Several of the world’s largest banks are known to have committed large-scale fraud. Why have we done so little about it?

July 16, JDN 2457951

In 2014, JPMorgan Chase paid a settlement of $614 million for fraudulent mortgage lending contributing to the crisis; but this was spare change compared to the $16.5 billion Bank of America paid in settlements for their fradulent mortgages.

In 2015, Citibank paid $700 million in restitution and $35 million in penalties for fraudulent advertising of “payment protection” services.

In 2016, Wells Fargo paid $190 in settlements for defrauding their customers with fake accounts.

Even PayPal has paid $25 million in settlements over abuses of their “PayPal Credit” system.
In 2016, Goldman Sachs paid $5.1 billion in settlements over their fraudulent sales of mortgage-backed securities.
But the worst offender of course is HSBC, which has paid $2.5 billion in settlements over fraud, as well as $1.9 billion in settlements for laundering money for terrorists. The US Justice Department has kept their money-laundering protections classified because they’re so bad that simply revealing them to the public could result in vast amounts of criminal abuse.
These are some of the world’s largest banks. JPMorgan Chase alone owns 8.0% of all investment banking worldwide; Goldman Sachs owns 6.6%; Citi owns 4.9%; Wells Fargo 2.5%; and HSBC 1.8%. That means that between them, these five corporations—all proven to have engaged in large-scale fraud—own almost one-fourth of all the world’s investment banking assets.

What shocks me the most about this is that hardly anyone seems to care. It’s seen as “normal”, as “business as usual” that a quarter of the world’s investment banking system is owned by white-collar criminals. When the issue is even brought up, often the complaint seems to be that the government is being somehow overzealous. The Economist even went so far as to characterize the prosecution of Wall Street fraud as a “shakedown”. Apparently the idea that our world’s most profitable companies shouldn’t be able to launder money for terrorists is just ridiculous. These are rich people; you expect them to follow rules? What is this, some kind of democracy?

Is this just always how it has been? Has corruption always been so thoroughly infused with finance that we don’t even know how to separate them? Has the oligarchy of the top 0.01% become so strong that we can’t even bring ourselves to challenge them when they commit literal treason? For, in case you’ve forgotten, that is what money-laundering for terrorists is: HSBC gave aid and comfort to the enemies of the free world. Like “freedom” and “terrorism”, the word “treason” has been so overused that we begin to forget its meaning; but one of the groups that HSBC gladly loaned money to is an organization that has financed Hezbollah and Al-Qaeda. These are people that American and British soldiers have died fighting against, and when a British bank was found colluding with them, the penalty was… a few weeks of profits, no personal responsibility, and not a single day of prison time. The settlement was in fact less than the profits gained from the criminal enterprise, so this wasn’t even a fine; it was a tax. Our response to treason was to impose a tax.

And this of course was not the result of some newfound leniency in American government in general. No, we are still the nation that imprisons 700 out of every 100,000 people, the nation with more prisoners than any other nation on Earth. Our police officers still kill young Black men with impunity, including at least three dozen unarmed Black men every year, many of them for no apparent reason at all. (The precise number is still unknown, as the police refuse to keep an official database of all the citizens they kill.) Decades of “law and order” politicians promising to stop the “rising crime” (that is actually falling) have made the United States very close to a police state, especially in poor neighborhoods that are primarily inhabited by Black and Hispanic people. We don’t even have an especially high crime rate, except for gun homicides (and that because we have so many guns, also more than any other nation on Earth). We are, if anything, an especially vindictive society, cruel, unforgiving, and violent towards those we perceive as transgressors.

Except, that is, when the criminals are rich. Even the racial biases seem to go away in such circumstances; there is no reasonable doubt as to the guilt of O.J. Simpson or Bill Cosby, but Simpson only ended up in prison years later on a completely unrelated offense, and after Cosby’s mistrial it’s unclear if he’ll ever see any prison time. I don’t see how either man could have been less punished for his crimes had he been White; but can anyone seriously doubt that both men would be punished more had they not been rich?

I do not think that capitalism is an irredeemable system. I think that, in themselves, free markets are very useful, and we should not remove or restrict them unnecessarily. But capitalism isn’t supposed to be a system where the rich can do whatever they want and the poor have to accept it. Capitalism is supposed to be a system where everyone is free to do as they choose, unless they are harming others—and the rules are supposed to be the same for everyone. A free market is not one where you can buy the right to take away other people’s freedom.

Is this just some utopian idealism? It would surely be utopian to imagine a world where fraud never happens, that much is true. Someone, somewhere, will always be defrauding someone else. But a world where fraud is punished most of the time? Where our most powerful institutions are still subject to the basic rule of law? Is that a pipe dream as well?

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

August 6, JDN 2457607

I discussed in a post awhile ago the fact that economists overwhelmingly favor free trade but most people don’t. There are some deep psychological reasons for this, particularly the loss aversion which makes people experience losses about twice as much as they experience gains. Free trade requires change; it creates some jobs and destroys others. Those forced transitions can be baffling and painful.

The good news is that views on trade in the US are actually getting more positive in recent years—which makes Trump that much more baffling. I honestly can’t make much sense of the fact that candidates who are against free trade have been so big in this election (and let’s face it, even Bernie Sanders is largely against free trade!), in light of polls showing that free trade is actually increasingly popular.

Partly this can be explained by the fact that people are generally more positive about free trade in general than they are about particular trade agreements, and understandably so, as free trade agreements often include some really awful provisions that in no way advance free trade. But that doesn’t really explain the whole effect here. Maybe it’s a special interest effect: People who hate trade are much more passionate about hating trade than people who like trade are passionate about liking trade. If that’s the case, then this is what we need to change.

Today I’d like to focus on what we as economists and the economically literate more generally can do to help people understand what free trade is and why it is so important. This means two things:

First, of course, we must be clearer about the benefits of free trade. Many economists seem to think that it is simply so obvious that they don’t even bother to explain it, and end up seeming like slogan-chanting ideologues. “Free trade! Free trade! Free trade!”

Above all, we need to talk about how it was primarily through free trade that global extreme poverty is now at the lowest level it has ever been. This benefit needs to be repeated over and over, and anyone who argues for protectionism needs to be confronted with the millions of people they will throw back into poverty. Most people don’t even realize that global poverty is declining, so first of all, they need to be shown that it is.

American ideas are often credited with fighting global poverty, but that’s not so convincing, since most of the improvement in poverty has happened in China (not exactly a paragon of free markets, much less liberal democracy); what really seems to have made the difference is American dollars, spent in free trade. Imports to the US from China have risen from $3.8 billion in 1985 to $483 billion in 2015. Extreme poverty in China fell from 61% of the population in 1990 to 4% in 2015. Coincidence? I think not. Indeed, that $483 billion is just about $1 per day for every man, woman, and child in China—and the UN extreme poverty line is $1.25 per person per day.

We need to be talking about the jobs that are created by trade—if need be, making TV commercials interviewing workers at factories who make products for export. “Most of our customers are in Japan,” they might say. “Without free trade, I’d be out of a job.” Interview business owners saying things like, “Two years ago we opened up sales to China. Now I need to double my workforce just to keep up with demand.” Unlike a lot of other economic policies where the benefits are diffuse and hard to keep track of, free trade is one where you can actually point to specific people and see that they are now better off because they make more selling exports. From there, we just need to point out that imports and exports are two sides of the same transaction—so if you like exports, you’d better have imports.

We need to make it clear that the economic gains from trade are just as real as the losses from transition, even if they may not be as obvious. William Poole put it very well in this article on attitudes toward free trade:

Economists are sometimes charged with insensitivity over job losses, when in fact most of us are extremely sensitive to such losses. What good economics tells us is that saving jobs in one industry does not save jobs in the economy as a whole. We urge people to be as sensitive to the jobs indirectly lost as a consequence of trade restriction as to those lost as a consequence of changing trade patterns.

Second, just as importantly, we must be honest about the costs of free trade. We need to stop eliding the distinction between net aggregate benefits and benefits for everyone everywhere. There are winners and losers, and we need to face up to that.

For example, we need to stop saying thinks like “Free trade will not send jobs to Mexico and China.” No, it absolutely will, and has, and does—and that is part of what it’s for. Because people in Mexico and China are people, and they deserve to have better jobs just as much as we do. Sending jobs to China is not a bug; it’s a feature. China needs jobs particularly badly.

Then comes the next part: “But if our jobs get sent to China, what will we do?” Better jobs, created here by the economic benefits of free trade. No longer will American workers toil in factories assembling parts; instead they will work in brightly-lit offices designing those parts on CAD software.

Of course this raises another problem: What happens to people who were qualified to toil in factories, but aren’t qualified to design parts on CAD software? Well, they’ll need to learn. And we should be paying for that education (though in large part, we are; altogether US federal, state, and local governments spend over $1 trillion a year on education).

And what if they can’t learn, can’t find another job somewhere else? What if they’re just not cut out for the kind of work we need in a 21st century economy? Then here comes my most radical statement of all: Then they shouldn’t have to.

The whole point of expanding economic efficiency—which free trade most certainly does—is to create more stuff. But if you create more stuff, you then have the opportunity to redistribute that stuff, in such a way that no one is harmed by that transition. This is what we have been failing to do in the United States. We need to set up our unemployment and pension systems so that people who lose their jobs due to free trade are not harmed by it, but instead feel like it is an opportunity to change careers or retire. We should have a basic income so that even people who can’t work at all can still live with dignity. This redistribution will not happen automatically; it is a policy choice we must make.


In theory there is a way around it, which is often proposed as an alternative to a basic income; it is called a job guarantee. Simply giving everyone free money for some reason makes people uncomfortable (never could quite fathom why; Donald Trump inherits capital income from his father, that’s fine, but we all inherit shared capital income as a nation, that’s a handout?), so instead we give everyone a job, so they can earn their money!

Well, here’s the thing: They won’t actually be earning it—or else it’s not a job guarantee. If you just want an active labor-market program to retrain workers and match them with jobs, that sounds great; Denmark has had great success with such things, and after all #ScandinaviaIsBetter. But no matter how good your program is, some people are going to not have any employable skills, or have disabilities too severe to do any productive work, or simply be too lazy to actually work. And now you’ve got a choice to make: Do you give those people jobs, or not?

If you don’t, it’s not a job guarantee. If you do, they’re not earning it anymore. Either employment is tied to actual productivity, or it isn’t; if you are guaranteed a certain wage no matter what you do, then some people are going to get that wage for doing nothing. As The Economist put it:

However, there are two alternatives: give people money with no strings attached (through a guaranteed basic income, unemployment insurance, disability payments, and so forth), or just make unemployed people survive on whatever miserable scraps they can cobble together.

If it’s really a job guarantee, we would still need to give jobs to people who can’t work or simply won’t. How is this different from a basic income? Well, it isn’t, except you added all these extra layers of bureaucracy so that you could feel like you weren’t just giving a handout. You’ve added additional costs for monitoring and administration, as well as additional opportunities for people to slip through the cracks. Either you are going to leave some people in poverty, or you are going to give money to people who don’t work—so why not give money to people who don’t work?

Another cost we need to be honest about is ecological. In our rush to open free trade, we are often lax in ensuring that this trade will not accelerate environmental degradation and climate change. This is often justified in the name of helping the world’s poorest people; but they will be hurt far more when their homes are leveled by hurricanes than by waiting a few more years to get the trade agreement right. That’s one where Poole actually loses me:

Few Americans favor a world trading system in which U.S. policies on environmental and other conditions could be controlled by foreign governments through their willingness to accept goods exported by the United States.

Really? You think we should be able to force other countries to accept our goods, regardless of whether they consider them ecologically sustainable? You think most Americans think that? It’s easy to frame it as other people imposing on us, but trade restrictions on ecologically harmful goods are actually a very minimal—indeed, almost certainly insufficient—regulation against environmental harm. Oil can still kill a lot of people even if it never crosses borders (or never crosses in liquid form—part of the point is you can’t stop the gaseous form). We desperately need global standards on ecological sustainability, and while we must balance environmental regulations with economic efficiency, currently that balance is tipped way too far against the environment—and millions will die if it remains this way.

This is the kernel of truth in otherwise economically-ignorant environmentalist diatribes like Naomi Klein’s This Changes Everything; free trade in principle doesn’t say anything about being environmentally unsustainable, but free trade in practice has often meant cutting corners and burning coal. Where we currently have diesel-powered container ships built in coal-powered factories and Klein wants no container ships and perhaps even no factories, what we really need are nuclear-powered container ships and solar-powered factories. Klein points out cases where free trade agreements have shut down solar projects that tried to create local jobs—but neither side seems to realize that a good free trade agreement would expand that solar project to create global jobs. Instead of building solar panels in Canada to sell only in Canada, we’d build solar panels in Canada to sell in China and India—and build ten times as many. That is what free trade could be, if we did it right.

Is Equal Unfair?

JDN 2457492

Much as you are officially a professional when people start paying you for what you do, I think you are officially a book reviewer when people start sending you books for free asking you to review them for publicity. This has now happened to me, with the book Equal Is Unfair by Don Watkins and Yaron Brook. This post is longer than usual, but in order to be fair to the book’s virtues as well as its flaws, I felt a need to explain quite thoroughly.

It’s a very frustrating book, because at times I find myself agreeing quite strongly with the first part of a paragraph, and then reaching the end of that same paragraph and wanting to press my forehead firmly into the desk in front of me. It makes some really good points, and for the most part uses economic statistics reasonably accurately—but then it rides gleefully down a slippery slope fallacy like a waterslide. But I guess that’s what I should have expected; it’s by leaders of the Ayn Rand Institute, and my experience with reading Ayn Rand is similar to that of Randall Monroe (I’m mainly referring to the alt-text, which uses slightly foul language).

As I kept being jostled between “That’s a very good point.”, “Hmm, that’s an interesting perspective.”, and “How can anyone as educated as you believe anything that stupid!?” I realized that there are actually three books here, interleaved:

1. A decent economics text on the downsides of taxation and regulation and the great success of technology and capitalism at raising the standard of living in the United States, which could have been written by just about any mainstream centrist neoclassical economist—I’d say it reads most like John Taylor or Ken Galbraith. My reactions to this book were things like “That’s a very good point.”, and “Sure, but any economist would agree with that.”

2. An interesting philosophical treatise on the meanings of “equality” and “opportunity” and their application to normative economic policy, as well as about the limitations of statistical data in making political and ethical judgments. It could have been written by Robert Nozick (actually I think much of it was based on Robert Nozick). Some of the arguments are convincing, others are not, and many of the conclusions are taken too far; but it’s well within the space of reasonable philosophical arguments. My reactions to this book were things like “Hmm, that’s an interesting perspective.” and “Your argument is valid, but I think I reject the second premise.”

3. A delusional rant of the sort that could only be penned by a True Believer in the One True Gospel of Ayn Rand, about how poor people are lazy moochers, billionaires are world-changing geniuses whose superior talent and great generosity we should all bow down before, and anyone who would dare suggest that perhaps Steve Jobs got lucky or owes something to the rest of society is an authoritarian Communist who hates all achievement and wants to destroy the American Dream. It was this book that gave me reactions like “How can anyone as educated as you believe anything that stupid!?” and “You clearly have no idea what poverty is like, do you?” and “[expletive] you, you narcissistic ingrate!”

Given that the two co-authors are Executive Director and a fellow of the Ayn Rand Institute, I suppose I should really be pleasantly surprised that books 1 and 2 exist, rather than disappointed by book 3.

As evidence of each of the three books interleaved, I offer the following quotations:

Book 1:

“All else being equal, taxes discourage production and prosperity.” (p. 30)

No reasonable economist would disagree. The key is all else being equal—it rarely is.

“For most of human history, our most pressing problem was getting enough food. Now food is abundant and affordable.” (p.84)

Correct! And worth pointing out, especially to anyone who thinks that economic progress is an illusion or we should go back to pre-industrial farming practices—and such people do exist.

“Wealth creation is first and foremost knowledge creation. And this is why you can add to the list of people who have created the modern world, great thinkers: people such as Euclid, Aristotle, Galileo, Newton, Darwin, Einstein, and a relative handful of others.” (p.90, emph. in orig.)

Absolutely right, though as I’ll get to below there’s something rather notable about that list.

“To be sure, there is competition in an economy, but it’s not a zero-sum game in which some have to lose so that others can win—not in the big picture.” (p. 97)

Yes! Precisely! I wish I could explain to more people—on both the Left and the Right, by the way—that economics is nonzero-sum, and that in the long run competitive markets improve the standard of living of society as a whole, not just the people who win that competition.

Book 2:

“Even opportunities that may come to us without effort on our part—affluent parents, valuable personal connections, a good education—require enormous effort to capitalize on.” (p. 66)

This is sometimes true, but clearly doesn’t apply to things like the Waltons’ inherited billions, for which all they had to do was be born in the right family and not waste their money too extravagantly.

“But life is not a game, and achieving equality of initial chances means forcing people to play by different rules.” (p. 79)

This is an interesting point, and one that I think we should acknowledge; we must treat those born rich differently from those born poor, because their unequal starting positions mean that treating them equally from this point forward would lead to a wildly unfair outcome. If my grandfather stole your grandfather’s wealth and passed it on to me, the fair thing to do is not to treat you and I equally from this point forward—it’s to force me to return what was stolen, insofar as that is possible. And even if we suppose that my grandfather earned far vaster wealth than yours, I think a more limited redistribution remains justified simply to put you and I on a level playing field and ensure fair competition and economic efficiency.

“The key error in this argument is that it totally mischaracterizes what it means to earn something. For the egalitarians, the results of our actions don’t merely have to be under our control, but entirely of our own making. […] But there is nothing like that in reality, and so what the egalitarians are ultimately doing is wiping out the very possibility of earning something.” (p. 193)

The way they use “egalitarian” as an insult is a bit grating, but there clearly are some actual egalitarian philosophers whose views are this extreme, such as G.A. Cohen, James Kwak and Peter Singer. I strongly agree that we need to make a principled distinction between gains that are earned and gains that are unearned, such that both sets are nonempty. Yet while Cohen would seem to make “earned” an empty set, Watkins and Brook very nearly make “unearned” empty—you get what you get, and you deserve it. The only exceptions they seem willing to make are outright theft and, what they consider equivalent, taxation. They have no concept of exploitation, excessive market power, or arbitrage—and while they claim they oppose fraud, they seem to think that only government is capable of it.

Book 3:

“What about government handouts (usually referred to as ‘transfer payments’)?” (p. 23)

Because Social Security is totally just a handout—it’s not like you pay into it your whole life or anything.

“No one cares whether the person who fixes his car or performs his brain surgery or applies for a job at his company is male or female, Indian or Pakistani—he wants to know whether they are competent.” (p.61)

Yes they do. We have direct experimental evidence of this.

“The notion that ‘spending drives the economy’ and that rich people spend less than others isn’t a view seriously entertained by economists,[…]” (p. 110)

The New Synthesis is Keynesian! This is what Milton Friedman was talking about when he said, “We’re all Keynesians now.”

“Because mobility statistics don’t distinguish between those who don’t rise and those who can’t, they are useless when it comes to assessing how healthy mobility is.” (p. 119)

So, if Black people have much lower odds of achieving high incomes even controlling for education, we can’t assume that they are disadvantaged or discriminated against; maybe Black people are just lazy or stupid? Is that what you’re saying here? (I think it might be.)

“Payroll taxes alone amount to 15.3 percent of your income; money that is taken from you and handed out to the elderly. This means that you have to spend more than a month and a half each year working without pay in order to fund other people’s retirement and medical care.” (p. 127)

That is not even close to how taxes work. Taxes are not “taken” from money you’d otherwise get—taxation changes prices and the monetary system depends upon taxation.

“People are poor, in the end, because they have not created enough wealth to make themselves prosperous.” (p. 144)

This sentence was so awful that when I showed it to my boyfriend, he assumed it must be out of context. When I showed him the context, he started swearing the most I’ve heard him swear in a long time, because the context was even worse than it sounds. Yes, this book is literally arguing that the reason people are poor is that they’re just too lazy and stupid to work their way out of poverty.

“No society has fully implemented the egalitarian doctrine, but one came as close as any society can come: Cambodia’s Khmer Rouge.” (p. 207)

Because obviously the problem with the Khmer Rouge was their capital gains taxes. They were just too darn fair, and if they’d been more selfish they would never have committed genocide. (The authors literally appear to believe this.)


So there are my extensive quotations, to show that this really is what the book is saying. Now, a little more summary of the good, the bad, and the ugly.

One good thing is that the authors really do seem to understand fairly well the arguments of their opponents. They quote their opponents extensively, and only a few times did it feel meaningfully out of context. Their use of economic statistics is also fairly good, though occasionally they present misleading numbers or compare two obviously incomparable measures.

One of the core points in Equal is Unfair is quite weak: They argue against the “shared-pie assumption”, which is that we create wealth as a society, and thus the rest of society is owed some portion of the fruits of our efforts. They maintain that this is fundamentally authoritarian and immoral; essentially they believe a totalizing false dichotomy between either absolute laissez-faire or Stalinist Communism.

But the “shared-pie assumption” is not false; we do create wealth as a society. Human cognition is fundamentally social cognition; they said themselves that we depend upon the discoveries of people like Newton and Einstein for our way of life. But it should be obvious we can never pay Einstein back; so instead we must pay forward, to help some child born in the ghetto to rise to become the next Einstein. I agree that we must build a society where opportunity is maximized—and that means, necessarily, redistributing wealth from its current state of absurd and immoral inequality.

I do however agree with another core point, which is that most discussions of inequality rely upon a tacit assumption which is false: They call it the “fixed-pie assumption”.

When you talk about the share of income going to different groups in a population, you have to be careful about the fact that there is not a fixed amount of wealth in a society to be distributed—not a “fixed pie” that we are cutting up and giving around. If it were really true that the rising income share of the top 1% were necessary to maximize the absolute benefits of the bottom 99%, we probably should tolerate that, because the alternative means harming everyone. (In arguing this they quote John Rawls several times with disapprobation, which is baffling because that is exactly what Rawls says.)

Even if that’s true, there is still a case to be made against inequality, because too much wealth in the hands of a few people will give them more power—and unequal power can be dangerous even if wealth is earned, exchanges are uncoerced, and the distribution is optimally efficient. (Watkins and Brook dismiss this contention out of hand, essentially defining beneficent exploitation out of existence.)

Of course, in the real world, there’s no reason to think that the ballooning income share of the top 0.01% in the US is actually associated with improved standard of living for everyone else.

I’ve shown these graphs before, but they bear repeating:

Income shares for the top 1% and especially the top 0.1% and 0.01% have risen dramatically in the last 30 years.


But real median income has only slightly increased during the same period.


Thus, mean income has risen much faster than median income.


While theoretically it could be that the nature of our productivity technology has shifted in such a way that it suddenly became necessary to heap more and more wealth on the top 1% in order to continue increasing national output, there is actually very little evidence of this. On the contrary, as Joseph Stiglitz (Nobel Laureate, you may recall) has documented, the leading cause of our rising inequality appears to be a dramatic increase in rent-seeking, which is to say corruption, exploitation, and monopoly power. (This probably has something to do with why I found in my master’s thesis that rising top income shares correlate quite strongly with rising levels of corruption.)

Now to be fair, the authors of Equal is Unfair do say that they are opposed to rent-seeking, and would like to see it removed. But they have a very odd concept of what rent-seeking entails, and it basically seems to amount to saying that whatever the government does is rent-seeking, whatever corporations do is fair free-market competition. On page 38 they warn us not to assume that government is good and corporations are bad—but actually it’s much more that they assume that government is bad and corporations are good. (The mainstream opinion appears to be actually that both are bad, and we should replace them both with… er… something.)

They do make some other good points I wish more leftists would appreciate, such as the point that while colonialism and imperialism can damage countries that suffer them and make them poorer, they generally do not benefit the countries that commit them and make them richer. The notion that Europe is rich because of imperialism is simply wrong; Europe is rich because of education, technology, and good governance. Indeed, the greatest surge in Europe’s economic growth occurred as the period of imperialism was winding down—when Europeans realized that they would be better off trying to actually invent and produce things rather than stealing them from others.

Likewise, they rightfully demolish notions of primitivism and anti-globalization that I often see bouncing around from folks like Naomi Klein. But these are book 1 messages; any economist would agree that primitivism is a terrible idea, and very few are opposed to globalization per se.

The end of Equal is Unfair gives a five-part plan for unleashing opportunity in America:

1. Abolish all forms of corporate welfare so that no business can gain unfair advantage.

2. Abolish government barriers to work so that every individual can enjoy the dignity of earned success.

3. Phase out the welfare state so that America can once again become the land of self-reliance.

4. Unleash the power of innovation in education by ending the government monopoly on schooling.

5. Liberate innovators from the regulatory shackles that are strangling them.

Number 1 is hard to disagree with, except that they include literally everything the government does that benefits a corporation as corporate welfare, including things like subsidies for solar power that the world desperately needs (or millions of people will die).

Number 2 sounds really great until you realize that they are including all labor standards, environmental standards and safety regulations as “barriers to work”; because it’s such a barrier for children to not be able to work in a factory where your arm can get cut off, and such a barrier that we’ve eliminated lead from gasoline emissions and thereby cut crime in half.

Number 3 could mean a lot of things; if it means replacing the existing system with a basic income I’m all for it. But in fact it seems to mean removing all social insurance whatsoever. Indeed, Watkins and Brook do not appear to believe in social insurance at all. The whole concept of “less fortunate”, “there but for the grace of God go I” seems to elude them. They have no sense that being fortunate in their own lives gives them some duty to help others who were not; they feel no pang of moral obligation whatsoever to help anyone else who needs help. Indeed, they literally mock the idea that human beings are “all in this together”.

They also don’t even seem to believe in public goods, or somehow imagine that rational self-interest could lead people to pay for public goods without any enforcement whatsoever despite the overwhelming incentives to free-ride. (What if you allow people to freely enter a contract that provides such enforcement mechanisms? Oh, you mean like social democracy?)

Regarding number 4, I’d first like to point out that private schools exist. Moreover, so do charter schools in most states, and in states without charter schools there are usually vouchers parents can use to offset the cost of private schools. So while the government has a monopoly in the market share sense—the vast majority of education in the US is public—it does not actually appear to be enforcing a monopoly in the anti-competitive sense—you can go to private school, it’s just too expensive or not as good. Why, it’s almost as if education is a public good or a natural monopoly.

Number 5 also sounds all right, until you see that they actually seem most opposed to antitrust laws of all things. Why would antitrust laws be the ones that bother you? They are designed to increase competition and lower barriers, and largely succeed in doing so (when they are actually enforced, which is rare of late). If you really want to end barriers to innovation and government-granted monopolies, why is it not patents that draw your ire?

They also seem to have trouble with the difference between handicapping and redistribution—they seem to think that the only way to make outcomes more equal is to bring the top down and leave the bottom where it is, and they often use ridiculous examples like “Should we ban reading to your children, because some people don’t?” But of course no serious egalitarian would suggest such a thing. Education isn’t fungible, so it can’t be redistributed. You can take it away (and sometimes you can add it, e.g. public education, which Watkins and Brooks adamantly oppose); but you can’t simply transfer it from one person to another. Money on the other hand, is by definition fungible—that’s kind of what makes it money, really. So when we take a dollar from a rich person and give it to a poor person, the poor person now has an extra dollar. We’ve not simply lowered; we’ve also raised. (In practice it’s a bit more complicated than that, as redistribution can introduce inefficiencies. So realistically maybe we take $1.00 and give $0.90; that’s still worth doing in a lot of cases.)

If attributes like intelligence were fungible, I think we’d have a very serious moral question on our hands! It is not obvious to me that the world is better off with its current range of intelligence, compared to a world where geniuses had their excess IQ somehow sucked out and transferred to mentally disabled people. Or if you think that the marginal utility of intelligence is increasing, then maybe we should redistribute IQ upward—take it from some mentally disabled children who aren’t really using it for much and add it onto some geniuses to make them super-geniuses. Of course, the whole notion is ridiculous; you can’t do that. But whereas Watkins and Brook seem to think it’s obvious that we shouldn’t even if we could, I don’t find that obvious at all. You didn’t earn your IQ (for the most part); you don’t seem to deserve it in any deep sense; so why should you get to keep it, if the world would be much better off if you didn’t? Why should other people barely be able to feed themselves so I can be good at calculus? At best, maybe I’m free to keep it—but given the stakes, I’m not even sure that would be justifiable. Peter Singer is right about one thing: You’re not free to let a child drown in a lake just to keep your suit from getting wet.

Ultimately, if you really want to understand what’s going on with Equal is Unfair, consider the following sentence, which I find deeply revealing as to the true objectives of these Objectivists:

“Today, meanwhile, although we have far more liberty than our feudal ancestors, there are countless ways in which the government restricts our freedom to produce and trade including minimum wage laws, rent control, occupational licensing laws, tariffs, union shop laws, antitrust laws, government monopolies such as those granted to the post office and education system, subsidies for industries such as agriculture or wind and solar power, eminent domain laws, wealth redistribution via the welfare state, and the progressive income tax.” (p. 114)

Some of these are things no serious economist would disagree with: We should stop subsidizing agriculture and tariffs should be reduced or removed. Many occupational licenses are clearly unnecessary (though this has a very small impact on inequality in real terms—licensing may stop you from becoming a barber, but it’s not what stops you from becoming a CEO). Others are legitimately controversial: Economists are currently quite divided over whether minimum wage is beneficial or harmful (I lean toward beneficial, but I’d prefer a better solution), as well as how to properly regulate unions so that they give workers much-needed bargaining power without giving unions too much power. But a couple of these are totally backward, exactly contrary to what any mainstream economist would say: Antitrust laws need to be enforced more, not eliminated (don’t take it from me; take it from that well-known Marxist rag The Economist). Subsidies for wind and solar power make the economy more efficient, not less—and suspiciously Watkins and Brook omitted the competing subsidies that actually are harmful, namely those to coal and oil.

Moreover, I think it’s very revealing that they included the word progressive when talking about taxation. In what sense does making a tax progressive undermine our freedom? None, so far as I can tell. The presence of a tax undermines freedom—your freedom to spend that money some other way. Making the tax higher undermines freedom—it’s more money you lose control over. But making the tax progressive increases freedom for some and decreases it for others—and since rich people have lower marginal utility of wealth and are generally more free in substantive terms in general, it really makes the most sense that, holding revenue constant, making a tax progressive generally makes your people more free.

But there’s one thing that making taxes progressive does do: It benefits poor people and hurts rich people. And thus the true agenda of Equal is Unfair becomes clear: They aren’t actually interested in maximizing freedom—if they were, they wouldn’t be complaining about occupational licensing and progressive taxation, they’d be outraged by forced labor, mass incarceration, indefinite detention, and the very real loss of substantive freedom that comes from being born into poverty. They wouldn’t want less redistribution, they’d want more efficient and transparent redistribution—a shift from the current hodgepodge welfare state to a basic income system. They would be less concerned about the “freedom” to pollute the air and water with impunity, and more concerned about the freedom to breathe clean air and drink clean water.

No, what they really believe is rich people are better. They believe that billionaires attained their status not by luck or circumstance, not by corruption or ruthlessness, but by the sheer force of their genius. (This is essentially the entire subject of chapter 6, “The Money-Makers and the Money-Appropriators”, and it’s nauseating.) They describe our financial industry as “fundamentally moral and productive” (p.156)—the industry that you may recall stole millions of homes and laundered money for terrorists. They assert that no sane person could believe that Steve Wozniack got lucky—I maintain no sane person could think otherwise. Yes, he was brilliant; yes, he invented good things. But he had to be at the right place at the right time, in a society that supported and educated him and provided him with customers and employees. You didn’t build that.

Indeed, perhaps most baffling is that they themselves seem to admit that the really great innovators, such as Newton, Einstein, and Darwin, were scientists—but scientists are almost never billionaires. Even the common counterexample, Thomas Edison, is largely false; he mainly plagiarized from Nikola Tesla and appropriated the ideas of his employees. Newton, Einstein and Darwin were all at least upper-middle class (as was Tesla, by the way—he did not die poor as is sometimes portrayed), but they weren’t spectacularly mind-bogglingly rich the way that Steve Jobs and Andrew Carnegie were and Bill Gates and Jeff Bezos are.

Some people clearly have more talent than others, and some people clearly work harder than others, and some people clearly produce more than others. But I just can’t wrap my head around the idea that a single man can work so hard, be so talented, produce so much that he can deserve to have as much wealth as a nation of millions of people produces in a year. Yet, Mark Zuckerberg has that much wealth. Remind me again what he did? Did he cure a disease that was killing millions? Did he colonize another planet? Did he discover a fundamental law of nature? Oh yes, he made a piece of software that’s particularly convenient for talking to your friends. Clearly that is worth the GDP of Latvia. Not that silly Darwin fellow, who only uncovered the fundamental laws of life itself.

In the grand tradition of reducing complex systems to simple numerical values, I give book 1 a 7/10, book 2 a 5/10, and book 3 a 2/10. Equal is Unfair is about 25% book 1, 25% book 2, and 50% book 3, so altogether their final score is, drumroll please: 4/10. Maybe read the first half, I guess? That’s where most of the good stuff is.

No, capital taxes should not be zero

JDN 2456998 PST 11:38.

It’s an astonishingly common notion among neoclassical economists that we should never tax capital gains, and all taxes should fall upon labor income. Here Scott Sumner writing for The Economist has the audacity to declare this a ‘basic principle of economics’. Many of the arguments are based on rather esoteric theorems like the Atkinson-Stiglitz Theorem (I thought you were better than that, Stiglitz!) and the Chamley-Judd Theorem.

All of these theorems rest upon two very important assumptions, which many economists take for granted—yet which are utterly and totally untrue. For once it’s not assumed that we are infinite identical psychopaths; actually psychopaths might not give wealth to their children in inheritance, which would undermine the argument in a different way, by making each individual have a finite time horizon. No, the assumptions are that saving is the source of investment, and investment is the source of capital income.

Investment is the source of capital, that’s definitely true—the total amount of wealth in society is determined by investment. You do have to account for the fact that real investment isn’t just factories and machines, it’s also education, healthcare, infrastructure. With that in mind, yes, absolutely, the total amount of wealth is a function of the investment rate.

But that doesn’t mean that investment is the source of capital income—because in our present system the distribution of capital income is in no way determined by real investment or the actual production of goods. Virtually all capital income comes from financial markets, which are rife with corruption—they are indeed the main source of corruption that remains in First World nations—and driven primarily by arbitrage and speculation, not real investment. Contrary to popular belief and economic theory, the stock market does not fund corporations; corporations fund the stock market. It’s this bizarre game our society plays, in which a certain portion of the real output of our productive industries is siphoned off so that people who are already rich can gamble over it. Any theory of capital income which fails to take these facts into account is going to be fundamentally distorted.

The other assumption is that investment is savings, that the way capital increases is by labor income that isn’t spent on consumption. This isn’t even close to true, and I never understood why so many economists think it is. The notion seems to be that there is a certain amount of money in the world, and what you don’t spend on consumption goods you can instead spend on investment. But this is just flatly not true; the money supply is dynamically flexible, and the primary means by which money is created is through banks creating loans for the purpose of investment. It’s that I term I talked about in my post on the deficit; it seems to come out of nowhere, because that’s literally what happens.

On the reasoning that savings is just labor income that you don’t spend on consumption, then if you compute the figure W – C , wages and salaries minus consumption, that figure should be savings, and it should be equal to investment. Well, that figure is negative—for reasons I gave in that post. Total employee compensation in the US in 2014 is $9.2 trillion, while total personal consumption expenditure is $11.4 trillion. The reason we are able to save at all is because of government transfers, which account for $2.5 trillion. To fill up our GDP to its total of $16.8 trillion, you need to add capital income: proprietor income ($1.4 trillion) and receipts on assets ($2.1 trillion); then you need to add in the part of government spending that isn’t transfers ($1.4 trillion).

If you start with the fanciful assumption that the way capital increases is by people being “thrifty” and choosing to save a larger proportion of their income, then it makes some sense not to tax capital income. (Scott Sumner makes exactly that argument, having us compare two brothers with equal income, one of whom chooses to save more.) But this is so fundamentally removed from how capital—and for that matter capitalism—actually operates that I have difficulty understanding why anyone could think that it is true.

The best I can come up with is something like this: They model the world by imagining that there is only one good, peanuts, and everyone starts with the same number of peanuts, and everyone has a choice to either eat their peanuts or save and replant them. Then, the total production of peanuts in the future will be due to the proportion of peanuts that were replanted today, and the amount of peanuts each person has will be due to their past decisions to save rather than consume. Therefore savings will be equal to investment and investment will be the source of capital income.

I bet you can already see the problem even in this simple model, if we just relax the assumption of equal wealth endowments: Some people have a lot more peanuts than others. Why do some people eat all their peanuts? Well it probably has something to do with the fact they’d starve if they didn’t. Reducing your consumption below the level at which you can survive isn’t “thrifty”, it’s suicidal. (And if you think this is a strawman, the IMF has literally told Third World countries that their problem is they need to save more. Here they are arguing that in Ghana.) In fact, economic growth leads to saving, not the other way around. Most Americans aren’t starving, and could probably stand to save more than we do, but honestly it might not be good if we did—everyone trying to save more can lead to the Paradox of Thrift and cause a recession.

Even worse, in that model world, there is only capital income. There is no such thing as labor income, only the number of peanuts you grow from last year’s planting. If we now add in labor income, what happens? Well, peanuts don’t work anymore… let’s try robots. You have a certain number of robots, and you can either use the robots to do things you need (including somehow feeding you, I guess), or you can use them to build more robots to use later. You can also build more robots yourself. Then the “zero capital tax” argument amounts to saying that the government should take some of your robots for public use if you made them yourself, but not if they were made by other robots you already had.

In order for that argument to carry through, you need to say that there was no such thing as an initial capital endowment; all robots that exist were either made by their owners or saved from previous construction. If there is anyone who simply happened to be born with more robots, or has more because they stole them from someone else (or, more likely, both, they inherited from someone who stole), the argument falls apart.

And even then you need to think about the incentives: If capital income is really all from savings, then taxing capital income provides an incentive to spend. Is that a bad thing? I feel like it isn’t; the economy needs spending. In the robot toy model, we’re giving people a reason to use their robots to do actual stuff, instead of just leaving them to make more robots. That actually seems like it might be a good thing, doesn’t it? More stuff gets done that helps people, instead of just having vast warehouses full of robots building other robots in the hopes that someday we can finally use them for something. Whereas, taxing labor income may give people an incentive not to work, which is definitely going to reduce economic output. More precisely, higher taxes on labor would give low-wage workers an incentive to work less, and give high-wage workers an incentive to work more, which is a major part of the justification of progressive income taxes. A lot of the models intended to illustrate the Chamley-Judd Theorem assume that taxes have an effect on capital but no effect on labor, which is kind of begging the question.

Another thought that occurred to me is: What if the robots in the warehouse are all destroyed by a war or an earthquake? And indeed the possibility of sudden capital destruction would be a good reason not to put everything into investment. This is generally modeled as “uninsurable depreciation risk”, but come on; of course it’s uninsurable. All real risk is uninsurable in the aggregate. Insurance redistributes resources from those who have them but don’t need them to those who suddenly find they need them but don’t have them. This actually does reduce the real risk in utility, but it certainly doesn’t reduce the real risk in terms of goods. Stephen Colbert made this point very well: “Obamacare needs the premiums of healthier people to cover the costs of sicker people. It’s a devious con that can only be described as—insurance.” (This suggests that Stephen Colbert understands insurance better than many economists.) Someone has to make that new car that you bought using your insurance when you totaled the last one. Insurance companies cannot create cars or houses—or robots—out of thin air. And as Piketty and Saez point out, uninsurable risk undermines the Chamley-Judd Theorem. Unlike all these other economists, Piketty and Saez actually understand capital and inequality.
Sumner hand-waves that point away by saying we should just institute a one-time transfer of wealth to equalized the initial distribution, as though this were somehow a practically (not to mention politically) feasible alternative. Ultimately, yes, I’d like to see something like that happen; restore the balance and then begin anew with a just system. But that’s exceedingly difficult to do, while raising the tax rate on capital gains is very easy—and furthermore if we leave the current stock market and derivatives market in place, we will not have a just system by any stretch of the imagination. Perhaps if we can actually create a system where new wealth is really due to your own efforts, where there is no such thing as inheritance of riches (say a 100% estate tax above $1 million), no such thing as poverty (a basic income), no speculation or arbitrage, and financial markets that actually have a single real interest rate and offer all the credit that everyone needs, maybe then you can say that we should not tax capital income.

Until then, we should tax capital income, probably at least as much as we tax labor income.