socialism

The injustice of talent

pnrj core principles, ethics, inequality, mathematical models, personal , , , , , , , , , , , , , , , ,

Sep 4 JDN 2459827

Consider the following two principles of distributive justice.

A: People deserve to be rewarded in proportion to what they accomplish.

B: People deserve to be rewarded in proportion to the effort they put in.

Both principles sound pretty reasonable, don’t they? They both seem like sensible notions of fairness, and I think most people would broadly agree with both them.

This is a problem, because they are mutually contradictory. We cannot possibly follow them both.

For, as much as our society would like to pretend otherwise—and I think this contradiction is precisely why our society would like to pretend otherwise—what you accomplish is not simply a function of the effort you put in.

Don’t get me wrong; it is partly a function of the effort you put in. Hard work does contribute to success. But it is neither sufficient, nor strictly necessary.

Rather, success is a function of three factors: Effort, Environment, and Talent.

Effort is the work you yourself put in, and basically everyone agrees you deserve to be rewarded for that.

Environment includes all the outside factors that affect you—including both natural and social environment. Inheritance, illness, and just plain luck are all in here, and there is general, if not universal, agreement that society should make at least some efforts to minimize inequality created by such causes.

And then, there is talent. Talent includes whatever capacities you innately have. It could be strictly genetic, or it could be acquired in childhood or even in the womb. But by the time you are an adult and responsible for your own life, these factors are largely fixed and immutable. This includes things like intelligence, disability, even height. The trillion-dollar question is: How much should we reward talent?

For talent clearly does matter. I will never swim like Michael Phelps, run like Usain Bolt, or shoot hoops like Steph Curry. It doesn’t matter how much effort I put in, how many hours I spend training—I will never reach their level of capability. Never. It’s impossible. I could certainly improve from my current condition; perhaps it would even be good for me to do so. But there are certain hard fundamental constraints imposed by biology that give them more potential in these skills than I will ever have.

Conversely, there are likely things I can do that they will never be able to do, though this is less obvious. Could Michael Phelps never be as good a programmer or as skilled a mathematician as I am? He certainly isn’t now. Maybe, with enough time, enough training, he could be; I honestly don’t know. But I can tell you this: I’m sure it would be harder for him than it was for me. He couldn’t breeze through college-level courses in differential equations and quantum mechanics the way I did. There is something I have that he doesn’t, and I’m pretty sure I was born with it. Call it spatial working memory, or mathematical intuition, or just plain IQ. Whatever it is, math comes easy to me in not so different a way from how swimming comes easy to Michael Phelps. I have talent for math; he has talent for swimming.

Moreover, these are not small differences. It’s not like we all come with basically the same capabilities with a little bit of variation that can be easily washed out by effort. We’d like to believe that—we have all sorts of cultural tropes that try to inculcate that belief in us—but it’s obviously not true. The vast majority of quantum physicists are people born with high IQ. The vast majority of pro athletes are people born with physical prowess. The vast majority of movie stars are people born with pretty faces. For many types of jobs, the determining factor seems to be talent.

This isn’t too surprising, actually—even if effort matters a lot, we would still expect talent to show up as the determining factor much of the time.

Let’s go back to that contest function model I used to analyze the job market awhile back (the one that suggests we spend way too much time and money in the hiring process). This time let’s focus on the perspective of the employees themselves.

Each employee has a level of talent, h. Employee X has talent hx and exerts effort x, producing output of a quality that is the product of these: hx x. Similarly, employee Z has talent hz and exerts effort z, producing output hz z.

Then, there’s a certain amount of luck that factors in. The most successful output isn’t necessarily the best, or maybe what should have been the best wasn’t because some random circumstance prevailed. But we’ll say that the probability an individual succeeds is proportional to the quality of their output.

So the probability that employee X succeeds is: hx x / ( hx x + hz z)

I’ll skip the algebra this time (if you’re interested you can look back at that previous post), but to make a long story short, in Nash equilibrium the two employees will exert exactly the same amount of effort.

Then, which one succeeds will be entirely determined by talent; because x = z, the probability that X succeeds is hx / ( hx + hz).

It’s not that effort doesn’t matter—it absolutely does matter, and in fact in this model, with zero effort you get zero output (which isn’t necessarily the case in real life). It’s that in equilibrium, everyone is exerting the same amount of effort; so what determines who wins is innate talent. And I gotta say, that sounds an awful lot like how professional sports works. It’s less clear whether it applies to quantum physicists.

But maybe we don’t really exert the same amount of effort! This is true. Indeed, it seems like actually effort is easier for people with higher talent—that the same hour spent running on a track is easier for Usain Bolt than for me, and the same hour studying calculus is easier for me than it would be for Usain Bolt. So in the end our equilibrium effort isn’t the same—but rather than compensating, this effect only serves to exaggerate the difference in innate talent between us.

It’s simple enough to generalize the model to allow for such a thing. For instance, I could say that the cost of producing a unit of effort is inversely proportional to your talent; then instead of hx / ( hx + hz ), in equilibrium the probability of X succeeding would become hx2 / ( hx2 + hz2). The equilibrium effort would also be different, with x > z if hx > hz.

Once we acknowledge that talent is genuinely important, we face an ethical problem. Do we want to reward people for their accomplishment (A), or for their effort (B)? There are good cases to be made for each.

Rewarding for accomplishment, which we might call meritocracy,will tend to, well, maximize accomplishment. We’ll get the best basketball players playing basketball, the best surgeons doing surgery. Moreover, accomplishment is often quite easy to measure, even when effort isn’t.

Rewarding for effort, which we might call egalitarianism, will give people the most control over their lives, and might well feel the most fair. Those who succeed will be precisely those who work hard, even if they do things they are objectively bad at. Even people who are born with very little talent will still be able to make a living by working hard. And it will ensure that people do work hard, which meritocracy can actually fail at: If you are extremely talented, you don’t really need to work hard because you just automatically succeed.

Capitalism, as an economic system, is very good at rewarding accomplishment. I think part of what makes socialism appealing to so many people is that it tries to reward effort instead. (Is it very good at that? Not so clear.)

The more extreme differences are actually in terms of disability. There’s a certain baseline level of activities that most people are capable of, which we think of as “normal”: most people can talk; most people can run, if not necessarily very fast; most people can throw a ball, if not pitch a proper curveball. But some people can’t throw. Some people can’t run. Some people can’t even talk. It’s not that they are bad at it; it’s that they are literally not capable of it. No amount of effort could have made Stephen Hawking into a baseball player—not even a bad one.

It’s these cases when I think egalitarianism becomes most appealing: It just seems deeply unfair that people with severe disabilities should have to suffer in poverty. Even if they really can’t do much productive work on their own, it just seems wrong not to help them, at least enough that they can get by. But capitalism by itself absolutely would not do that—if you aren’t making a profit for the company, they’re not going to keep you employed. So we need some kind of social safety net to help such people. And it turns out that such people are quite numerous, and our current system is really not adequate to help them.

But meritocracy has its pull as well. Especially when the job is really important—like surgery, not so much basketball—we really want the highest quality work. It’s not so important whether the neurosurgeon who removes your tumor worked really hard at it or found it a breeze; what we care about is getting that tumor out.

Where does this leave us?

I think we have no choice but to compromise, on both principles. We will reward both effort and accomplishment, to greater or lesser degree—perhaps varying based on circumstances. We will never be able to entirely reward accomplishment or entirely reward effort.

This is more or less what we already do in practice, so why worry about it? Well, because we don’t like to admit that it’s what we do in practice, and a lot of problems seem to stem from that.

We have people acting like billionaires are such brilliant, hard-working people just because they’re rich—because our society rewards effort, right? So they couldn’t be so successful if they didn’t work so hard, right? Right?

Conversely, we have people who denigrate the poor as lazy and stupid just because they are poor. Because it couldn’t possibly be that their circumstances were worse than yours? Or hey, even if they are genuinely less talented than you—do less talented people deserve to be homeless and starving?

We tell kids from a young age, “You can be whatever you want to be”, and “Work hard and you’ll succeed”; and these things simply aren’t true. There are limitations on what you can achieve through effort—limitations imposed by your environment, and limitations imposed by your innate talents.

I’m not saying we should crush children’s dreams; I’m saying we should help them to build more realistic dreams, dreams that can actually be achieved in the real world. And then, when they grow up, they either will actually succeed, or when they don’t, at least they won’t hate themselves for failing to live up to what you told them they’d be able to do.

If you were wondering why Millennials are so depressed, that’s clearly a big part of it: We were told we could be and do whatever we wanted if we worked hard enough, and then that didn’t happen; and we had so internalized what we were told that we thought it had to be our fault that we failed. We didn’t try hard enough. We weren’t good enough. I have spent years feeling this way—on some level I do still feel this way—and it was not because adults tried to crush my dreams when I was a child, but on the contrary because they didn’t do anything to temper them. They never told me that life is hard, and people fail, and that I would probably fail at my most ambitious goals—and it wouldn’t be my fault, and it would still turn out okay.

That’s really it, I think: They never told me that it’s okay not to be wildly successful. They never told me that I’d still be good enough even if I never had any great world-class accomplishments. Instead, they kept feeding me the lie that I would have great world-class accomplishments; and then, when I didn’t, I felt like a failure and I hated myself. I think my own experience may be particularly extreme in this regard, but I know a lot of other people in my generation who had similar experiences, especially those who were also considered “gifted” as children. And we are all now suffering from depression, anxiety, and Impostor Syndrome.

All because nobody wanted to admit that talent, effort, and success are not the same thing.

Capitalism can be fair

pnrj core principles, ethics , , , , , ,

Aug 22 JDN 2459449

There are certainly extreme right-wing libertarians who seem to think that capitalism is inherently fair, or that “fairness” is meaningless and (some very carefully defined notion of) liberty is the only moral standard. I am not one of them. I agree that many of the actual practices of modern capitalism as we know it are unfair, particularly in the treatment of low-skill workers.

But lately I’ve been seeing a weirdly frequent left-wing take—Marxist take, really—that goes to the opposite extreme, saying that capitalism is inherently unfair, that the mere fact that capital owners ever get any profit on anything is proof that the system is exploitative and unjust and must be eliminated.

So I decided it would be worthwhile to provide a brief illustration of how, at least in the best circumstances, a capitalist system of labor can in fact be fair and just.

The argument that capitalism is inherently unjust seems to be based on the notion that profit means “workers are paid less than their labor is worth”. I think that the reason this argument is so insidious is that it’s true in one sense—but not true in another. Workers are indeed paid less than the total surplus of their actual output—but, crucially, they are not paid less than what the surplus of their output would have been had the capital owner not provided capital and coordination.

Suppose that we are making some sort of product. To make it more concrete, let’s say shirts. You can make a shirt by hand, but it’s a lot of work, and it takes a long time. Suppose that you, working on your own by hand, can make 1 shirt per day. You can sell each shirt for $10, so you get $10 per day.

Then, suppose that someone comes along who owns looms and sewing machines. They gather you and several other shirt-makers and offer to let you use their machines, in exchange for some of the revenue. With the aid of 9 other workers and the machines, you are able to make 30 shirts per day. You can still sell each shirt for $10, so now there is total revenue of $300.

Whether or not this is fair depends on precisely the bargain that was struck with the owner of the machines. Suppose that he asked for 40% of the revenue. Then the 10 workers including yourself would get (0.60)($300) = $180 to split, presumably evenly, and each get $18 per day. This seems fair; you’re clearly better off than you were making shirts by yourself. The capital owner then gets (0.40)($300) = $120, which is more than each of you, but not by a ridiculous amount; and he probably has costs to deal with in maintaining those machines.

But suppose instead the owner had demanded 80% of the revenue; then you would have to split (0.20)($300) = $60 between you, and each would only get $6 per day. The capital owner would then get (0.80)($300) = $240, 40 times as much as each of you.

Or perhaps instead of a revenue-sharing agreement, the owner offers to pay you a wage. If that wage is $18 per day, it seems fair. If it is $6 per day, it seems obviously unfair.

If this owner is the only employer, then he is competing only with working alone. So we would expect him to offer a wage of $10 per day, or maybe slightly more since working with the machines may be harder or more unpleasant than working by hand.

But if there are many employers, then he is now competing with those employers as well. If he offers $10, someone else might offer $12, and a third might offer $15. Competition should drive the system toward an equilibrium where workers are getting paid their marginal value product—in other words, the wage for one hour of work should equal the additional value added by one more hour of work.

In the case that seems fair, where workers are getting more money than they would have on their own, are they getting paid “less than the value of their labor”? In one sense, yes; the total surplus is not going all to the workers, but is being shared with the owner of the machines. But the more important sense is whether they’d be better off quitting and working on their own—and they obviously would not be.

What value does the capital owner provide? Well, the capital, of course. It’s their property and they are letting other people use it. Also, they incur costs to maintain it.

Of course, it matters how the capital owner obtained that capital. If they are an inventor who made it themselves, it seems obviously just that they should own it. If they inherited it or got lucky on the stock market, it isn’t something they deserve in a deep sense, but it’s reasonable to say they are entitled to it. But if the only reason they have the capital is by theft, fraud, or exploitation, then obviously they don’t deserve it. In practice, there are very few of the first category, a huge number of the second, and all too many of the third. Yet this is not inherent to the capitalist work arrangement. Many capital owners don’t deserve what they own; but those who do have a right to make a profit letting other people use their property.

There are of course many additional complexities that arise in the real world, in terms of market power, bargaining, asymmetric information, externalities, and so on. I freely admit that in practice, capitalism is often unfair. But I think it’s worth pointing out that the mere existence of profit from capital ownership is not inherently unjust, and in fact by organizing our economy around it we have managed to achieve unprecedented prosperity.

Capitalism isn’t bad for the environment

pnrj public policy , , , , , , , , ,

Sep 27 JDN 2459120

There are certainly many legitimate criticisms to be made against capitalism, particularly unregulated, unfettered capitalism. But many of the criticisms the left likes to offer against capitalism really don’t hold water, and one of them is the assertion that capitalism is bad for the environment.

The world’s most polluted cities are largely in India and China. In fact, as China has opened up to world markets and become more capitalist, it has become more ecologically efficient, in the sense of producing far less greenhouse emission per dollar of GDP.

Indeed, the entire world has been getting more efficient on this metric: We now produce about twice as much GDP per ton of CO2 emitted than we did in 1990.

Pollution in the Soviet Union was horrific; even today, many of the world’s most polluted places are in the former Soviet Union. Much of the ecological damage was hidden while the USSR was still in place, but once it collapsed, the damage that Soviet policy had done to the environment became obvious.

If you sort countries by their per-capita greenhouse emissions, the worst offenders are Kuwait, Brunei, Qatar, Oman, and Bahrain—small, oil-producing countries in the Middle East. The US and Canada also do pretty badly, and are certainly quite capitalist; but so do Libya, Kazakhstan, and Turkmenistan, not exactly known for their devotion to free markets.

I think this in fact too generous to socialist countries. We really should adjust for GDP per capita. It’s easy to produce zero pollution: Just let everyone starve to death. And if that sounds extreme, consider that millions of people literally did starve to death under Stalin and Mao. It’s a fair question whether we really need the high standard of living we have become accustomed to in the First World; perhaps we could afford to cut back. But clearly some kind of adjustment is necessary: A country is obviously doing better if they can produce more GDP for the same carbon emissions.

Therefore, let’s see what happens when we rank countries by kilograms of CO2 emissions per dollar of GDP. The highest polluters are then the Central African Republic, Belize, Libya, Gambia, Eritrea, Niger, Grenada, Palau… not a First World country among them. CAR produces a horrifying 126 tons of CO2 per $10,000 of GDP. The US is near the world average at about 3.0 tons of CO2 per $10,000 of GDP, and as usual Scandinavia Is Better with about 1 ton of CO2 per $10,000 of GDP. China does worse than the US, at about 4.0 tons of CO2 per $10,000 of GDP. Russia and most of the former Soviet Union does substantially worse, generally around 5.0 tons of CO2 per $10,000 of GDP.

Then again, these figures use production-based accounting; perhaps we should be using consumption-based accounting, so that First World countries can’t simply offshore their emissions. The data is less complete and probably less reliable, but it’s still pretty clear that the highest per-capita emissions are in small oil-exporting countries in the Middle East, like Qatar and Brunei.

Moreover, on consumption-based accounting, the highest emissions per dollar of GDP are in Mongolia, Namibia, Ukraine, South Africa, and Kazakhstan. The US actually does better at 2.6 tons of CO2 per $10,000 of GDP, while Scandinavia is still at about 1 ton of CO2 per $10,000 of GDP. China closes the gap, but still does worse than the US, at about 3.0 tons of CO2 per $10,000 of GDP.

No matter how you slice it, the US just isn’t the world’s worst polluter, and we only look like we are in the top 10 because we are so fabulously rich. If it were generally true that higher wealth always comes with proportionally higher pollution, then perhaps capitalism could be blamed for producing all this pollution—though then we’d have a difficult tradeoff to make between reducing pollution and increasing wealth. But in fact there is wide variation in the ecological efficiency of an economy; nuclearize your energy grid like France did and you can cut your emissions in half. Do whatever Scandanavia does and you can do even better.

Now I suppose it would be fair to say that France and Scandinavia are less capitalist than the United States; they certainly have much stronger social welfare states (including universal healthcare) and more redistribution of wealth. But they’re still quite capitalist. They have robust free-market economies, thousands of for-profit corporations, and plenty of billionaires. France has 41 billionaires among 65 million people, just a slightly lower rate of billionaires-per-capita than the US. Sweden has 31 billionaires among 10 million people, a substantially higher rate of billionaires-per-capita than the US. It may be that the optimal level of capitalism for environmental sustainability is not 100%; but it doesn’t seem to be anywhere near 0% either. National Review overstates the case a little (I mean, they are National Review), but I don’t think they are wrong when they say that socialism is bad for the environment.

Indeed, it seems quite important that France and Scandinavia are democratic (by some measures the most democratic places in the world), while China and Russia are authoritarian. It’s not hard to see why democracy would be good for the environment: It solves the Tragedy of the Commons by including the interests of everyone who is impacted by pollution. Policies that produce really catastrophic pollution tend to get leaders voted out.

The rather surprising result is that empirically there doesn’t appear to be a strong effect of democracy on environmental sustainability either. There’s some evidence that it helps, but it seems to depend upon a lot of factors, and on some measures democracy may actually make matters worse. I honestly don’t have a good explanation for this; I would have expected a really strong benefit, since the theoretical argument is quite strong: Voters have strong reasons to want clean air and water, while dictators don’t (especially water, which they can easily pay to import).


Perhaps capitalism is bad for the environment, but democracy is good, and the two sort of cancel out? But there isn’t even much reason theoretically to think that capitalism would be worse for the environment. Private ownership yields private stewardship, and poisoning your employees and customers is not good business. Yes, some forms of pollution spread out far enough that they become a Tragedy of the Commons; but it’s actually hard to find clear examples where pollution spreads far enough to be a Tragedy of the Commons for a corporation but doesn’t spread far enough to be a Tragedy of the Commons for a whole country. Some multinational corporations are large enough that they probably have more reason to care about the environment than many small countries—Walmart’s total revenue is nearly 15 times higher than Brunei’s total GDP. Indeed, one of the few upsides of concentrated oligopolies is that they are less likely to pollute!

I can understand why it’s tempting to blame capitalism for the degradation of the environment. Indeed, if the argument could stick, it would be a really compelling reason to dismantle capitalism—we simply cannot continue to degrade the environment at the rate we have been for much longer. But empirically it just doesn’t work; whatever determines a country’s ecological sustainability or lack thereof, it’s something subtler than capitalism versus socialism—or even democracy versus authoritarianism.

Failures of democracy or capitalism?

pnrj core principles, current events, public policy , , , , ,

May 24 JDN 2458992

Blaming capitalism for the world’s woes is a common habit of the left wing in general, but it seems to have greatly increased in frequency and volume in the era of Trump. I don’t want to say that this is always entirely wrong; capitalism in its purest form certainly does have genuine flaws that need to be addressed (and that’s why we have taxes, regulations, the welfare state, etc.).

But I’ve noticed that a lot of the things people complain about most really don’t seem to have a lot to do with capitalism.

For instance: Forced labor in Third World countries? First of all, that’s been around for as long as civilization has existed, and quite probably longer. It’s certainly not new to capitalism. Second, the freedom to choose who you transact with—including who employs you—is a fundamental principle of capitalism. In that sense, forced labor is the very opposite of capitalism; it spits upon everything capitalism stands for.

It’s certainly the case that many multinational corporations are implicated in slavery, even today—usually through complex networks of subsidiaries and supply chains. But it’s not clear to me that socialism is any kind of solution to this problem; nationalized industries are perfectly capable of enslaving people. (You may have heard of a place called the Gulag?)

Or what about corporate welfare, the trillions of dollars in subsidies we give to the oil and coal industries? Well, that’s not very capitalist either; capitalism is supposed to be equal competition in a free market, not the government supporting particular businesses or industries at the expense of others. And it’s not like socialist Venezuela has any lack of oil subsidies—indeed it’s not quite clear to me where the government ends and PDVSA begins. We need a word for such policies that are neither capitalist nor socialist; perhaps “corporatist”?

And really, the things that worry me about America today are not flaws in our markets; they are flaws in our government. We are not witnessing a catastrophic failure of capitalism; we are witnessing a catastrophic failure of democracy.

As if the Electoral College weren’t bad enough (both Al Gore and Hillary Clinton should have won the Presidency, by any sensible notion of democratic voting!), we are now seeing extreme levels of voter suppression, including refusing to accept mail-in ballots in the middle of a historic pandemic. This looks disturbingly like how democracy has collapsed in other countries, such as Turkey and Hungary.

The first-past-the-post plurality vote is already basically the worst possible voting system that can still technically be considered democratic. But it is rendered far worse by a defective primary system, which was even more of a shambles this year than usual. The number of errors in the Iowa caucus was ridiculous, and the primaries as a whole suffered from so many flaws that many voters now consider them illegitimate.

And of course there’s Donald Trump himself. He is certainly a capitalist (though he’s not exactly a free-trade neoliberal; he’s honestly more like a mercantilist). But what really makes him dangerous is not his free-market ideology, which is basically consistent with the US right wing going back at least 30 years; it’s his willingness to flaunt basic norms of democracy and surround himself with corrupt, incompetent sycophants. Republicans have been cutting the upper tax brackets and subsidizing oil companies for quite some time now; but it’s only recently that they have so blatantly disregarded the guardrails of democracy.

I’m not saying it’s wrong to criticize capitalism. There certainly are things worth criticizing, particularly about the most extreme free-market ideology. But it’s important to be clear about where exactly problems lie if you want to fix them—and right now we desperately need to fix them. America is in a crisis right now, something much bigger than just this pandemic. We are not in this crisis because of an excessive amount of deregulation or tax-cutting; we are in this crisis because of an excessive amount of corruption, incompetence, and authoritarianism. We wouldn’t fix this by nationalizing industries or establishing worker co-ops. We need to fix it first by voting out those responsible, and second by reforming our system so that they won’t get back in.

Just how rich is rich?

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

May 26 JDN 2458630

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

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

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

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

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

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

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

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

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

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

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

And Jeff Bezos has net wealth of $157 billion.

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

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

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

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

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

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

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

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

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

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

Do you think maybe these people have too much money?

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

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

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

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

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

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

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

Green New Deal Part 3: Guaranteeing education and healthcare is easy—why aren’t we doing it?

pnrj current events, ethics, inequality, personal, public policy , , , , , , , , , , , ,

Apr 21 JDN 2458595

Last week was one of the “hard parts” of the Green New Deal. Today it’s back to one of the “easy parts”: Guaranteed education and healthcare.

“Providing all people of the United States with – (i) high-quality health care; […]

“Providing resources, training, and high-quality education, including higher education, to all people of the United States.”

Many Americans seem to think that providing universal healthcare would be prohibitively expensive. In fact, it would have literally negative net cost.
The US currently has the most bloated, expensive, inefficient healthcare system in the entire world. We spend almost $10,000 per person per year on healthcare, and get outcomes no better than France or the UK where they spend less than $5,000.
In fact, our public healthcare expenditures are currently higher than almost every other country. Our private expenditures are therefore pure waste; all they are doing is providing returns for the shareholders of corporations. If we were to simply copy the UK National Health Service and spend money in exactly the same way as they do, we would spend the same amount in public funds and almost nothing in private funds—and the UK has a higher mean lifespan than the US.
This is absolutely a no-brainer. Burn the whole system of private insurance down. Copy a healthcare system that actually works, like they use in every other First World country.
It wouldn’t even be that complicated to implement: We already have a single-payer healthcare system in the US; it’s called Medicare. Currently only old people get it; but old people use the most healthcare anyway. Hence, Medicare for All: Just lower the eligibility age for Medicare to 18 (if not zero). In the short run there would be additional costs for the transition, but in the long run we would save mind-boggling amounts of money, all while improving healthcare outcomes and extending our lifespans. Current estimates say that the net savings of Medicare for All would be about $5 trillion over the next 10 years. We can afford this. Indeed, the question is, as it was for infrastructure: How can we afford not to do this?
Isn’t this socialism? Yeah, I suppose it is. But healthcare is one of the few things that socialist countries consistently do extremely well. Cuba is a socialist country—a real socialist country, not a social democratic welfare state like Norway but a genuinely authoritarian centrally-planned economy. Cuba’s per-capita GDP PPP is a third of ours. Yet their life expectancy is actually higher than ours, because their healthcare system is just that good. Their per-capita healthcare spending is one-fourth of ours, and their health outcomes are better. So yeah, let’s be socialist in our healthcare. Socialists seem really good at healthcare.
And this makes sense, if you think about it. Doctors can do their jobs a lot better when they’re focused on just treating everyone who needs help, rather than arguing with insurance companies over what should and shouldn’t be covered. Preventative medicine is extremely cost-effective, yet it’s usually the first thing that people skimp on when trying to save money on health insurance. A variety of public health measures (such as vaccination and air quality regulation) are extremely cost-effective, but they are public goods that the private sector would not pay for by itself.
It’s not as if healthcare was ever really a competitive market anyway: When you get sick or injured, do you shop around for the best or cheapest hospital? How would you even go about that, when they don’t even post most of their prices and what prices they post are often wildly different than what you’ll actually pay?
The only serious argument I’ve heard against single-payer healthcare is a moral one: “Why should I have to pay for other people’s healthcare?” Well, I guess, because… you’re a human being? You should care about other human beings, and not want them to suffer and die from easily treatable diseases?
I don’t know how to explain to you that you should care about other people.

Single-payer healthcare is not only affordable: It would be cheaper and better than what we are currently doing. (In fact, almost anything would be cheaper and better than what we are currently doing—Obamacare was an improvement over the previous mess, but it’s still a mess.)
What about public education? Well, we already have that up to the high school level, and it works quite well.
Contrary to popular belief, the average public high school has better outcomes in terms of test scores and college placements than the average private high school. There are some elite private schools that do better, but they are extraordinarily expensive and they self-select only the best students. Public schools have to take all students, and they have a limited budget; but they have high quality standards and they require their teachers to be certified.
The flaws in our public school system are largely from it being not public enough, which is to say that schools are funded by their local property taxes instead of having their costs equally shared across whole states. This gives them the same basic problem as private schools: Rich kids get better schools.
If we removed that inequality, our educational outcomes would probably be among the best in the world—indeed, in our most well-funded school districts, they are. The state of Massachusetts which actually funds their public schools equally and well, gets international test scores just as good as the supposedly “superior” educational systems of Asian countries. In fact, this is probably even unfair to Massachusetts, as we know that China specifically selects the regions that have the best students to be the ones to take these international tests. Massachusetts is the best the US has to offer, but Shanghai is also the best China has to offer, so it’s only fair we compare apples to apples.
Public education has benefits for our whole society. We want to have a population of citizens, workers, and consumers who are well-educated. There are enormous benefits of primary and secondary education in terms of reducing poverty, improving public health, and increased economic growth.
So there’s my impassioned argument for why we should continue to support free, universal public education up to high school.
When it comes to college, I can’t be quite so enthusiastic. While there are societal benefits of college education, most of the benefits of college accrue to the individuals who go to college themselves.
The median weekly income of someone with a high school diploma is about $730; with a bachelor’s degree this rises to $1200; and with a doctoral or professional degree it gets over $1800. Higher education also greatly reduces your risk of being unemployed; while about 4% of the general population is unemployed, only 1.5% of people with doctorates or professional degrees are. Add that up over all the weeks of your life, and it’s a lot of money.
The net present value of a college education has been estimated at approximately $1 million. This result is quite sensitive to the choice of discount rate; at a higher discount rate you can get the net present value as “low” as $250,000.
With this in mind, the fact that the median student loan debt for a college graduate is about $30,000 doesn’t sound so terrible, does it? You’re taking out a loan for $30,000 to get something that will earn you between $250,000 and $1 million over the course of your life.
There is some evidence that having student loans delays homeownership; but this is a problem with our mortgage system, not our education system. It’s mainly the inability to finance a down payment that prevents people from buying homes. We should implement a system of block grants for first-time homeowners that gives them a chunk of money to make a down payment, perhaps $50,000. This would cost about as much as the mortgage interest tax deduction which mainly benefits the upper-middle class.
Higher education does have societal benefits as well. Perhaps the starkest I’ve noticed is how categorically higher education decided people’s votes on Donald Trump: Counties with high rates of college education almost all voted for Clinton, and counties with low rates of college education almost all voted for Trump. This was true even controlling for income and a lot of other demographic factors. Only authoritarianism, sexism and racism were better predictors of voting for Trump—and those could very well be mediating variables, if education reduces such attitudes.
If indeed it’s true that higher education makes people less sexist, less racist, less authoritarian, and overall better citizens, then it would be worth every penny to provide universal free college.
But it’s worth noting that even countries like Germany and Sweden which ostensibly do that don’t really do that: While college tuition is free for Swedish citizens and Germany provides free college for all students of any nationality, nevertheless the proportion of people in Sweden and Germany with bachelor’s degrees is actually lower than that of the United States. In Sweden the gap largely disappears if you restrict to younger cohorts—but in Germany it’s still there.
Indeed, from where I’m sitting, “universal free college” looks an awful lot like “the lower-middle class pays for the upper-middle class to go to college”. Social class is still a strong predictor of education level in Sweden. Among OECD countries, education seems to be the best at promoting upward mobility in Australia, and average college tuition in Australia is actually higher than average college tuition in the US (yes, even adjusting for currency exchange: Australian dollars are worth only slightly less than US dollars).
What does Australia do? They have a really good student loan system. You have to reach an annual income of about $40,000 per year before you need to make payments at all, and the loans are subsidized to be interest-free. Once you do owe payments, the debt is repaid at a rate proportional to your income—so effectively it’s not a debt at all but an equity stake.
In the US, students have been taking the desperate (and very cyberpunk) route of selling literal equity stakes in their education to Wall Street banks; this is a terrible idea for a hundred reasons. But having the government have something like an equity stake in students makes a lot of sense.
Because of the subsidies and generous repayment plans, the Australian government loses money on their student loan system, but so what? In order to implement universal free college, they would have spent an awful lot more than they are losing now. This way, the losses are specifically on students who got a lot of education but never managed to raise their income high enough—which means the government is actually incentivized to improve the quality of education or job-matching.
The cost of universal free college is considerable: That $1.3 trillion currently owed as student loans would be additional government debt or tax liability instead. Is this utterly unaffordable? No. But it’s not trivial either. We’re talking about roughly $60 billion per year in additional government spending, a bit less than what we currently spend on food stamps. An expenditure like that should have a large public benefit (as food stamps absolutely, definitely do!); I’m not convinced that free college would have such a benefit.
It would benefit me personally enormously: I currently owe over $100,000 in debt (about half from my undergrad and half from my first master’s). But I’m fairly privileged. Once I finally make it through this PhD, I can expect to make something like $100,000 per year until I retire. I’m not sure that benefiting people like me should be a major goal of public policy.
That said, I don’t think universal free college is a terrible policy. Done well, it could be a good thing. But it isn’t the no-brainer that single-payer healthcare is. We can still make sure that students are not overburdened by debt without making college tuition actually free.

For labor day, thoughts on socialism

pnrj critique of neoclassical economics, ethics, inequality, market failure, public policy , , , , , , , , , , , , , , ,

Planned Post 255: Sep 9 JDN 2458371

This week includes Labor Day, the holiday where we are perhaps best justified in taking the whole day off from work and doing nothing. Labor Day is sort of the moderate social democratic counterpart to the explicitly socialist holiday May Day.

The right wing in this country has done everything in their power to expand the definition of “socialism”, which is probably why most young people now have positive views of socialism. There was a time when FDR was seen as an alternative to socialism; but now I’m pretty sure he’d just be called a socialist.

Because of this, I am honestly not sure whether I should be considered a socialist. I definitely believe in the social democratic welfare state epitomized by Scandinavia, but I definitely don’t believe in total collectivization of all means of production.

I am increasingly convinced that shareholder capitalism is a terrible system (the renowned science fiction author Charles Stross actually gave an excellent talk on this subject), but I would not want to abandon free markets.
The best answer might be worker-owned cooperatives. The empirical data is actually quite consistent in showing worker co-ops to be as efficient if not more efficient than conventional corporations, and by construction their pay systems produce less inequality than corporations.

Indeed, I think there is reason to believe that a worker co-op is a much more natural outcome for free markets under a level playing field than a conventional corporation, and the main reason we have corporations is actually that capitalism arose out of (and in response to) feudalism.

Think about it: Why should most things be owned by the top 1%? (Okay, not quite “most”: to be fair, the top 1% only owns 40% of all US net wealth.) Why is 80% of the value of the stock market held by the top 10% of the population?

Most things aren’t done by the top 1%. There are a handful of individuals (namely, scientists who make seminal breakthroughs: Charles Darwin, Marie Curie, Albert Einstein, Rosalind Franklin, Alan Turing, Jonas Salk) who are so super-productive that they might conceivably deserve billionaire-level compensation—but they are almost never the ones who are actually billionaires. If markets were really distributing capital to those who would use it most productively, there’s no reason to think that inequality would be so self-sustaining—much less self-enhancing as it currently seems to be.

But when you realize that capitalism emerged out of a system where the top 1% (or less) already owned most things, and did so by a combination of “divine right” ideology and direct, explicit violence, this inequality becomes a lot less baffling. We never had a free market on a level playing field. The closest we’ve ever gotten has always been through social-democratic reforms (like the New Deal and Scandinavia).

How does this result in corporations? Well, when all the wealth is held by a small fraction of individuals, how do you start a business? You have to borrow money from the people who have it. Borrowing makes you beholden to your creditors, and puts you at great risk if your venture fails (especially back in the days when there were debtor’s prisons—and we’re starting to go back that direction!). Equity provides an alternative: In exchange for giving them the downside risk if your venture fails, you also give your creditors—now shareholders—the upside risk if your venture succeeds. But at the end of the day when your business has succeeded, where did most of the profits go? Into the hands of the people who already had money to begin with, who did nothing to actually contribute to society. The world would be better off if those people had never existed and their wealth had simply been shared with everyone else.

Compare this to what would happen if we all started with similar levels of wealth. (How much would each of us have? Total US wealth of about $44 trillion, spread among a population of 328 million, is about $130,000 each. I don’t know about you, but I think I could do quite a bit with that.) When starting a business, you wouldn’t go heavily into debt or sign away ownership of your company to some billionaire; you’d gather a group of dedicated partners, each of whom would contribute money and effort into building the business. As you added on new workers, it would make sense to pool their assets, and give them a share of the company as well. The natural structure for your business would be not a shareholder corporation, but a worker-owned cooperative.

I think on some level the super-rich actually understand this. If you look closely at the sort of policies they fight for, they really aren’t capitalist. They don’t believe in free, unfettered markets where competition reigns. They believe in monopoly, lobbying, corruption, nepotism, and above all, low taxes. (There’s actually nothing in the basic principles of capitalism that says taxes should be low. Taxes should be as high as they need to be to cover public goods—no higher, and no lower.) They don’t want to provide nationalized healthcare, not because they believe that private healthcare competition is more efficient (no one who looks at the data for even a few minutes can honestly believe that—US healthcare is by far the most expensive in the world), but because they know that it would give their employees too much freedom to quit and work elsewhere. Donald Trump doesn’t want a world where any college kid with a brilliant idea and a lot of luck can overthrow his empire; he wants a world where everyone owes him and his family personal favors that he can call in to humiliate them and exert his power. That’s not capitalism—it’s feudalism.

Crowdfunding also provides an interesting alternative; we might even call it the customer-owned cooperative. Kickstarter and Patreon provide a very interesting new economic model—still entirely within the realm of free markets—where customers directly fund production and interact with producers to decide what will be produced. This might turn out to be even more efficient—and notice that it would run a lot more smoothly if we had all started with a level playing field.

Establishing such a playing field, of course, requires a large amount of redistribution of wealth. Is this socialism? If you insist. But I think it’s more accurate to describe it as reparations for feudalism (not to mention colonialism). We aren’t redistributing what was fairly earned in free markets; we are redistributing what was stolen, so that from now on, wealth can be fairly earned in free markets.

Did the World Bank modify its ratings to manipulate the outcome of an election in Chile?

pnrj current events, development economics, ethics, inequality, public policy , , , , , , , , , , , , , , ,

Jan 21 JDN 2458140

(By the way, my birthday is January 19. I can’t believe I’m turning 30.)

This is a fairly obscure news item, so you may have missed it. It should be bigger news than it is.
I can’t fault the New York Times for having its front page focus mainly on the false missile alert that was issued to some people in Hawaii; a false alarm of nuclear attack definitely is the most important thing that could be going on in the world, short of course of actual nuclear war.

CNN, on the other hand, is focused entirely on Trump. When I first wrote this post, they were also focused on Trump, mainly interested in asking whether Trump’s comments about “immigrants from shithole countries” was racist. My answer: Yes, but not because he said the countries were “shitholes”. That was crude, yes, but not altogether inaccurate. Countries like Syria, Afghanistan, and Sudan are, by any objective measure, terrible places. His comments were racist because they attributed that awfulness to the people leaving these countries. But in fact we have a word for immigrants who flee terrible places seeking help and shelter elsewhere: Refugees. We call those people refugees. There are over 10 million refugees in the world today, most of them from Syria.

So anyway, here’s the news item you should have heard about but probably didn’t: The Chief Economist of the World Bank (Paul Romer, who coincidentally I mentioned in my post about DSGE models) has opened an investigation into the possibility that the World Bank’s ratings of economic freedom were intentionally manipulated in order to tilt a Presidential election in Chile.

The worst part is, it may have worked: Chile’s “Doing Business” rating consistently fell under President Michelle Bachelet and rose under President Sebastian Piñera, and Piñera won the most recent election. Was that the reason he won? Who knows? I’m still not entirely clear on how we ended up with President Trump. But it very likely contributed.

The World Bank is supposed to be an impartial institution representing the interests of global economic development. I’m not naive; I recognize that no human institution is perfect, and there will always be competing political and economic interests within any complex institution. Development economists are subject to cognitive biases just like anyone else. If this was the work of a handful of economic analysts (or if Romer turns out to be wrong and the changes in statistical methodology were totally reasonable), so be it; let’s make sure that the bias is corrected and the analysts involved are punished.

But I fear that the rot may run deeper than this. The World Bank is effectively a form of unelected international government. It has been accused of inherent pro-capitalist (or even racist) bias due to the fact that Western governments are overrepresented in its governance, but I actually consider that accusation unfair: There are very good reasons to make sure that your international institutions are managed by liberal democracies, and turns out that most of the world’s liberal democracies are Western. The fact that the US, France, Germany, and the UK make most of the decisions is entirely sensible: Those are in fact the countries we should want making global decisions.

China is not underrepresented, because China is not a democracy and doesn’t deserve to be represented. They are already more represented in the World Bank than they should be, because representing the PRC is not actually representing the interests of the people of China. Russia and Saudi Arabia are undeniably overrepresented. India is underrepresented; they should be complaining. Some African democracies, such as Namibia and Botswana, would also have a legitimate claim to underrepresentation. But I don’t lose any sleep over the fact that Zimbabwe and Iran aren’t getting votes in the World Bank. If and when those countries actually start representing their people, then we can talk about giving them representation in world government. I don’t see how refusing to give international authority to dictators and theocrats constitutes racism or pro-capitalist bias.

That said, there are other reasons to think that the World Bank might actually have some sort of pro-capitalist bias. The World Bank was instrumental in forming the Washington Consensus, which opened free trade and increase economic growth worldwide, but also exposed many poor countries to risk from deregulated financial markets and undermined social safety nets through fiscal austerity programs. They weren’t wrong to want more free trade, and many of their reforms did make sense; but they were at best wildly overconfident in their policy prescriptions, and at worst willing to sacrifice people in poor countries at the altar of bank profits. World poverty has in fact fallen by about half since 1990, and the World Bank has a lot to do with that. But things may have gone faster and smoother if they hadn’t insisted on removing so many financial regulations so quickly without clear forecasts of what would happen. I don’t share Jason Hickel’s pessimistic view that the World Bank’s failures were intentional acts toward an ulterior agenda, but I can see how it begins to look that way when they keep failing the same ways over and over again. (I instead invoke Hanlon’s razor: “Never attribute to malice that which is adequately explained by stupidity.”)

There are also reports of people facing retaliation for criticizing World Bank projects, including those within the World Bank who raise ethical concerns. If this was politically-motivated data manipulation, there may have been people who saw it happening, but were afraid to say anything for fear of being fired or worse.

And Chile in particular has reason to be suspicious. The World Bank suddenly started giving loans to Chile when Augusto Pinochet took power (the CIA denies supporting the coup, by the way—though, given the source, I can understand why one would take that with a grain of salt), and did so under the explicit reasoning that an authoritarian capitalist regime was somehow “more trustworthy” than a democratic socialist regime. Even in the narrow sense of financial creditworthiness that seems difficult to defend; the World Bank knew almost nothing about what kind of government Pinochet was going to create, and in fact despite the so-called “Miracle of Chile”, rapid economic growth in Chile didn’t really happen until the 1990s, after Chile became a democratic capitalist regime.

What I’m really getting at here is that the World Bank has a lot to answer for. I am prepared to believe that most of these actions were honest mistakes or ideological blinders, rather than corruption or cruelty; but even so, when millions of lives are at stake, even honest mistakes aren’t so forgivable. They should be looking for ways to improve their internal governance to make sure that mistakes are caught and corrected quickly. They should be constantly vigilant for biases—either intentional or otherwise—that might seep into their research. Error should be met with immediate correction and public apology; malfeasance should be met with severe punishment.

Perhaps Romer’s investigation actually signals a shift toward such a policy. If so, this is a very good thing. If only we had done this, say, thirty years ago.

No, Scandinavian countries aren’t parasites. They’re just… better.

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

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.

What is socialism?

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

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?