings, 25% opposed). 79% support anti-discrimination laws. 68% favor gun control.

The major departure from left-wing views that the majority of economists make is a near-universal opposition to protectionism, with 86.8% opposed, 7.6% with mixed feelings, and only 5.3% in favor. It seems I am not the only economist to cringe when politicians say they want to “stop sending jobs overseas”, which they do left and right. This view is quite popular; but the evidence says that it is wrong. Protectionism is not the answer; you make your trading partners poorer, they retaliate with their own protections, and you both end up worse off. We need open trade. I’ll save the details on why open trade is so important for a later post.

One issue that economists are very divided on right now is minimum wage; 47.3% favor minimum wage, 38.3% oppose it, and 14.4% have mixed feelings. This division likely reflects the ambiguity of empirical results on the employment effect of minimum wage, which have a wide margin of error but effect sizes that cluster around zero. Economists are also somewhat divided on military aid, with 36.8% in favor, 33% opposed, and 29.9% with mixed feelings. This I attribute more to the fact that military aid, like most military action, can be justified in principle but is typically unjustified in practice. And indeed perhaps “mixed feelings” is the most reasonable view to have on war and its instruments.

Since Bernie Sanders strongly supports raising minimum wage and some of his statements verge on protectionism, I do have to place him to the left of the economic consensus. A lot of economists would probably disagree on the particulars of his tax plans and such. But his core policies are entirely in line with that consensus, and being a social democrat is absolutely part of that. Compare this to the Republicans, who keep trying to out-crazy each other (apparently Scott Walker thinks we should not only build a wall against Mexico, but also against Canada?) and want policies that were abandoned decades ago by mainstream economists (like the gold standard, or a balanced-budget amendment), or simply would never be taken seriously by mainstream economists at all (the aforementioned border wall, eliminating all environmental regulation, or ending all transfer payments and social welfare programs). Even the things they supposedly agree on I’m not sure they do; when economists say they want “deregulation” Republicans seem to think that means “no rules at all” when in fact it’s supposed to mean “simple, transparent rules that can be tightly and fairly enforced”. (I think we need a new term for it, though there is a slogan I like: “Deregulate with a scalpel, not a chainsaw.”) Obama has done a very good job of deregulating in the sense that economists intend, and I think in general most economists view him positively as a leader who made the best of a bad situation.

In any case, the broad consensus of American economists (and I think most economists around the world) is that some form of capitalist social democracy is the best system we have so far. There is dispute about particular policies—how much should the tax rates be, should we tax income, consumption, real estate, capital, etc.; how large should the transfers be; what regulations should be added or removed—but the basic concept of a market economy with a government that taxes, transfers, and regulates is not in serious dispute.

Indeed, social democracy is the economic system of the free world.

Even using the conservative Heritage Foundation’s data, the correlation between tax burden and economic freedom—that’s economic freedom—is small but positive. (I’m excluding missing data, as well as Timor-Leste because it has a “tax burden” larger than its GDP due to weird accounting of its tourism-based economy, and North Korea because they lie to us and they theoretically have “zero taxes” but that’s clearly not true; the Heritage Foundation reports them as 100% taxes, but that’s also clearly not true either.) See for yourself:

Graph: Heritage Foundation Economic Freedom Index and tax burden

Why is this? Do taxes automatically make you more free? No, they make you less free, because you have to pay for things you didn’t choose to buy (which I admit and the Heritage Foundation includes in their index). But taxes are how you manage a free economy. You need to control monetary policy somehow, which means adding and removing money. The way that social democracies do this is by spending on public goods and transfers to add money, and taxing income, consumption, or assets to remove money. Even if you tie your money to the gold standard, you still need to pay for public goods like military and police; and with a fixed money supply that means spending must be matched by taxes.

There are other ways to do this. You could be like Zimbabwe and print as much money as you feel like. You could be like Venezuela, and have government-owned industries form the majority of your economy. Or, actually, you could not do it; you could fail to manage your country’s economy and leave it wallowing in poverty, like Ghana. All of the countries I just listed have lower tax burdens than the United States.

Within the framework of social democracy, there are higher taxes so that spending and transfers can be higher, which means that more public goods are provided and poverty is lower, which means that real equality of opportunity and thus, real economic freedom, are higher. It’s not that raising taxes automatically makes people more free; rather, the kind of policies that make people more free tend to be the kind of social-democratic policies that involve relatively high taxes.

Worldwide, US is 12th in terms of economic freedom and 62nd in terms of tax burden. We currently stand at 24%. That’s quite low for a First World country, but still relatively high by world standards. The highest tax burden is in Eritrea at 50%; the lowest is in Kuwait at an astonishing 0.7% (I don’t even know how that’s possible). Neither is a really wonderful place to live (though Kuwait is better).

Indeed, if you restrict the sample to North America and Europe, the correlation basically disappears; all the countries are fairly free, all the taxes are fairly high, and within that the two aren’t very much related. (It’s been a long time since I’ve seen a trendline that flat, actually!)

Graph: Heritage Foundation Economic Freedom Index and tax burden, Europe and North America

Switzerland, Canada, and Denmark all have higher economic freedom scores than the United States, as well as higher tax burdens; but on the other hand, Greece, Spain, and Austria have higher tax burdens but lower freedom scores. All of them are variations on social democracy.

Is that socialism? I’m really not sure. Why does it matter, really?

The sunk-cost fallacy

JDN 2457075 EST 14:46.

I am back on Eastern Time once again, because we just finished our 3600-km road trek from Long Beach to Ann Arbor. I seem to move an awful lot; this makes me a bit like Schumpeter, who moved an average of every two years his whole adult life. Schumpeter and I have much in common, in fact, though I have no particular interest in horses.

Today’s topic is the sunk-cost fallacy, which was particularly salient as I had to box up all my things for the move. There were many items that I ended up having to throw away because it wasn’t worth moving them—but this was always painful, because I couldn’t help but think of all the work or money I had put into them. I threw away craft projects I had spent hours working on and collections of bottlecaps I had gathered over years—because I couldn’t think of when I’d use them, and ultimately the question isn’t how hard they were to make in the past, it’s what they’ll be useful for in the future. But each time it hurt, like I was giving up a little part of myself.

That’s the sunk-cost fallacy in a nutshell: Instead of considering whether it will be useful to us later and thus worth having around, we naturally tend to consider the effort that went into getting it. Instead of making our decisions based on the future, we make them based on the past.

Come to think of it, the entire Marxist labor theory of value is basically one gigantic sunk-cost fallacy: Instead of caring about the usefulness of a product—the mainstream utility theory of value—we are supposed to care about the labor that went into making it. To see why this is wrong, imagine someone spends 10,000 hours carving meaningless symbols into a rock, and someone else spends 10 minutes working with chemicals but somehow figures out how to cure pancreatic cancer. Which one would you pay more for—particularly if you had pancreatic cancer?

This is one of the most common irrational behaviors humans do, and it’s worth considering why that might be. Most people commit the sunk-cost fallacy on a daily basis, and even those of us who are aware of it will still fall into it if we aren’t careful.

This often seems to come from a fear of being wasteful; I don’t know of any data on this, but my hunch is that the more environmentalist you are, the more often you tend to run into the sunk-cost fallacy. You feel particularly bad wasting things when you are conscious of the damage that waste does to our planetary ecosystem. (Which is not to say that you should not be environmentalist; on the contrary, most of us should be a great deal more environmentalist than we are. The negative externalities of environmental degradation are almost unimaginably enormous—climate change already kills 150,000 people every year and is projected to kill tens if not hundreds of millions people over the 21st century.)

I think sunk-cost fallacy is involved in a lot of labor regulations as well. Most countries have employment protection legislation that makes it difficult to fire people for various reasons, ranging from the basically reasonable (discrimination against women and racial minorities) to the totally absurd (in some countries you can’t even fire people for being incompetent). These sorts of regulations are often quite popular, because people really don’t like the idea of losing their jobs. When faced with the possibility of losing your job, you should be thinking about what your future options are; but many people spend a lot of time thinking about the past effort they put into this one. I think there is also some endowment effect and loss aversion at work as well: You value your job more simply because you already have it, so you don’t want to lose it even for something better.

Yet these regulations are widely regarded by economists as inefficient; and for once I am inclined to agree. While I certainly don’t want people being fired frivolously or for discriminatory reasons, sometimes companies really do need to lay off workers because there simply isn’t enough demand for their products. When a factory closes down, we think about the jobs that are lost—but we don’t think about the better jobs they can now do instead.

I favor a system like what they have in Denmark (I’m popularizing a hashtag about this sort of thing: #Scandinaviaisbetter): We don’t try to protect your job, we try to protect you. Instead of regulations that make it hard to fire people, Denmark has a generous unemployment insurance system, strong social welfare policies, and active labor market policies that help people retrain and find new and better jobs. One thing I think Denmark might want to consider is restrictions on cyclical layoffs—in a recession there is pressure to lay off workers, but that can create a vicious cycle that makes recessions worse. Denmark was hit considerably harder by the Great Recession than France, for example; where France’s unemployment rose from 7.5% to 9.6%, Denmark’s rose from an astonishing 3.1% all the way up to 7.6%.

Then again, sometimes what looks like a sunk-cost fallacy actually isn’t—and I think this gives us insight into how we might have evolved such an apparently silly heuristic in the first place.

Why would you care about what you did in the past when deciding what to do in the future? Well there’s one reason in particular: Credible commitment. There are many cases in life where you’d like to be able to plan to do something in the future, but when the time comes to actually do it you’ll be tempted not to follow through.

This sort of thing happens all the time: When you take out a loan, you plan to pay it back—but when you need to actually make payments it sure would be nice if you didn’t have to. If you’re trying to slim down, you go on a diet—but doesn’t that cookie look delicious? You know you should quit smoking for your health—but what’s one more cigarette, really? When you get married, you promise to be faithful—but then sometimes someone else comes along who seems so enticing! Your term paper is due in two weeks, so you really should get working on it—but your friends are going out for drinks tonight, why not start the paper tomorrow?

Our true long-term interests are often misaligned with our short-term temptations. This often happens because of hyperbolic discounting, which is a bit technical; but the basic idea is that you tend to rate the importance of an event in inverse proportion to its distance in time. That turns out to be irrational, because as you get closer to the event, your valuations will change disproportionately. The optimal rational choice would be exponential discounting, where you value each successive moment a fixed percentage less than the last—since that percentage doesn’t change, your valuations will always stay in line with one another. But basically nobody really uses exponential discounting in real life.

We can see this vividly in experiments: If we ask people whether they would you rather receive $100 today, or $110 a week from now, they often go with $100 today. But if you ask them whether they would rather receive $100 in 52 weeks or $110 in 53 weeks, almost everyone chooses the $110. The value of a week apparently depends on how far away it is! (The $110 is clearly the rational choice by the way. Discounting 10% per week makes no sense at all—unless you literally believe that $1,000 today is as good as $140,000 a year from now.)

To solve this problem, it can be advantageous to make commitments—either enforced by direct measures such as legal penalties, or even simply by making promises that we feel guilty breaking. That’s why cold turkey is often the most effective way to quit a drug. Physiologically that makes no sense, because gradual cessation clearly does reduce withdrawal symptoms. But psychologically it does, because cold turkey allows you to make a hardline commitment to never again touch the stuff. The majority of successful smokers report using cold turkey, though there is still ongoing research on whether properly-orchestrated gradual reduction can be more effective. Likewise, vague notions like “I’ll eat better and exercise more” are virtually useless, while specific prescriptions like “I will do 20 minutes of exercise every day and stop eating red meat” are much more effective—the latter allows you to make a promise to yourself that can be broken, and since you feel bad breaking it you are motivated to keep it.

In the presence of such commitments, the past does matter, at least insofar as you made commitments to yourself or others in the past. If you promised never to smoke another cigarette, or never to cheat on your wife, or never to eat meat again, you actually have a good reason—and a good chance—to never do those things. This is easy to confuse with a sunk cost; when you think about the 20 years you’ve been married or the 10 years you’ve been vegetarian, you might be thinking of the sunk cost you’ve incurred over that time, or you might be thinking of the promises you’ve made and kept to yourself and others. In the former case you are irrationally committing a sunk-cost fallacy; in the latter you are rationally upholding a credible commitment.

This is most likely why we evolved in such a way as to commit sunk-cost fallacies. The ability to enforce commitments on ourselves and others was so important that it was worth it to overcompensate and sometimes let us care about sunk costs. Because commitments and sunk costs are often difficult to distinguish, it would have been more costly to evolve better ways of distinguish them than it was to simply make the mistake.

Perhaps people who are outraged by being laid off aren’t actually committing a sunk-cost fallacy at all; perhaps they are instead assuming the existence of a commitment where none exists. “I gave this company 20 good years, and now they’re getting rid of me?” But the truth is, you gave the company nothing. They never committed to keeping you (unless they signed a contract, but that’s different; if they are violating a contract, of course they should be penalized for that). They made you a trade, and when that trade ceases to be advantageous they will stop making it. Corporations don’t think of themselves as having any moral obligations whatsoever; they exist only to make profit. It is certainly debatable whether it was a good idea to set up corporations in this way; but unless and until we change that system it is important to keep it in mind. You will almost never see a corporation do something out of kindness or moral obligation; that’s simply not how corporations work. At best, they do nice things to enhance their brand reputation (Starbucks, Whole Foods, Microsoft, Disney, Costco). Some don’t even bother doing that, letting people hate as long as they continue to buy (Walmart, BP, DeBeers). Actually the former model seems to be more successful lately, which bodes well for the future; but be careful to recognize that few if any of these corporations are genuinely doing it out of the goodness of their hearts. Human beings are often altruistic; corporations are specifically designed not to be.

And there were some things I did promise myself I would keep—like old photos and notebooks that I want to keep as memories—so those went in boxes. Other things were obviously still useful—clothes, furniture, books. But for the rest? It was painful, but I thought about what I could realistically use them for, and if I couldn’t think of anything, they went into the trash.