Sometimes people have to lose their jobs. This isn’t a bad thing.

Oct 8, JDN 2457670

Eleizer Yudkowsky (founder of the excellent blog forum Less Wrong) has a term he likes to use to distinguish his economic policy views from either liberal, conservative, or even libertarian: “econoliterate”, meaning the sort of economic policy ideas one comes up with when one actually knows a good deal about economics.

In general I think Yudkowsky overestimates this effect; I’ve known some very knowledgeable economists who disagree quite strongly over economic policy, and often following the conventional political lines of liberal versus conservative: Liberal economists want more progressive taxation and more Keynesian monetary and fiscal policy, while conservative economists want to reduce taxes on capital and remove regulations. Theoretically you can want all these things—as Miles Kimball does—but it’s rare. Conservative economists hate minimum wage, and lean on the theory that says it should be harmful to employment; liberal economists are ambivalent about minimum wage, and lean on the empirical data that shows it has almost no effect on employment. Which is more reliable? The empirical data, obviously—and until more economists start thinking that way, economics is never truly going to be a science as it should be.

But there are a few issues where Yudkowsky’s “econoliterate” concept really does seem to make sense, where there is one view held by most people, and another held by economists, regardless of who is liberal or conservative. One such example is free trade, which almost all economists believe in. A recent poll of prominent economists by the University of Chicago found literally zero who agreed with protectionist tariffs.

Another example is my topic for today: People losing their jobs.

Not unemployment, which both economists and almost everyone else agree is bad; but people losing their jobs. The general consensus among the public seems to be that people losing jobs is always bad, while economists generally consider it a sign of an economy that is run smoothly and efficiently.

To be clear, of course losing your job is bad for you; I don’t mean to imply that if you lose your job you shouldn’t be sad or frustrated or anxious about that, particularly not in our current system. Rather, I mean to say that policy which tries to keep people in their jobs is almost always a bad idea.

I think the problem is that most people don’t quite grasp that losing your job and not having a job are not the same thing. People not having jobs who want to have jobs—unemployment—is a bad thing. But losing your job doesn’t mean you have to stay unemployed; it could simply mean you get a new job. And indeed, that is what it should mean, if the economy is running properly.

Check out this graph, from FRED:

hires_separations

The red line shows hires—people getting jobs. The blue line shows separations—people losing jobs or leaving jobs. During a recession (the most recent two are shown on this graph), people don’t actually leave their jobs faster than usual; if anything, slightly less. Instead what happens is that hiring rates drop dramatically. When the economy is doing well (as it is right now, more or less), both hires and separations are at very high rates.

Why is this? Well, think about what a job is, really: It’s something that needs done, that no one wants to do for free, so someone pays someone else to do it. Once that thing gets done, what should happen? The job should end. It’s done. The purpose of the job was not to provide for your standard of living; it was to achieve the task at hand. Once it doesn’t need done, why keep doing it?

We tend to lose sight of this, for a couple of reasons. First, we don’t have a basic income, and our social welfare system is very minimal; so a job usually is the only way people have to provide for their standard of living, and they come to think of this as the purpose of the job. Second, many jobs don’t really “get done” in any clear sense; individual tasks are completed, but new ones always arise. After every email sent is another received; after every patient treated is another who falls ill.

But even that is really only true in the short run. In the long run, almost all jobs do actually get done, in the sense that no one has to do them anymore. The job of cleaning up after horses is done (with rare exceptions). The job of manufacturing vacuum tubes for computers is done. Indeed, the job of being a computer—that used to be a profession, young women toiling away with slide rules—is very much done. There are no court jesters anymore, no town criers, and very few artisans (and even then, they’re really more like hobbyists). There are more writers now than ever, and occasional stenographers, but there are no scribes—no one powerful but illiterate pays others just to write things down, because no one powerful is illiterate (and even few who are not powerful, and fewer all the time).

When a job “gets done” in this long-run sense, we usually say that it is obsolete, and again think of this as somehow a bad thing, like we are somehow losing the ability to do something. No, we are gaining the ability to do something better. Jobs don’t become obsolete because we can’t do them anymore; they become obsolete because we don’t need to do them anymore. Instead of computers being a profession that toils with slide rules, they are thinking machines that fit in our pockets; and there are plenty of jobs now for software engineers, web developers, network administrators, hardware designers, and so on as a result.

Soon, there will be no coal miners, and very few oil drillers—or at least I hope so, for the sake of our planet’s climate. There will be far fewer auto workers (robots have already done most of that already), but far more construction workers who install rail lines. There will be more nuclear engineers, more photovoltaic researchers, even more miners and roofers, because we need to mine uranium and install solar panels on rooftops.

Yet even by saying that I am falling into the trap: I am making it sound like the benefit of new technology is that it opens up more new jobs. Typically it does do that, but that isn’t what it’s for. The purpose of technology is to get things done.

Remember my parable of the dishwasher. The goal of our economy is not to make people work; it is to provide people with goods and services. If we could invent a machine today that would do the job of everyone in the world and thereby put us all out of work, most people think that would be terrible—but in fact it would be wonderful.

Or at least it could be, if we did it right. See, the problem right now is that while poor people think that the purpose of a job is to provide for their needs, rich people think that the purpose of poor people is to do jobs. If there are no jobs to be done, why bother with them? At that point, they’re just in the way! (Think I’m exaggerating? Why else would anyone put a work requirement on TANF and SNAP? To do that, you must literally think that poor people do not deserve to eat or have homes if they aren’t, right now, working for an employer. You can couch that in cold economic jargon as “maximizing work incentives”, but that’s what you’re doing—you’re threatening people with starvation if they can’t or won’t find jobs.)

What would happen if we tried to stop people from losing their jobs? Typically, inefficiency. When you aren’t allowed to lay people off when they are no longer doing useful work, we end up in a situation where a large segment of the population is being paid but isn’t doing useful work—and unlike the situation with a basic income, those people would lose their income, at least temporarily, if they quit and tried to do something more useful. There is still considerable uncertainty within the empirical literature on just how much “employment protection” (laws that make it hard to lay people off) actually creates inefficiency and reduces productivity and employment, so it could be that this effect is small—but even so, likewise it does not seem to have the desired effect of reducing unemployment either. It may be like minimum wage, where the effect just isn’t all that large. But it’s probably not saving people from being unemployed; it may simply be shifting the distribution of unemployment so that people with protected jobs are almost never unemployed and people without it are unemployed much more frequently. (This doesn’t have to be based in law, either; while it is made by custom rather than law, it’s quite clear that tenure for university professors makes tenured professors vastly more secure, but at the cost of making employment tenuous and underpaid for adjuncts.)

There are other policies we could make that are better than employment protection, active labor market policies like those in Denmark that would make it easier to find a good job. Yet even then, we’re assuming that everyone needs jobs–and increasingly, that just isn’t true.

So, when we invent a new technology that replaces workers, workers are laid off from their jobs—and that is as it should be. What happens next is what we do wrong, and it’s not even anybody in particular; this is something our whole society does wrong: All those displaced workers get nothing. The extra profit from the more efficient production goes entirely to the shareholders of the corporation—and those shareholders are almost entirely members of the top 0.01%. So the poor get poorer and the rich get richer.

The real problem here is not that people lose their jobs; it’s that capital ownership is distributed so unequally. And boy, is it ever! Here are some graphs I made of the distribution of net wealth in the US, using from the US Census.

Here are the quintiles of the population as a whole:

net_wealth_us

And here are the medians by race:

net_wealth_race

Medians by age:

net_wealth_age

Medians by education:

net_wealth_education

And, perhaps most instructively, here are the quintiles of people who own their homes versus renting (The rent is too damn high!)

net_wealth_rent

All that is just within the US, and already they are ranging from the mean net wealth of the lowest quintile of people under 35 (-$45,000, yes negative—student loans) to the mean net wealth of the highest quintile of people with graduate degrees ($3.8 million). All but the top quintile of renters are poorer than all but the bottom quintile of homeowners. And the median Black or Hispanic person has less than one-tenth the wealth of the median White or Asian person.

If we look worldwide, wealth inequality is even starker. Based on UN University figures, 40% of world wealth is owned by the top 1%; 70% by the top 5%; and 80% by the top 10%. There is less total wealth in the bottom 80% than in the 80-90% decile alone. According to Oxfam, the richest 85 individuals own as much net wealth as the poorest 3.7 billion. They are the 0.000,001%.

If we had an equal distribution of capital ownership, people would be happy when their jobs became obsolete, because it would free them up to do other things (either new jobs, or simply leisure time), while not decreasing their income—because they would be the shareholders receiving those extra profits from higher efficiency. People would be excited to hear about new technologies that might displace their work, especially if those technologies would displace the tedious and difficult parts and leave the creative and fun parts. Losing your job could be the best thing that ever happened to you.

The business cycle would still be a problem; we have good reason not to let recessions happen. But stopping the churn of hiring and firing wouldn’t actually make our society better off; it would keep people in jobs where they don’t belong and prevent us from using our time and labor for its best use.

Perhaps the reason most people don’t even think of this solution is precisely because of the extreme inequality of capital distribution—and the fact that it has more or less always been this way since the dawn of civilization. It doesn’t seem to even occur to most people that capital income is a thing that exists, because they are so far removed from actually having any amount of capital sufficient to generate meaningful income. Perhaps when a robot takes their job, on some level they imagine that the robot is getting paid, when of course it’s the shareholders of the corporations that made the robot and the corporations that are using the robot in place of workers. Or perhaps they imagine that those shareholders actually did so much hard work they deserve to get paid that money for all the hours they spent.

Because pay is for work, isn’t it? The reason you get money is because you’ve earned it by your hard work?

No. This is a lie, told to you by the rich and powerful in order to control you. They know full well that income doesn’t just come from wages—most of their income doesn’t come from wages! Yet this is even built into our language; we say “net worth” and “earnings” rather than “net wealth” and “income”. (Parade magazine has a regular segment called “What People Earn”; it should be called “What People Receive”.) Money is not your just reward for your hard work—at least, not always.

The reason you get money is that this is a useful means of allocating resources in our society. (Remember, money was created by governments for the purpose of facilitating economic transactions. It is not something that occurs in nature.) Wages are one way to do that, but they are far from the only way; they are not even the only way currently in use. As technology advances, we should expect a larger proportion of our income to go to capital—but what we’ve been doing wrong is setting it up so that only a handful of people actually own any capital.

Fix that, and maybe people will finally be able to see that losing your job isn’t such a bad thing; it could even be satisfying, the fulfillment of finally getting something done.

The high cost of frictional unemployment

Sep 3, JDN 2457635

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What really happened in Greece

JDN 2457506

I said I’d get back to this issue, so here goes.

Let’s start with what is uncontroversial: Greece is in trouble.

Their per-capita GDP PPP has fallen from a peak of over $32,000 in 2007 to a trough of just over $24,000 in 2013, and only just began to recover over the last 2 years. That’s a fall of 29 log points. Put another way, the average person in Greece has about the same real income now that they had in the year 2000—a decade and a half of economic growth disappeared.

Their unemployment rate surged from about 7% in 2007 to almost 28% in 2013. It remains over 24%. That is, almost one quarter of all adults in Greece are seeking jobs and not finding them. The US has not seen an unemployment rate that high since the Great Depression.

Most shocking of all, over 40% of the population in Greece is now below the national poverty line. They define poverty as 60% of the inflation-adjusted average income in 2009, which works out to 665 Euros per person ($756 at current exchange rates) per month, or about $9000 per year. They also have an absolute poverty line, which 14% of Greeks now fall below, but only 2% did before the crash.

So now, let’s talk about why.

There’s a standard narrative you’ve probably heard many times, which goes something like this:

The Greek government spent too profligately, heaping social services on the population without the tax base to support them. Unemployment insurance was too generous; pensions were too large; it was too hard to fire workers or cut wages. Thus, work incentives were too weak, and there was no way to sustain a high GDP. But they refused to cut back on these social services, and as a result went further and further into debt until it finally became unsustainable. Now they are cutting spending and raising taxes like they needed to, and it will eventually allow them to repay their debt.

Here’s a fellow of the Cato Institute spreading this narrative on the BBC. Here’s ABC with a five bullet-point list: Pension system, benefits, early retirement, “high unemployment and work culture issues” (yes, seriously), and tax evasion. Here the Telegraph says that Greece “went on a spending spree” and “stopped paying taxes”.

That story is almost completely wrong. Almost nothing about it is true. Cato and the Telegraph got basically everything wrong. The only one ABC got right was tax evasion.

Here’s someone else arguing that Greece has a problem with corruption and failed governance; there is something to be said for this, as Greece is fairly corrupt by European standards—though hardly by world standards. For being only a generation removed from an authoritarian military junta, they’re doing quite well actually. They’re about as corrupt as a typical upper-middle income country like Libya or Botswana; and Botswana is widely regarded as the shining city on a hill of transparency as far as Sub-Saharan Africa is concerned. So corruption may have made things worse, but it can’t be the whole story.

First of all, social services in Greece were not particularly extensive compared to the rest of Europe.

Before the crisis, Greece’s government spending was about 44% of GDP.

That was about the same as Germany. It was slightly more than the UK. It was less than Denmark and France, both of which have government spending of about 50% of GDP.

Greece even tried to cut spending to pay down their debt—it didn’t work, because they simply ended up worsening the economic collapse and undermining the tax base they needed to do that.

Europe has fairly extensive social services by world standards—but that’s a major part of why it’s the First World. Even the US, despite spending far less than Europe on social services, still spends a great deal more than most countries—about 36% of GDP.

Second, if work incentives were a problem, you would not have high unemployment. People don’t seem to grasp what the word unemployment actually means, which is part of why I can’t stand it when news outlets just arbitrarily substitute “jobless” to save a couple of syllables. Unemployment does not mean simply that you don’t have a job. It means that you don’t have a job and are trying to get one.

The word you’re looking for to describe simply not having a job is nonemployment, and that’s such a rarely used term my spell-checker complains about it. Yet economists rarely use this term precisely because it doesn’t matter; a high nonemployment rate is not a symptom of a failing economy but a result of high productivity moving us toward the post-scarcity future (kicking and screaming, evidently). If the problem with Greece were that they were too lazy and they retire too early (which is basically what ABC was saying in slightly more polite language), there would be high nonemployment, but there would not be high unemployment. “High unemployment and work culture issues” is actually a contradiction.

Before the crisis, Greece had an employment-to-population ratio of 49%, meaning a nonemployment rate of 51%. If that sounds ludicrously high, you’re not accustomed to nonemployment figures. During the same time, the United States had an employment-to-population ratio of 52% and thus a nonemployment rate of 48%. So the number of people in Greece who were voluntarily choosing to drop out of work before the crisis was just slightly larger than the number in the US—and actually when you adjust for the fact that the US is full of young immigrants and Greece is full of old people (their median age is 10 years older than ours), it begins to look like it’s we Americans who are lazy. (Actually, it’s that we are studious—the US has an extremely high rate of college enrollment and the best colleges in the world. Full-time students are nonemployed, but they are certainly not unemployed.)

But Greece does have an enormously high debt, right? Yes—but it was actually not as bad before the crisis. Their government debt surged from 105% of GDP to almost 180% today. 105% of GDP is about what we have right now in the US; it’s less than what we had right after WW2. This is a little high, but really nothing to worry about, especially if you’ve incurred the debt for the right reasons. (The famous paper by Rogart and Reinhoff arguing that 90% of GDP is a horrible point of no return was literally based on math errors.)

Moreover, Ireland and Spain suffered much the same fate as Greece, despite running primary budget surpluses.

So… what did happen? If it wasn’t their profligate spending that put them in this mess, what was it?

Well, first of all, there was the Second Depression, a worldwide phenomenon triggered by the collapse of derivatives markets in the United States. (You want unsustainable debt? Try 20 to 1 leveraged CDO-squareds and one quadrillion dollars in notional value. Notional value isn’t everything, but it’s a lot.) So it’s mainly our fault, or rather the fault of our largest banks. As far as us voters, it’s “our fault” in the way that if your car gets stolen it’s “your fault” for not locking the doors and installing a LoJack. We could have regulated against this and enforced those regulations, but we didn’t. (Fortunately, Dodd-Frank looks like it might be working.)

Greece was hit particularly hard because they are highly dependent on trade, particularly in services like tourism that are highly sensitive to the business cycle. Before the crash they imported 36% of GDP and exported 23% of GDP. Now they import 35% of GDP and export 33% of GDP—but it’s a much smaller GDP. Their exports have only slightly increased while their imports have plummeted. (This has reduced their “trade deficit”, but that has always been a silly concept. I guess it’s less silly if you don’t control your own currency, but it’s still silly.)

Once the crash happened, the US had sovereign monetary policy and the wherewithal to actually use that monetary policy effectively, so we weathered the crash fairly well, all things considered. Our unemployment rate barely went over 10%. But Greece did not have sovereign monetary policy—they are tied to the Euro—and that severely limited their options for expanding the money supply as a result of the crisis. Raising spending and cutting taxes was the best thing they could do.

But the bank(st?)ers and their derivatives schemes caused the Greek debt crisis a good deal more directly than just that. Part of the condition of joining the Euro was that countries must limit their fiscal deficit to no more than 3% of GDP (which is a totally arbitrary figure with no economic basis in case you were wondering). Greece was unwilling or unable to do so, but wanted to look like they were following the rules—so they called up Goldman Sachs and got them to make some special derivatives that Greece could use to continue borrowing without looking like they were borrowing. The bank could have refused; they could have even reported it to the European Central Bank. But of course they didn’t; they got their brokerage fee, and they knew they’d sell it off to some other bank long before they had to worry about whether Greece could ever actually repay it. And then (as I said I’d get back to in a previous post) they paid off the credit rating agencies to get them to rate these newfangled securities as low-risk.

In other words, Greece is not broke; they are being robbed.

Like homeowners in the US, Greece was offered loans they couldn’t afford to pay, but the banks told them they could, because the banks had lost all incentive to actually bother with the question of whether loans can be repaid. They had “moved on”; their “financial innovation” of securitization and collateralized debt obligations meant that they could collect origination fees and brokerage fees on loans that could never possibly be repaid, then sell them off to some Greater Fool down the line who would end up actually bearing the default. As long as the system was complex enough and opaque enough, the buyers would never realize the garbage they were getting until it was too late. The entire concept of loans was thereby broken: The basic assumption that you only loan money you expect to be repaid no longer held.

And it worked, for awhile, until finally the unpayable loans tried to create more money than there was in the world, and people started demanding repayment that simply wasn’t possible. Then the whole scheme fell apart, and banks began to go under—but of course we saved them, because you’ve got to save the banks, how can you not save the banks?

Honestly I don’t even disagree with saving the banks, actually. It was probably necessary. What bothers me is that we did nothing to save everyone else. We did nothing to keep people in their homes, nothing to stop businesses from collapsing and workers losing their jobs. Precisely because of the absurd over-leveraging of the financial system, the cost to simply refinance every mortgage in America would have been less than the amount we loaned out in bank bailouts. The banks probably would have done fine anyway, but if they didn’t, so what? The banks exist to serve the people—not the other way around.

We can stop this from happening again—here in the US, in Greece, in the rest of Europe, everywhere. But in order to do that we must first understand what actually happened; we must stop blaming the victims and start blaming the perpetrators.

The credit rating agencies to be worried about aren’t the ones you think

JDN 2457499

John Oliver is probably the best investigative journalist in America today, despite being neither American nor officially a journalist; last week he took on the subject of credit rating agencies, a classic example of his mantra “If you want to do something evil, put it inside something boring.” (note that it’s on HBO, so there is foul language):

As ever, his analysis of the subject is quite good—it’s absurd how much power these agencies have over our lives, and how little accountability they have for even assuring accuracy.

But I couldn’t help but feel that he was kind of missing the point. The credit rating agencies to really be worried about aren’t Equifax, Experian, and Transunion, the ones that assess credit ratings on individuals. They are Standard & Poor’s, Moody’s, and Fitch (which would have been even easier to skewer the way John Oliver did—perhaps we can get them confused with Standardly Poor, Moody, and Filch), the agencies which assess credit ratings on institutions.

These credit rating agencies have almost unimaginable power over our society. They are responsible for rating the risk of corporate bonds, certificates of deposit, stocks, derivatives such as mortgage-backed securities and collateralized debt obligations, and even municipal and government bonds.

S&P, Moody’s, and Fitch don’t just rate the creditworthiness of Goldman Sachs and J.P. Morgan Chase; they rate the creditworthiness of Detroit and Greece. (Indeed, they played an important role in the debt crisis of Greece, which I’ll talk about more in a later post.)

Moreover, they are proven corrupt. It’s a matter of public record.

Standard and Poor’s is the worst; they have been successfully sued for fraud by small banks in Pennsylvania and by the State of New Jersey; they have also settled fraud cases with the Securities and Exchange Commission and the Department of Justice.

Moody’s has also been sued for fraud by the Department of Justice, and all three have been prosecuted for fraud by the State of New York.

But in fact this underestimates the corruption, because the worst conflicts of interest aren’t even illegal, or weren’t until Dodd-Frank was passed in 2010. The basic structure of this credit rating system is fundamentally broken; the agencies are private, for-profit corporations, and they get their revenue entirely from the banks that pay them to assess their risk. If they rate a bank’s asset as too risky, the bank stops paying them, and instead goes to another agency that will offer a higher rating—and simply the threat of doing so keeps them in line. As a result their ratings are basically uncorrelated with real risk—they failed to predict the collapse of Lehman Brothers or the failure of mortgage-backed CDOs, and they didn’t “predict” the European debt crisis so much as cause it by their panic.

Then of course there’s the fact that they are obviously an oligopoly, and furthermore one that is explicitly protected under US law. But then it dawns upon you: Wait… US law? US law decides the structure of credit rating agencies that set the bond rates of entire nations? Yes, that’s right. You’d think that such ratings would be set by the World Bank or something, but they’re not; in fact here’s a paper published by the World Bank in 2004 about how rather than reform our credit rating system, we should instead tell poor countries to reform themselves so they can better impress the private credit rating agencies.

In fact the whole concept of “sovereign debt risk” is fundamentally defective; a country that borrows in its own currency should never have to default on debt under any circumstances. National debt is almost nothing like personal or corporate debt. Their fears should be inflation and unemployment—their monetary policy should be set to minimize the harm of these two basic macroeconomic problems, understanding that policies which mitigate one may enflame the other. There is such a thing as bad fiscal policy, but it has nothing to do with “running out of money to pay your debt” unless you are forced to borrow in a currency you can’t control (as Greece is, because they are on the Euro—their debt is less like the US national debt and more like the debt of Puerto Rico, which is suffering an ongoing debt crisis you may not have heard about). If you borrow in your own currency, you should be worried about excessive borrowing creating inflation and devaluing your currency—but not about suddenly being unable to repay your creditors. The whole concept of giving a sovereign nation a credit rating makes no sense. You will be repaid on time and in full, in nominal terms; if inflation or currency exchange has devalued the currency you are repaid in, that’s sort of like a partial default, but it’s a fundamentally different kind of “default” than simply not paying back the money—and credit ratings have no way of capturing that difference.

In particular, it makes no sense for interest rates on government bonds to go up when a country is suffering some kind of macroeconomic problem.

The basic argument for why interest rates go up when risk is higher is that lenders expect to be paid more by those who do pay to compensate for what they lose from those who don’t pay. This is already much more problematic than most economists appreciate; I’ve been meaning to write a paper on how this system creates self-fulfilling prophecies of default and moral hazard from people who pay their debts being forced to subsidize those who don’t. But it at least makes some sense.

But if a country is a “high risk” in the sense of macroeconomic instability undermining the real value of their debt, we want to ensure that they can restore macroeconomic stability. But we know that when there is a surge in interest rates on government bonds, instability gets worse, not better. Fiscal policy is suddenly shifted away from real production into higher debt payments, and this creates unemployment and makes the economic crisis worse. As Paul Krugman writes about frequently, these policies of “austerity” cause enormous damage to national economies and ultimately benefit no one because they destroy the source of wealth that would have been used to repay the debt.

By letting credit rating agencies decide the rates at which governments must borrow, we are effectively treating national governments as a special case of corporations. But corporations, by design, act for profit and can go bankrupt. National governments are supposed to act for the public good and persist indefinitely. We can’t simply let Greece fail as we might let a bank fail (and of course we’ve seen that there are serious downsides even to that). We have to restructure the sovereign debt system so that it benefits the development of nations rather than detracting from it. The first step is removing the power of private for-profit corporations in the US to decide the “creditworthiness” of entire countries. If we need to assess such risks at all, they should be done by international institutions like the UN or the World Bank.

But right now people are so stuck in the idea that national debt is basically the same as personal or corporate debt that they can’t even understand the problem. For after all, one must repay one’s debts.

The Parable of the Dishwasher

JDN 2456478

Much like free trade, technological unemployment is an issue where the consensus opinion among economists diverges quite sharply from that of the general population.

Enough people think that “robots taking our jobs” is something bad that I’ve seen a fair number of memes like this:

EVERY TIME you use the Self Checkout you are ELIMINATING JOBS!

But like almost all economists, I think that self-checkouts, robots, and automation in general are a pretty good thing. They do have a few downsides, chiefly in terms of forcing us to make transitions that are costly and painful; but in general I want more robots, not fewer.

To help turn you toward this view, I offer a parable.

Suppose we have a family, the (stereo)typical American family with a father, a mother, and two kids, a boy named Joe and a girl named Sue.

The kids do chores for their allowance, and split them as follows: Joe always does the dishes, and Sue always vacuums the carpet. They both spend about 1 hour per week and they both get paid $10 a week.

But one day, Dad decides to buy a dishwasher. This dramatically cuts down the time it takes Joe to do the dishes; where he used to spend 1 hour washing dishes, now he can load the dishwasher and get it done in 5 minutes.

  1. Mom suggests they just sell back the dishwasher to get rid of the problem.
  2. Dad says that Joe should now only be paid for the 5 minutes he works each week, so he would now be paid $0.83 per week. (He’s not buying a lot of video games on that allowance.)
  3. Joe protests that he gets the same amount of work done, so he should be paid the same $10 for doing it.
  4. Sue says it would be unfair for her to have to work so much more than Joe, and has a different solution: They’ll trade off the two sets of chores each week, and they should of course get paid the same amount of money for getting the same amount of work done—$10 per kid per week, for an average of 32.5 minutes of work each.

Which of those solutions sounds the most sensible to you?

Mom’s solution is clearly the worst, right? It’s the Luddite solution, the one that throws away technological progress and makes everything less efficient. Yet that is the solution being offered by people who say “Don’t use the self-checkout machine!” Indeed, anyone who speaks of the virtues of “hard work” is really speaking Mom’s language here; they should be talking about the virtues of getting things done. The purpose of washing dishes is to have clean dishes, not to “work hard”. And likewise, when we construct bridges or make cars or write books or solve equations, our goal should be to get that thing done—not to fulfill some sense of moral obligation to prove our worthiness through hard work.

Joe’s solution is what neoclassical economics says should happen—higher productivity should yield higher wages, so the same amount of production should yield the same pay. This seems like it could work, but empirically it rarely happens. There’s also something vaguely unfair about it; if productivity increases in your industry but not in someone else’s, you get to cut your work hours dramatically while they are stuck working just as hard as before.

Dad’s “solution” is clearly terrible, and makes no sense at all. Yet this is what we actually tend to observe—capital owners appropriate all (or nearly all) the benefits of the new technology, and workers get displaced or get ever-smaller wages. (I talked about that in a recent post.)

It’s Sue’s solution that really seems to make the most sense, isn’t it? When one type of work becomes more efficient, people should shift into different types of labor so that people can work fewer hours—and wages should rise enough that incomes remain the same. “Baumol’s disease” is not a disease—it is the primary means by which capitalism raises human welfare. (That’s why I prefer to use the term “Baumol Effect” instead.)

One problem with this in practice is that sometimes people can’t switch into other industries. That’s a little hard to imagine in this case, but let’s stipulate that for some reason Joe can’t do the vacuuming. Maybe he has some sort of injury that makes it painful to use the vacuum cleaner, but doesn’t impair his ability to wash dishes. Or maybe he has a severe dust allergy, so bad that the dust thrown up by the vacuum cleaner sends him into fits of coughing.

In that case I think we’re back to Joe’s solution; he should get paid the same for getting the same amount of work done. I’m actually tempted to say that Sue should get paid more, to compensate her for the unfairness; but in the real world there is a pretty harsh budget constraint there, so we need to essentially pretend that Dad only has $20 per week to give out in allowances. A possible compromise would be to raise Sue up to $12 and cut Joe down to $8; Joe will probably still be better off than he was, because he has that extra 55 minutes of free time each week for which he only had to “pay” $2. This also makes the incentives work out better—Joe doesn’t have a reason to malinger and exaggerate his dust allergy just to get out of doing the vacuuming, since he would actually get paid more if he were willing to do the vacuuming; but if his allergy really is that bad, he can still do okay otherwise. (There’s a lesson here for the proper structure of Social Security Disability, methinks.)

But you know what really seems like the best solution? Buy a Roomba.

Buy a Roomba, make it Sue’s job to spend 5 minutes a week keeping the Roomba working at vacuuming the carpet, and continue paying both kids $10 per week. Give them both 55 minutes more per week to hang out with their friends or play video games. Whether you think of this $10 as a “higher wage” for higher productivity or simply an allowance they get anyway—a basic income—ultimately doesn’t matter all that much. The point is that everyone gets enough money and nobody has to work very much, because the robots do everything.

And now, hopefully you see why I think we need more robots, not fewer.

Of course, like any simple analogy, this isn’t perfect; it may be difficult to reduce the hours in some jobs or move more people into them. There are a lot of additional frictions and complications that go into the real-world problem of achieving equitable labor markets. But I hope I’ve gotten across the basic idea that robots are not the problem, and could in fact be the solution–not just to our current labor market woes, but to the very problem of wage labor itself.

My ultimate goal is a world where “work” itself is fundamentally redefined—so that it always means the creative sense “This painting is some of my best work.” and not the menial sense “Sweeping this floor is so much work!”; so that human beings do things because we want to do them, because they are worth doing, and not because some employer is holding our food and housing hostage if we don’t.

But that will require our whole society to rethink a lot of our core assumptions about work, jobs, and economics in general. We’re so invested in this idea that “hard work” is inherently virtuous that we forgot the purpose of an economy was to get things done. Work is not a benefit; work is a cost. Costs are to be reduced. Puritanical sexual norms have been extremely damaging to American society, but time will tell if Puritanical work ethic actually does more damage to our long-term future.

Why Millennials feel “entitled”

JDN 2457064

I’m sure you’ve already heard this plenty of times before, but just in case here are a few particularly notable examples: “Millennials are entitled.” “Millennials are narcissistic.” “Millennials expect instant gratification.

Fortunately there are some more nuanced takes as well: One survey shows that we are perceived as “entitled” and “self-centered” but also “hardworking” and “tolerant”. This article convincingly argues that Baby Boomers show at least as much ‘entitlement’ as we do. Another article points out that young people have been called these sorts of names for decades—though actually the proper figure is centuries.

Though some of the ‘defenses’ leave a lot to be desired: “OK, admittedly, people do live at home. But that’s only because we really like our parents. And why shouldn’t we?” Uh, no, that’s not it. Nor is it that we’re holding off on getting married. The reason we live with our parents is that we have no money and can’t pay for our own housing. And why aren’t we getting married? Because we can’t afford to pay for a wedding, much less buy a home and start raising kids. (Since the time I drafted this for Patreon and it went live, yet another article hand-wringing over why we’re not getting married was publishedin Scientific American, of all places.)

Are we not buying cars because we don’t like cars? No, we’re not buying cars because we can’t afford to pay for them.

The defining attributes of the Millennial generation are that we are young (by definition) and broke (with very few exceptions). We’re not uniquely narcissistic or even tolerant; younger generations always have these qualities.

But there may be some kernel of truth here, which is that we were promised a lot more than we got.

Educational attainment in the United States is the highest it has ever been. Take a look at this graph from the US Department of Education:

Percentage of 25- to 29-year-olds who completed a bachelor’s or higher degree, by race/ethnicity: Selected years, 1990–2014

education_attainment_race

More young people of every demographic except American Indians now have college degrees (and those figures fluctuate a lot because of small samples—whether my high school had an achievement gap for American Indians depended upon how I self-identified on the form, because there were only two others and I was tied for the highest GPA).

Even the IQ of Millennials is higher than that of our parents’ generation, which is higher than their parents’ generation; (measured) intelligence rises over time in what is called the Flynn Effect. IQ tests have to be adjusted to be harder by about 3 points every 10 years because otherwise the average score would stop being 100.

As your level of education increases, your income tends to go up and your unemployment tends to go down. In 2014, while people with doctorates or professional degrees had about 2% unemployment and made a median income of $1590 per week, people without even high school diplomas had about 9% unemployment and made a median income of only $490 per week. The Bureau of Labor Statistics has a nice little bar chart of these differences:

education_employment_earnings

Now the difference is not quite as stark. With the most recent data, the unemployment rate is 6.7% for people without a high school diploma and 2.5% for people with a bachelor’s degree or higher.

But that’s for the population as a whole. What about the population of people 18 to 35, those of us commonly known as Millennials?

Well, first of all, our unemployment rate overall is much higher. With the most recent data, unemployment among people ages 20-24 is a whopping 9.4%. For ages 25 to 34 it gets better, 5.3%; but it’s still much worse than unemployment at ages 35-44 (4.0%), 45-54 (3.6%), or 55+ (3.2%). Overall, unemployment among Millennials is about 6.7% while unemployment among Baby Boomers is about 3.2%, half as much. (Gen X is in between, but a lot closer to the Boomers at around 3.8%.)

It was hard to find data specifically breaking it down by both age and education at the same time, but the hunt was worth it.

Among people age 20-24 not in school:

Without a high school diploma, 328,000 are unemployed, out of 1,501,000 in the labor force. That’s an unemployment rate of 21.9%. Not a typo, that’s 21.9%.

With only a high school diploma, 752,000 are unemployed, out of 5,498,000 in the labor force. That’s an unemployment rate of 13.7%.

With some college but no bachelor’s degree, 281,000 are unemployed, out of 3,620,000 in the labor force. That’s an unemployment rate of 7.7%.

With a bachelor’s degree, 90,000 are unemployed, out of 2,313,000 in the labor force. That’s an unemployment rate of 3.9%.

What this means is that someone 24 or under needs to have a bachelor’s degree in order to have the same overall unemployment rate that people from Gen X have in general, and even with a bachelor’s degree, people under 24 still have a higher unemployment rate than what Baby Boomers simply have by default. If someone under 24 doesn’t even have a high school diploma, forget it; their unemployment rate is comparable to the population unemployment rate at the trough of the Great Depression.

In other words, we need to have college degrees just to match the general population older than us, of whom only 20% have a college degree; and there is absolutely nothing a Millennial can do in terms of education to ever have the tiny unemployment rate (about 1.5%) of Baby Boomers with professional degrees. (Be born White, be in perfect health, have a professional degree, have rich parents, and live in a city with very high employment, and you just might be able to pull it off.)

So, why do Millennials feel like a college degree should “entitle” us to a job?

Because it does for everyone else.

Why do we feel “entitled” to a higher standard of living than the one we have?
Take a look at this graph of GDP per capita in the US:

US_GDP_per_capita

You may notice a rather sudden dip in 2009, around the time most Millennials graduated from college and entered the labor force. On the next graph, I’ve added a curve approximating what it would look like if the previous trend had continued:

US_GDP_per_capita_trend

(There’s a lot on this graph for wonks like me. You can see how the unit-root hypothesis seemed to fail in the previous four recessions, where economic output rose back up to potential; but it clearly held in this recession, and there was a permanent loss of output. It also failed in the recession before that. So what’s the deal? Why do we recover from some recessions and take a permanent blow from others?)

If the Great Recession hadn’t happened, instead of per-capita GDP being about $46,000 in 2005 dollars, it would instead be closer to $51,000 in 2005 dollars. In today’s money, that means our current $56,000 would be instead closer to $62,000. If we had simply stayed on the growth trajectory we were promised, we’d be almost 10 log points richer (11% for the uninitiated).

So, why do Millennials feel “entitled” to things we don’t have? In a word, macroeconomics.

People anchored their expectations of what the world would be like on forecasts. The forecasts said that the skies were clear and economic growth would continue apace; so naturally we assumed that this was true. When the floor fell out from under our economy, only a few brilliant and/or lucky economists saw it coming; even people who were paying quite close attention were blindsided. We were raised in a world where economic growth promised rising standard of living and steady employment for the rest of our lives. And then the storm hit, and we were thrown into a world of poverty and unemployment—and especially poverty and unemployment for us.

We are angry about how we had been promised more than we were given, angry about how the distribution of what wealth we do have gets ever more unequal. We are angry that our parents’ generation promised what they could not deliver, and angry that it was their own blind worship of the corrupt banking system that allowed the crash to happen.

And because we are angry and demand a fairer share, they have the audacity to call us “narcissistic”.

Why is it so hard to get a job?

JDN 2457411

The United States is slowly dragging itself out of the Second Depression.

Unemployment fell from almost 10% to about 5%.

Core inflation has been kept between 0% and 2% most of the time.

Overall inflation has been within a reasonable range:

US_inflation

Real GDP has returned to its normal growth trend, though with a permanent loss of output relative to what would have happened without the Great Recession.

US_GDP_growth

Consumption spending is also back on trend, tracking GDP quite precisely.

The Federal Reserve even raised the federal funds interest rate above the zero lower bound, signaling a return to normal monetary policy. (As I argued previously, I’m pretty sure that was their main goal actually.)

Employment remains well below the pre-recession peak, but is now beginning to trend upward once more.

The only thing that hasn’t recovered is labor force participation, which continues to decline. This is how we can have unemployment go back to normal while employment remains depressed; people leave the labor force by retiring, going back to school, or simply giving up looking for work. By the formal definition, someone is only unemployed if they are actively seeking work. No, this is not new, and it is certainly not Obama rigging the numbers. This is how we have measured unemployment for decades.

Actually, it’s kind of the opposite: Since the Clinton administration we’ve also kept track of “broad unemployment”, which includes people who’ve given up looking for work or people who have some work but are trying to find more. But we can’t directly compare it to anything that happened before 1994, because the BLS didn’t keep track of it before then. All we can do is estimate based on what we did measure. Based on such estimation, it is likely that broad unemployment in the Great Depression may have gotten as high as 50%. (I’ve found that one of the best-fitting models is actually one of the simplest; assume that broad unemployment is 1.8 times narrow unemployment. This fits much better than you might think.)

So, yes, we muddle our way through, and the economy eventually heals itself. We could have brought the economy back much sooner if we had better fiscal policy, but at least our monetary policy was good enough that we were spared the worst.

But I think most of us—especially in my generation—recognize that it is still really hard to get a job. Overall GDP is back to normal, and even unemployment looks all right; but why are so many people still out of work?

I have a hypothesis about this: I think a major part of why it is so hard to recover from recessions is that our system of hiring is terrible.

Contrary to popular belief, layoffs do not actually substantially increase during recessions. Quits are substantially reduced, because people are afraid to leave current jobs when they aren’t sure of getting new ones. As a result, rates of job separation actually go down in a recession. Job separation does predict recessions, but not in the way most people think. One of the things that made the Great Recession different from other recessions is that most layoffs were permanent, instead of temporary—but we’re still not sure exactly why.

Here, let me show you some graphs from the BLS.

This graph shows job openings from 2005 to 2015:

job_openings

This graph shows hires from 2005 to 2015:

job_hires

Both of those show the pattern you’d expect, with openings and hires plummeting in the Great Recession.

But check out this graph, of job separations from 2005 to 2015:

job_separations

Same pattern!

Unemployment in the Second Depression wasn’t caused by a lot of people losing jobs. It was caused by a lot of people not getting jobs—either after losing previous ones, or after graduating from school. There weren’t enough openings, and even when there were openings there weren’t enough hires.

Part of the problem is obviously just the business cycle itself. Spending drops because of a financial crisis, then businesses stop hiring people because they don’t project enough sales to justify it; then spending drops even further because people don’t have jobs, and we get caught in a vicious cycle.

But we are now recovering from the cyclical downturn; spending and GDP are back to their normal trend. Yet the jobs never came back. Something is wrong with our hiring system.

So what’s wrong with our hiring system? Probably a lot of things, but here’s one that’s been particularly bothering me for a long time.
As any job search advisor will tell you, networking is essential for career success.

There are so many different places you can hear this advice, it honestly gets tiring.

But stop and think for a moment about what that means. One of the most important determinants of what job you will get is… what people you know?

It’s not what you are best at doing, as it would be if the economy were optimally efficient.
It’s not even what you have credentials for, as we might expect as a second-best solution.

It’s not even how much money you already have, though that certainly is a major factor as well.

It’s what people you know.

Now, I realize, this is not entirely beyond your control. If you actively participate in your community, attend conferences in your field, and so on, you can establish new contacts and expand your network. A major part of the benefit of going to a good college is actually the people you meet there.

But a good portion of your social network is more or less beyond your control, and above all, says almost nothing about your actual qualifications for any particular job.

There are certain jobs, such as marketing, that actually directly relate to your ability to establish rapport and build weak relationships rapidly. These are a tiny minority. (Actually, most of them are the sort of job that I’m not even sure needs to exist.)

For the vast majority of jobs, your social skills are a tiny, almost irrelevant part of the actual skill set needed to do the job well. This is true of jobs from writing science fiction to teaching calculus, from diagnosing cancer to flying airliners, from cleaning up garbage to designing spacecraft. Social skills are rarely harmful, and even often provide some benefit, but if you need a quantum physicist, you should choose the recluse who can write down the Dirac equation by heart over the well-connected community leader who doesn’t know what an integral is.

At the very least, it strains credibility to suggest that social skills are so important for every job in the world that they should be one of the defining factors in who gets hired. And make no mistake: Networking is as beneficial for landing a job at a local bowling alley as it is for becoming Chair of the Federal Reserve. Indeed, for many entry-level positions networking is literally all that matters, while advanced positions at least exclude candidates who don’t have certain necessary credentials, and then make the decision based upon who knows whom.

Yet, if networking is so inefficient, why do we keep using it?

I can think of a couple reasons.

The first reason is that this is how we’ve always done it. Indeed, networking strongly pre-dates capitalism or even money; in ancient tribal societies there were certainly jobs to assign people to: who will gather berries, who will build the huts, who will lead the hunt. But there were no colleges, no certifications, no resumes—there was only your position in the social structure of the tribe. I think most people simply automatically default to a networking-based system without even thinking about it; it’s just the instinctual System 1 heuristic.

One of the few things I really liked about Debt: The First 5000 Years was the discussion of how similar the behavior of modern CEOs is to that of ancient tribal chieftans, for reasons that make absolutely no sense in terms of neoclassical economic efficiency—but perfect sense in light of human evolution. I wish Graeber had spent more time on that, instead of many of these long digressions about international debt policy that he clearly does not understand.

But there is a second reason as well, a better reason, a reason that we can’t simply give up on networking entirely.

The problem is that many important skills are very difficult to measure.

College degrees do a decent job of assessing our raw IQ, our willingness to persevere on difficult tasks, and our knowledge of the basic facts of a discipline (as well as a fantastic job of assessing our ability to pass standardized tests!). But when you think about the skills that really make a good physicist, a good economist, a good anthropologist, a good lawyer, or a good doctor—they really aren’t captured by any of the quantitative metrics that a college degree provides. Your capacity for creative problem-solving, your willingness to treat others with respect and dignity; these things don’t appear in a GPA.

This is especially true in research: The degree tells how good you are at doing the parts of the discipline that have already been done—but what we really want to know is how good you’ll be at doing the parts that haven’t been done yet.

Nor are skills precisely aligned with the content of a resume; the best predictor of doing something well may in fact be whether you have done so in the past—but how can you get experience if you can’t get a job without experience?

These so-called “soft skills” are difficult to measure—but not impossible. Basically the only reliable measurement mechanisms we have require knowing and working with someone for a long span of time. You can’t read it off a resume, you can’t see it in an interview (interviews are actually a horribly biased hiring mechanism, particularly biased against women). In effect, the only way to really know if someone will be good at a job is to work with them at that job for awhile.

There’s a fundamental information problem here I’ve never quite been able to resolve. It pops up in a few other contexts as well: How do you know whether a novel is worth reading without reading the novel? How do you know whether a film is worth watching without watching the film? When the information about the quality of something can only be determined by paying the cost of purchasing it, there is basically no way of assessing the quality of things before we purchase them.

Networking is an attempt to get around this problem. To decide whether to read a novel, ask someone who has read it. To decide whether to watch a film, ask someone who has watched it. To decide whether to hire someone, ask someone who has worked with them.

The problem is that this is such a weak measure that it’s not much better than no measure at all. I often wonder what would happen if businesses were required to hire people based entirely on resumes, with no interviews, no recommendation letters, and any personal contacts treated as conflicts of interest rather than useful networking opportunities—a world where the only thing we use to decide whether to hire someone is their documented qualifications. Could it herald a golden age of new economic efficiency and job fulfillment? Or would it result in widespread incompetence and catastrophic collapse? I honestly cannot say.

How about we listen to the Nobel Laureate when we set our taxes?

JDN 2457321 EDT 11:20

I know I’m going out on a limb here, but I think it would generally be a good thing if we based our tax system on the advice of Nobel Laureate economists. Joseph Stiglitz wrote a tax policy paper for the Roosevelt Institution last year that describes in detail how our tax system could be reformed to simultaneously restore economic growth, reduce income inequality, promote environmental sustainability, and in the long run even balance the budget. What’s more, he did the math (I suppose Nobel Laureate economists are known for that), and it looks like his plan would actually work.

The plan is good enough that I think it’s worth going through in some detail.

He opens by reminding us that our “debt crisis” is of our own making, the result of politicians (and voters) who don’t understand economics:

“But we should be clear that these crises – which have resulted in a government shutdown and a near default on the national debt – are not economic but political. The U.S. is not like Greece, unable to borrow to fund its debt and deficit. Indeed, the U.S. has been borrowing at negative real interest rates.”

Stiglitz pulls no punches against bad policies, and isn’t afraid to single out conservatives:

“We also show that some of the so-called reforms that conservatives propose would be counterproductive – they could simultaneously reduce growth and economic welfare and increase unemployment and inequality. It would be better to have no reform than these reforms.”

A lot of the news media keep trying to paint Bernie Sanders as a far-left radical candidate (like this article in Politico calling his hometown the “People’s Republic of Burlington”), because he says things like this: “in recent years, over 99 percent of all new income generated in the economy has gone to the top 1 percent.”

But the following statement was not said by Bernie Sanders, it was said by Joseph Stiglitz, who I will remind you one last time is a world-renowned Nobel Laureate economist:

“The weaknesses in the labor market are reflected in low wages and stagnating incomes. That helps explain why 95 percent of the increase in incomes in the three years after the recovery officially began went to the upper 1 percent. For most Americans, there has been no recovery.”

It was also Stiglitz who said this:

“The American Dream is, in reality, a myth. The U.S. has some of the worst inequality across generations (social mobility) among wealthy nations. The life prospects of a young American are more dependent on the income and education of his parents than in other advanced countries.”

In this country, we have reached the point where policies supported by the analysis of world-renowned economists is considered far-left radicalism, while the “mainstream conservative” view is a system of tax policy that is based on pure fantasy, which has been called “puppies and rainbows” by serious policy analysts and “voodoo economics” by yet another Nobel Laureate economist. A lot of very smart people don’t understand what’s happening in our political system, and want “both sides” to be “equally wrong”, but that is simply not the case: Basic facts of not just social science (e.g. Keynesian monetary policy), but indeed natural science (evolutionary biology, anthropogenic climate change) are now considered “political controversies” because the right wing doesn’t want to believe them.

But let’s get back to the actual tax plan Stiglitz is proposing. He is in favor of raising some taxes and lowering others, spending more on some things and less on other things. His basic strategy is actually quite simple: Raise taxes with low multipliers and cut taxes with high multipliers. Raise spending with high multipliers and cut spending with low multipliers.

“While in general taxes take money out of the system, and therefore have a deflationary bias, some taxes have a larger multiplier than others, i.e. lead to a greater reduction in aggregate demand per dollar of revenue raised. Taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand. Taxes on lower income individuals have the most adverse effect on aggregate demand.”

In other words, by making the tax system more progressive, we can directly stimulate economic growth while still increasing the amount of tax revenue we raise. And of course we have plenty of other moral and economic reasons to prefer progressive taxation.

Stiglitz tears apart the “job creator” myth:

“It is important to dispel a misunderstanding that one often hears from advocates of lower taxes for the rich and corporations, which contends that the rich are the job producers, and anything that reduces their income will reduce their ability and incentive to create jobs. First, at the current time, it is not lack of funds that is holding back investment. It is not even a weak and dysfunctional financial sector. America’s large corporations are sitting on more than $2 trillion in cash. What is holding back investment, especially by large corporations, is the lack of demand for their products.”

Stiglitz talks about two principles of taxation to follow:

First is the Generalized Henry George Principle, that we should focus taxes on things that are inelastic, meaning their supply isn’t likely to change much with the introduction of a tax. Henry George favored taxing land, which is quite inelastic indeed. The reason we do this is to reduce the economic distortions created by a tax; the goal is to collect revenue without changing the number of real products that are bought and sold. We need to raise revenue and we want to redistribute income, but we want to do it without creating unnecessary inefficiencies in the rest of the economy.

Second is the Generalized Polluter Pays Principle, that we should tax things that have negative externalities—effects on other people that are harmful. When a transaction causes harm to others who were not party to the transaction, we should tax that transaction in an amount equal to the harm that it would cause, and then use that revenue to offset the damage. In effect, if you hurt someone else, you should have to pay to clean up your own mess. This makes obvious moral sense, but it also makes good economic sense; taxing externalities can improve economic efficiency and actually make everyone better off. The obvious example is again pollution (the original Polluter Pays Principle), but there are plenty of other examples as well.

Stiglitz of course supports taxes on pollution and carbon emissions, which really should be a no-brainer. They aren’t just good for the environment, they would directly increase economic efficiency. The only reason we don’t have comprehensive pollution taxes (or something similar like cap-and-trade) is again the political pressure of right-wing interests.

Stiglitz focuses in particular on the externalities of the financial system, the boom-and-bust cycle of bubble, crisis, crash that has characterized so much of our banking system for generations. With a few exceptions, almost every major economic crisis has been preceded by some sort of breakdown of the financial system (and typically widespread fraud by the way). It is not much exaggeration to say that without Wall Street there would be no depressions. Externalities don’t get a whole lot bigger than that.

Stiglitz proposes a system of financial transaction taxes that are designed to create incentives against the most predatory practices in finance, especially the high-frequency trading in which computer algorithms steal money from the rest of the economy thousands of times per second. Even a 0.01% tax on each financial transaction would probably be enough to eliminate this particular activity.

He also suggests the implementation of “bonus taxes” which disincentivize paying bonuses, which could basically be as simple as removing the deductions placed during the Clinton administration (in a few years are we going to have to say “the first Clinton administration”?) that exempt “performance-based pay” from most forms of income tax. All pay is performance-based, or supposed to be. There should be no special exemption for bonuses and stock options.

Stiglitz also proposes a “bank rescue fund” which would be something like an expansion of the FDIC insurance that banks are already required to have, but designed as catastrophe insurance for the whole macroeconomy. Instead of needing bailed out from general government funds, banks would only be bailed out from a pool of insurance funds they paid in themselves. This could work, but honestly I think I’d rather reduce the moral hazard even more by saying that we will never again bail out banks directly, but instead bail out consumers and real businesses. This would probably save banks anyway (most people don’t default on debts if they can afford to pay them), and if it doesn’t, I don’t see why we should care. The only reason banks exist is to support the real economy; if we can support the real economy without them, they deserve to die. That basic fact seems to have been lost somewhere along the way, and we keep talking about how to save or stabilize the financial system as if it were valuable unto itself.

Stiglitz also proposes much stricter regulations on credit cards, which would require them to charge much lower transaction fees and also pay a portion of their transaction revenue in taxes. I think it’s fair to ask whether we need credit cards at all, or if there’s some alternative banking system that would allow people to make consumer purchases without paying 20% annual interest. (It seems like there ought to be, doesn’t it?)

Next Stiglitz gets to his proposal to reform the corporate income tax. Like many of us, he is sick of corporations like Apple and GE with ten and eleven-figure profits paying little or no taxes by exploiting a variety of loopholes. He points out some of the more egregious ones, like the “step up of basis at death” which allows inherited capital to avoid taxation (personally, I think both morally and economically the optimal inheritance tax rate is 100%!), as well as the various loopholes on offshore accounting which allow corporations to design and sell their products in the US, even manufacture them here, and pay taxes as if all their work were done in the Cayman Islands. He also points out that the argument that corporate taxes disincentivize investment is ridiculous, because most investment is financed by corporate bonds which are tax-deductible.

Stiglitz departs from most other economists in that he actually proposes raising the corporate tax rate itself. Most economists favor cutting the rate on paper, then closing the loopholes to ensure that the new rate is actually paid. Stiglitz says this is not enough, and we must both close the loopholes and increase the rate.

I’m actually not sure I agree with him on this; the incidence of corporate taxes is not very well-understood, and I think there’s a legitimate worry that taxing Apple will make iPhones more expensive without actually taking any money from Tim Cook. I think it would be better to get rid of the corporate tax entirely and then dramatically raise the marginal rates on personal income, including not only labor income but also all forms of capital income. Instead of taxing Apple hoping it will pass through to Tim Cook, I say we just tax Tim Cook. Directly tax his $4 million salary and $70 million in stock options.

Stiglitz does have an interesting proposal to introduce “rent-seeking” taxes that specifically apply to corporations which exercise monopoly or oligopoly power. If you can actually get this to work, it’s very clever; you could actually create a market incentive for corporations to support their own competition—and not in the sense of collusion but in the sense of actually trying to seek out more competitive markets in order to avoid the monopoly tax. Unfortunately, Stiglitz is a little vague on how we’d actually pull that off.

One thing I do agree with Stiglitz on is the use of refundable tax credits to support real investment. Instead of this weird business about not taxing dividends and capital gains in the hope that maybe somehow this will support real investment, we actually give tax credits specifically to companies that build factories or hire more workers.

Stiglitz also does a good job of elucidating the concept of “corporate welfare”, officially called “tax expenditures”, in which subsidies for corporations are basically hidden in the tax code as rebates or deductions. This is actually what Obama was talking about when he said “spending in the tax code”, (he did not invent the concept of tax expenditures), but since he didn’t explain himself well even Jon Stewart accused him of Orwellian Newspeak. Economically a refundable tax rebate of $10,000 is exactly the same thing as a subsidy of $10,000. There are some practical and psychological differences, but there are no real economic differences. If you’re still confused about tax expenditures, the Center for American Progress has a good policy memo on the subject.

Stiglitz also has some changes to make to the personal income tax, all of which I think are spot-on. First we increase the marginal rates, particularly at the very top. Next we equalize rates on all forms of income, including capital income. Next, we remove most, if not all, of the deductions that allow people to avoid paying the rate it says on paper. Finally, we dramatically simplify the tax code so that the majority of people can file a simplified return which basically just says, “This is my income. This is the tax rate for that income. This is what I owe.” You wouldn’t have to worry about itemizing your student loans or mortgage payments or whatever else; just tally up your income and look up your rate. As he points out, this would save a lot of people a lot of stress and also remove a lot of economic distortions.

He talks about how we can phase out the mortgage-interest deduction in particular, because it’s clearly inefficient and regressive but it’s politically popular and dropping it suddenly could lead to another crisis in housing prices.

Stiglitz has a deorbit for anyone who thinks capital income should not be taxed:

“There is, moreover, no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.”

By equalizing rates on labor and capital income, he estimates we could raise an additional $130 billion per year—just shy of what it would take to end world hunger. (Actually some estimates say it would be more than enough, others that it would be about half what we need. It’s definitely in the ballpark, however.)

Stiglitz actually proposes making a full deduction of gross household income at $100,000, meaning that the vast majority of Americans would pay no income tax at all. This is where he begins to lose me, because it necessarily means we aren’t going to raise enough revenue by income taxes alone.

He proposes to make up the shortfall by introducing a value-added tax, a VAT. I have to admit a lot of countries have these (including most of Europe) and seem to do all right with them; but I never understood why they are so popular among economists. They are basically sales taxes, and it’s very hard to make any kind of sales tax meaningfully progressive. In fact, they are typically regressive, because rich people spend a smaller proportion of their income than poor people do. Unless we specifically want to disincentivize buying things (and a depression is not the time to do that!), I don’t see why we would want to switch to a sales tax.

At the end of the paper Stiglitz talks about the vital difference between short-term spending cuts and long-term fiscal sustainability:

“Thus, policies that promote output and employment today also contribute to future growth – particularly if they lead to more investment. Thus, austerity measures that take the form of cutbacks in spending on infrastructure, technology, or education not only weaken the economy today, but weaken it in the future, both directly (through the obvious impacts, for example, on the capital stock) but also indirectly, through the diminution in human capital that arises out of employment or educational experience. […] Mindless “deficit fetishism” is likely to be counterproductive. It will weaken the economy and prove counterproductive to raising revenues because the main reason that we are in our current fiscal position is the weak economy.”

It amazes me how many people fail to grasp this. No one would say that paying for college is fiscally irresponsible, because we know that all that student debt will be repaid by your increased productivity and income later on; yet somehow people still think that government subsidies for education are fiscally irresponsible. No one would say that it is a waste of money for a research lab to buy new equipment in order to have a better chance at making new discoveries, yet somehow people still think it is a waste of money for the government to fund research. The most legitimate form of this argument is “crowding-out”, the notion that the increased government spending will be matched by an equal or greater decrease in private spending; but the evidence shows that many public goods—like education, research, and infrastructure—are currently underfunded, and if there is any crowding-out, it is much smaller than the gain produced by the government investment. Crowding-out is theoretically possible but empirically rare.

Above all, now is not the time to fret about deficits. Now is the time to fret about unemployment. We need to get more people working; we need to create jobs for those who are already seeking them, better jobs for those who have them but want more, and opportunities for people who have given up searching for work to keep trying. To do that, we need spending, and we will probably need deficits. That’s all right; once the economy is restored to full capacity then we can adjust our spending to balance the budget (or we may not even need to, if we devise taxes correctly).

Of course, I fear that most of these policies will fall upon deaf ears; but Stiglitz calls us to action:

“We can reform our tax system in ways that will strengthen the economy today, address current economic and social problems, and strengthen our economy for the future. The economic agenda is clear. The question is, will the vested interests which have played such a large role in creating the current distorted system continue to prevail? Do we have the political will to create a tax system that is fair and serves the interests of all Americans?”

The scissors of supply and demand

JDN 2457299 EDT 17:03

In recent posts I talked about demand and then I talked about supply. Now it’s time to talk about both at once–which is where the real magic happens. Alfred Marshall famously compared supply and demand to the lower and upper blades of a pair of scissors:

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

~Alfred Marshall, Principles of Economics

Before Marshall, it was actually rather common to debate whether prices are determined by supply or by demand. Actually there seems to be a certain branch of Marxists today who insist upon the “labor theory of value” that seems to rest upon a similar sort of confusion, basically saying that the real value of something is entirely determined by its cost of supply. If the value of something were strictly determined by the labor put into making it, there would be literally no reason to ever make anything. If the value you get from a good is precisely equal to the labor put into it, there is no net benefit to ever making any goods. At most, embodying labor in a product might allow you to transfer labor from one person to another; but there would be no such thing as real economic growth. In order to have real economic growth, products must end up being worth more than what it cost to make them—that is, their value of demand must exceed their cost of supply.

Toward the other end of the political spectrum, we have “Say’s Law”, which says that “supply creates its own demand”; that is, that there is never any such thing as too much or too little overall demand in an economy, because supplying a good automatically makes that good available to trade for something else. I hate to even call it a “law” because isn’t even like the Pirate Code; it’s not even useful as a guideline, it’s just flat wrong. There is absolutely no reason that making something would make someone else want to buy it from you. You can make all sorts of things that nobody wants to buy; the possibilities are endless, really. Balls of lint dusted with powdered sugar, broken ballpoint pens dipped in motor oil, burnt-out lightbulbs covered in melted Swiss cheese. It’s possible that someone might want to buy such bizarre items (call them “postmodernist found art” or something), but there clearly isn’t a large market for such goods, even if you should decide to manufacture thousands of them. Even in an aggregate sense, there’s also no particular reason to think that we can’t have an economy where millions of products pile up on shelves because no one can afford to buy them; indeed, that’s basically what happens in a recession.

In fact, the converse, “demand creates its own supply”, is considerably closer to true. It’s still not strictly true—centuries of searching for the elixir of immortality have failed to produce it, though modern genetic engineering just might finally succeed where all else has failed. (After all, every new technology is impossible… until it isn’t.) But in the long run, this converse law (it doesn’t have a name so far as I know) does contain an important grain of truth: If people want something badly enough, they will spend enormous resources in order to find a way to get it. If you know that a lot of people want something that no one is supplying, it behooves you to find a way to provide it—it might just make you a billionaire. Over centuries of technological advancement, humanity has found ways to provide many goods and services that were previously thought impossible, and one of the central benefits of a capitalist economy is that it provides powerful economic incentives for entrepreneurs to innovate and find ways to provide goods that people have always wanted but never had. Yet, even so, it isn’t true that demand creates its own supply—certainly not in the short run.

Neither supply or demand on its own does much of anything. You can have insatiable demand for something nobody can supply (the aforementioned elixir of immortality), and it still won’t be sold. You can have endless supply of something nobody demands (vacuum?), and it will remain worthless. It’s only when you have both supply and demand that a market becomes possible.

One of the central insights of modern economics is that prices and quantities in a capitalist market are determined simultaneously by supply and demand. In general, both supply and demand are constantly changing in response to events in the world, and thus the prices and quantities of goods shift from one equilibrium to another. In order to predict exactly how they will shift, we would need to know how both supply and demand have changed.

As Marshall alludes to in the above quotation, in some cases we can take either supply or demand as fixed and then the other one is what matters; but these are only special cases. In general, both supply and demand are subject to the winds of changing markets, and we need to keep track of both at once. If that sounds really difficult, that’s because it is—most of what economists do in the real world ultimately amounts to finding ways to distinguish supply effects from demand effects in various situations. Even most statistical methods in econometrics were basically designed as means of separating out demand-related causes from supply-related causes.

A lot of policy questions ultimately depend upon whether supply or demand is the dominant factor: If the business cycle is primarily driven by changes in demand, it makes sense to use monetary and fiscal policy to stabilize the economy (short version: it is, and it does). If it were instead driven by supply (“supply-side economics”), it would instead be better to make structural changes that reduce costs of production. (Why is this obviously wrong? Because there weren’t sudden increases in production costs in 2008—but there was a sudden collapse of consumer buying power. Maybe the 1973 recession can be explained by a sudden increase in oil prices, but there was no such supply shock in 2008.) If the labor market is primarily driven by demand, we need to find ways to get business to hire more people; but if it’s primarily driven by supply, we need to find ways to get people to get off their butts and try to find work. (Again, I think it’s pretty obvious that the former is true, not the latter—since at least 2000 there have never been as many job openings in the US as there were unemployed people.)

In the above policy questions the liberal view is the demand-side and the conservative view is the supply-side, but that need not be the case. Regarding renewable energy, for example, the more liberal view is that lots of people would want to buy electric cars and solar panels, if they were made available, but they aren’t—we are supply-constrained. The more conservative view is that the reason they aren’t selling more is that nobody particularly wants them and trying to force them on us is a fool’s errand—we are demand-constrained. Likewise when it comes to banking, liberals generally think that the reason there isn’t more credit is that banks refuse to supply loans, while conservatives (particularly from the banks themselves) usually argue that it’s because people aren’t willing to take the risk of taking out more loans.

The point, however, is that a lot of policy debates ultimately hinge upon the question of whether demand or supply is more important in driving a particular market—and since sometimes they are both important, sometimes the policy solution requires a combination of different approaches. One of the advantages of quantitative economic analysis is that we can determine exactly how much the costs and benefits of each policy option will be, and thereby choose the one that is most cost-effective.

In this way, “supply or demand?” is a lot like “nature or nurture?”; the answer is always “both”, but there are times when one factor or the other is more important for the policy question at hand.

What do we do about unemployment?

JDN 2457188 EDT 11:21.

Macroeconomics, particularly monetary policy, is primarily concerned with controlling two variables.

The first is inflation: We don’t want prices to rise too fast, or markets will become unstable. This is something we have managed fairly well; other than food and energy prices which are known to be more volatile, prices have grown at a rate between 1.5% and 2.5% per year for the last 10 years; even with food and energy included, inflation has stayed between -1.5% and +5.0%. After recovering from its peak near 15% in 1980, US inflation has stayed between -1.5% and +6.0% ever since. While the optimal rate of inflation is probably between 2.0% and 4.0%, anything above 0.0% and below 10.0% is probably fine, so the only significant failure of US inflation policy was the deflation in 2009.

The second is unemployment: We want enough jobs for everyone who wants to work, and preferably we also wouldn’t have underemployment (people who are only working part-time even though they’d prefer full-time or discouraged workers (people who give up looking for jobs because they can’t find any, and aren’t counted as unemployed because they’re no looking looking for work). There’s also a tendency among economists to want “work incentives” that maximize the number of people who want to work, but I think these are wildly overrated. Work isn’t an end in itself; work is supposed to be creating products and providing services that make human lives better. The benefits of production have to be weighed against the costs of stress, exhaustion, and lost leisure time from working. Given that stress-related illnesses are some of the leading causes of death and disability in the United States, I don’t think that our problem is insufficient work incentives.

Unemployment is a problem that we have definitely not solved. Unemployment has bounced up and down between peaks and valleys, dropping as low as 4.0% and rising as high as 11.0% over the last 60 years. If 2009’s -1.5% deflation concerns you, then its 9.9% unemployment should concern you far more. Indeed, I’m not convinced that 5.0% is an acceptable “natural” rate of unemployment—that’s still millions of people who want work and can’t find it—but most economists would say that it is.

In fact, matters are worse than most people realize. Our unemployment rate has fallen back to a relatively normal 5.5%, as you can see in this graph (the blue line is unemployment, the red line is underemployment):

All_Unemployment

However, our employment rate never recovered from the Second Depression. As you can see in this graph, it fell from 63% to 58%, and has now only risen back to 59%:

Employment

How can unemployment fall without employment rising? The key is understanding how unemployment is calculated: It only counts people in the labor force. If people leave the labor force entirely, by retiring, going back to school, or simply giving up on finding work, they will no longer be counted as unemployed. The unemployment rate only counts people who want work but don’t have it, so as far as I’m concerned that figure should always be nearly zero. (Not quite zero since it takes some time to find a good fit; but maybe 1% at most. Any more than that and there is something wrong with our economic system.)

The optimal employment rate is not as obvious; it certainly isn’t 100%, as some people are too young, too old, or too disabled to be spending their time working. As automation improves, the number of workers necessary to produce any given product decreases, and eventually we may decide as a society that we are making enough products and most of us should be spending more of our time on other things, like spending time with family, creating works of art, or simply having fun. Maybe only a handful of people, the most driven or the most brilliant, will actually decide to work—and they will do because they want to, not because they have to. Indeed, the truly optimal employment rate might well be zero; think of The Culture, where there is no such concept as a “job”; there are things you do because you want to do them, or because they seem worthwhile, but there is none of this “working for pay” nonsense. We are not yet at the level of automation where this would be possible, but we are much closer than I think most people realize. Think about all of the various administrative and bureaucratic tasks that most people do the majority of the time, all the reports, all the meetings; why do they do that? Is it actually because the work is necessary, that the many levels of bureaucracy actually increase efficiency through specialization? Or is it simply because we’ve become so accustomed to the idea that people have to be working all the time in order to justify their existence? Is David Graeber (I reviewed one of his books previously) right that most jobs are actually (and this is a technical term), “bullshit jobs”? Once again, the problem doesn’t seem to be too few work incentives, but if anything too many.

Indeed, there is a basic fact about unemployment that has been hidden from most people. I’d normally say that this is accidental, that it’s too technical or obscure for most people to understand, but no, I think it has been actively concealed, or, since I guess the information has been publicly available, at least discussion of it has been actively avoided. It’s really not at all difficult to understand, yet it will fundamentally change the way you think about our unemployment problem. Here goes:

Since at least 2000 and probably since 1980 there have been more people looking for jobs than there have been jobs available.

The entire narrative of “people are lazy and don’t want to work” or “we need more work incentives” is just totally, totally wrong; people are desperate to find work, and there hasn’t been enough work for them to find since longer than I’ve been alive.

You can see this on the following graph, which is of what’s called the “Beveridge curve”; the horizontal axis is the unemployment rate, while the vertical axis is the rate of job vacancies. The red line across the diagonal is the point at which the two are even, and there are as many people looking for jobs as there are jobs to fill. Notice how the graph is always below the line. There have always been more unemployed people than jobs for them to fill, and at the worst of the Second Depression the ratio was 5 to 1.

Beveridge_curve_2

Personally I believe that we should be substantially above the line, and in a truly thriving economy there should be employers desperately trying to find employees and willing to pay them whatever it takes. You shouldn’t have to send out 20 job applications to get hired; 20 companies should have to send offers to you. For the economy does not exist to serve corporations; it exists to serve people.

I can see two basic ways to solve this problem: You can either create more jobs, or you can get people to stop looking for work. That may be sort of obvious, but I think people usually forget the second option.

We definitely do talk a lot about “job creation”, though usually in a totally nonsensical way—somehow “Job Creator” has come to be a euphemism for “rich person”. In fact the best way to create jobs is to put money into the hands of people who will spend it. The more people spend their money, the more it flows through the economy and the more wealth we end up with overall. High rates of spending—high marginal propensity to consumecan multiply the value of a dollar many times over.

But there’s also something to be said for getting people to stop looking for work—the key is do it in the right way. They shouldn’t stop looking because they give up; they should stop looking because they don’t need to work. People should have their basic needs met even if they aren’t working for an employer; human beings have rights and dignity beyond their productivity in the market. Employers should have to make you a better offer than “you’ll be homeless if you don’t do this”.

Both of these goals can be accomplished simultaneously by one simple policy: Basic income.

It’s really amazing how many problems can be solved by a basic income; it’s more or less the amazing wonder policy that solves all the world’s economic problems simultaneously. Poverty? Gone. Unemployment? Decimated. Inequality? Contained. (The pilot studies of basic income in India have been successful beyond all but the wildest dreams; they eliminate poverty, improve health, increase entrepreneurial activity, even reduce gender inequality.) The one major problem basic income doesn’t solve is government debt (indeed it likely increases it, at least in the short run), but as I’ve already talked about, that problem is not nearly as bad as most people fear.

And once again I think I should head off accusations that advocating a basic income makes me some sort of far-left Communist radical; Friedrich Hayek supported a basic income.

Basic income would help with unemployment in a third way as well; one of the major reasons unemployment is so harmful is that people who are unemployed can’t provide for themselves or their families. So a basic income would reduce the number of people looking for jobs, increase the number of jobs available, and also make being unemployed less painful, all in one fell swoop. I doubt it would solve the problem of unemployment entirely, but I think it would make an enormous difference.