Seeing Like a State

I recently finished reading Seeing Like a State, an interesting book by James Scott, a political scientist at Yale. Scott argues that many attempts to coordinate and control from the top down necessarily leave out many important details that are essential to the workings of an organically developed process. In his words “Designed or planned social order is necessarily schematic; it always ignores essential features of any real, functioning social order.” His thesis is essentially a Hayekian one. Because they can never fully collect the local knowledge of individuals, state programs often forget important features of society, in some cases leading to tragic results.

Scott begins the book with an example that I think perfectly encapsulates his broader point. He describes the story of the forestry industry in late 18th century Prussia and Saxony. In order to optimize lumber yields, states decided that there was no need to keep the seemingly unordered naturally grown forest. Instead, they could optimize forest growth, planting only the most valuable trees in a grid-like setup to enable easy access. You can probably guess what comes next.

While the managed forests worked well for one generation, soon the trees stopped growing quite as large or even dying before they could be used for lumber. Without the natural habitat they had evolved to survive in, the trees no longer received the nutrients they needed from the soil. Scientists attempted to replicate the essential features of the forest, to provide the trees with the nutrients they needed while maintaining their controlled environment. As Scott describes, “given the fragility of the simplified production forest, the massive outside intervention that was required to establish it – we might call it the administrators’ forest – is increasingly necessary in order to sustain it as well.” Just as we see in countless cases of government intervention, a single intervention ends up requiring even more intervention and government becomes necessary to maintain the system despite being itself the original source of the problem.

Scott summarizes the situation:

“The metaphorical value of this brief account of scientific production forestry is that it illustrates the dangers of dismembering an exceptionally complex and poorly understood set of relations and processes in order to isolate a single element of instrumental value…Everything that interfered with the efficient production of the key commodity was implacably eliminated. Everything that seemed unrelated to efficient production was ignored. Having come to see the forest as a commodity, scientific forestry set about refashioning it as a commodity machine. Utilitarian simplification in the forest was an effective way of maximizing wood production in the short and intermediate term. Ultimately, however, its emphasis on yield and paper profits, its relatively short time horizon, and, above all, the vast array of consequences it had resolutely bracketed came back to haunt it.” (21)

It is hard to read the excerpt above without immediately thinking of other examples where governments have attempted to replace complex natural systems with more intelligible, but far simpler systems. The remainder of the book goes through many such examples, from the design of cities and languages, to the failed communist experiments of the Soviets and the Chinese and many more. Scott picks out four features that his research suggests lead to poor results of state control. They are, in his words

  1. “Administrative ordering of nature and society”
  2. “High modernist ideology”
  3. “Authoritarian state that is willing and able to use the full weight of its coercive power to bring these high-modernist designs into being”
  4. “Prostrate civil society that lacks the capacity to resist these plans”

1, 3, and 4 are pretty straightforward, but 2 deserves some further discussion. By “high modernist ideology,” Scott refers to the belief that scientists and other experts know how to design a society in a more efficient way than ones that develop without any top down intervention. It is the belief that a centralized plan can trump decentralized spontaneous order. Hayek frequently called this attitude “scientism” in his work. Both Scott and Hayek argue that high modernist thinking is too arrogant. Ancient traditions may look backwards to a modern scientist. Customs may seem strange, cultures don’t always make sense.

But it is important to remember that just because you don’t understand the reason behind something doesn’t mean there isn’t one. To the central planner who only cared about lumber production, natural forests seemed incredibly inefficient. So the solution is simple. Cut out everything we don’t need and just keep the good stuff. In doing so, however, those seemingly useless features often reveal themselves to be essential.

Overall, I found the book to be full of interesting historical examples that each serve to illustrate this theme again and again. One point that I did wish had gotten more attention was the role of corporations and their similar top down nature. Scott briefly mentions that “large-scale capitalism is just as much an agency of homogenization, uniformity, grids, and heroic simplification as the state is.” He is quick to note that there is a major difference that “for capitalists, simplification must pay.” Still, in cases like the German forests, if the results were profitable in the short run and the problems only observable after dozens of years, it is easy to imagine capitalist firms falling into the same trap. I would have liked to see some examples of historical corporations that have also failed to simplify complex systems, but I guess that would require a much longer book. As it stands, the book serves as a useful warning for any attempt to improve a natural process that is not fully understood. Well worth the read.

 

The Neoliberal Conspiracy

My name is Chris, and I’m a neoliberal. Well, at least I think I am. One can never be quite sure. The question of what defines a neoliberal and the significance of the term itself consistently drums up a somewhat bizarre debate with various points of view ranging from the idea that neoliberalism has dominated the world for the last 40 years (and literally the root of all our problems) to claims that neoliberalism is a completely meaningless term.

I don’t have any real stake in this debate – deciding what label should be used to describe people is almost always a fruitless exercise. It seems to me that neoliberal has been used primarily as an insult used by the Left to disparage people who think free markets are generally good, a point made in a recent article by Jonathan Chait. It is important to point out that neoliberal does not only refer to the hardcore libertarian end of the political spectrum. Clinton and Obama are lumped into the same label as Reagan and Bush. However, I think most people agree that the source of the so-called neoliberal movement comes from the strongest supporters of laissez-faire, market-oriented economics. Hayek, Friedman, and other big names in the libertarian community were the ones who set the neoliberal train in motion.

But as soon as they acknowledge the founding fathers of neoliberalism, many analyses of neoliberal thought tend to go off the rails. Perhaps the best example of the kind of thinking I am talking about is a 2014 article by Philip Mirowski entitled “The Political Movement that Dared not Speak its own Name: The Neoliberal Thought Collective Under Erasure.” Mirowski has dedicated much of his career to explaining the expansion of neoliberal thought. It is immediately clear that he opposes essentially all of its primary tenets, but of course anybody can be fascinated by a philosophy without agreeing with it. Unfortunately, Mirowski’s work paints (in my admittedly biased point of view) an incredibly misleading picture of not only what neoliberals believe, but also what their ultimate goals are.

Mirowski states his favored definition of neoliberal as “the dependence upon the strong state to pursue the disenchantment of politics by economics.” Hmm. Is that unintelligible to everybody or just me? Luckily, he also provides a longer list of principles he believes neoliberals adhere to (which he takes from Ben Fink):

(1) “Free” markets do not occur naturally. They must be actively constructed through political organizing. (2) “The market” is an information processor, and the most efficient one possible—more efficient than any government or any single human ever could be. (3) Market society is, and therefore should be, the natural and inexorable state of humankind. (4) The political goal of neoliberals is not to destroy the state, but to take control of it, and to redefine its structure and function, in order to create and maintain the market-friendly culture. (5) There is no contradiction between public/politics/citizenship and private/ market/entrepreneur-and- consumerism—because the latter does and should eclipse the former. (6) The most important virtue—more important than justice, or anything else—is freedom, defined “negatively” as “freedom to choose”, and most importantly, defined as the freedom of corporations to act as they please. (7) Capital has a natural right to flow freely across national boundaries—labor, not so much. (8) Inequality—of resources, income, wealth, and even political rights—is a good thing; it prompts productivity, because people envy the rich and emulate them; people who complain about inequality are either sore losers or old fogies, who need to get hip to the way things work nowadays. (9) Corporations can do no wrong—by definition. (10) The market, engineered and promoted by neoliberal experts, can always provide solutions to problems seemingly caused by the market in the first place: there’s always “an app for that.” (11) There is no difference between is and should be: “free” markets both should be (normatively) and are (positively) most the efficient economic system, and the most just way of doing politics, and the most empirically true description of human behavior, and the most ethical and moral way to live—which in turn explains, and justifies, why their versions of “free” markets should be, and as neoliberals build more and more power, increasingly are, universal.

So how many people would agree to all of the points above? I haven’t taken a survey, but if I did I can almost guarantee the result would be zero. The above description is not even a strawman of the philosophy of people like Friedman and Hayek (or me). On some points, it’s probably not too far off, but on others it’s either misleading or just blatantly false (I take particular issue with 1, 5, 7, 9, 10, and 11). Both the tone (of course all neoliberals regard people who complain about inequality as “sore losers or old fogies”) and the content are apparently designed to position neoliberalism as a front for the elites in society to retain their power. It is the unholy alliance of state and corporate power that drives the neoliberal doctrine.

Now, if you’ve ever read Friedman or Hayek (or my blog) and gotten a very different picture of what it means to be a neoliberal I don’t blame you at all (Note: I prefer to label myself libertarian, but again I’m not concerned about labels here – if Friedman and Hayek are neoliberal then so am I). While the state is certainly necessary to provide some of the features that neoliberals deem conducive to a prosperous society (property rights certainly seem to be a necessary condition), to claim that they “explicitly proposed policies to strengthen the state” is disingenuous. Mirowski gives two examples of such policies from Friedman: his plan to have the central bank grow the money supply at a constant rate and to replace public schools with vouchers. It’s certainly true that both of these policies require a state, but Mirowski chooses to avoid the fact that each requires significantly less state intervention than the current setup. Does he mean to argue that the state providing vouchers to attend private schools requires more state power than the government actually running the schools themselves? I can’t imagine.

Even Mirowski admits that the rhetoric of the neoliberal movement is aimed at promoting the freedom of the individual and limiting the power of the state. But here’s where it gets interesting. Instead of taking neoliberals at their word, Mirowski claims that all of this talk of liberty and freedom is really just a way to “postpone the truth as long as possible when it comes to the nature of the society they are dedicated to bring about.” All of those videos on Youtube of Milton Friedman exquisitely extolling the virtues of a free society? Yeah he doesn’t really believe any of that. The only reason you think he does is because you haven’t “devoted years of their lives to reading the neoliberals, as I [Mirowski] have.”

I think a more accurate statement might be that you haven’t spent years reading the neoliberals and doing everything in your power to find ways to make them look bad. As another person who has spent years reading the neoliberals, I’m almost sure that Milton Friedman believed every word of what he said in those Youtube videos. Mirowski continues in a footnote:

I am always shocked to find the infrastructure of the Neoliberal Thought Collective is always far more developed than any of my private paranoid fantasies. Not only is Free to Choose available on the ubiquitous YouTube, but there is also a slick dedicated website called FreetoChoose.tv, with extended unedited tape from the series…It also includes video lectures from many other neoliberal figures

This comment confuses me. The “infrastructure” of the neoliberal conspiracy is so highly developed that it even has videos on Youtube and *GASP* even a website?! There are two explanations. Either Mirowski has been so engulfed in his study of neoliberalism that he doesn’t realize we are in the 21st century, or he hasn’t had time to look at literally any other topic in the world. I don’t know what his “private paranoid fantasies” consist of, but if you can’t find a website dedicated to them, they must be pretty darn weird.

Jokes aside, Mirowski’s surprise at the lengths the neoliberal movement has gone to promote its message make more sense if we consider it in the context of his broad message. If the freedom rhetoric of the neoliberal movement is really just a front for its desire to strengthen the state and please the elites, his concern makes a lot more sense. For him, the tools of the “Neoliberal Thought Collective” are about as powerful and almost as terrifying as Nazi propaganda. Of course, there’s a far less pernicious reason why the reach of the free market movement extends so far: Its supporters truly care about its message and believe that it will lead to a better world.

And this point seems to be the one that those on the left have such a hard time grasping. They simply can’t believe that anybody honestly believes free markets would lead to a better society. The only explanation is that there is some grand neoliberal conspiracy driving it all. The elites (usually the Kochs take a starring role here) and their economist cronies put on a nice show. They bamboozle the public with nice words like freedom and liberty to draw support to their cause, but their real goal is to be the architects of the society they desire (and probably line their pockets while they’re at it).

Nancy Maclean’s recent book on James Buchanan is an excellent example of such a story. In her account, Buchanan carried out a “stealth plan” to destroy democracy and enact his own vision for the United States (which happened to include many racist policies). I haven’t read Maclean’s book, but I have read several interviews and I find her thesis very odd. Weren’t many of the civil rights victories only possible precisely because of limits on democracy? This post is already long and since I am not an expert on Buchanan and I haven’t read the book I don’t want to comment too much on Maclean’s point specifically (see here, here, and here for some reviews by people who do know what they’re talking about). But I think it does tie into exactly the same kind of thinking illustrated by Mirowski. Never is any probability given to the possibility that Buchanan actually just wanted to improve the system of government in the US. Since his methods were different than progressives, he must be racist and selfish. And since he can’t say those things outright, he had to hide them.

I can’t speak for Buchanan. I don’t know what was really going on in the brains of Friedman or Hayek. Maybe they are all just frauds. But I do know with certainty that there exists at least one person that supports free market policies because he actually thinks they are good (full disclosure: I have received Koch money to attend conferences at the Koch funded Institute for Humane Studies – but I got that money because I am libertarian, not the other way around). I’ve met many other people who are either great actors or are genuinely convinced that markets work well and are beneficial for the vast majority of society. They aren’t hiding those beliefs. They aren’t huddled behind closed doors trying to devise ways to lead everyone else into a trap. There is no hidden meaning behind their words. There is no neoliberal conspiracy.

Don’t Be Afraid of Trade

One of the economic concepts that is most frequently misunderstood by non-economists (and probably by economists too) is the trade deficit. First, a definition. The trade deficit refers to the difference between the amount of goods a country imports and the amount it exports. As the graph below shows, the US has had a large trade deficit for the past several decades. It has been importing goods at a much higher rate than it has been exporting them. Nobody disagrees with that definition or that fact. The debate comes in when people start to decide whether this situation is actually a problem.

Part of the problem is simply an incorrect interpretation of what the trade deficit measures. It is common for non-economists to confuse this trade deficit with the equally frequently maligned budget deficit, which measures the difference between how much the government spends and how much it takes in as revenue. Unfortunately, our own president is among those who have made this mistake. According to Trump:

“The United States has trade deficits with many, many countries, and we cannot allow that to continue … with South Korea right now, but we cannot allow that to continue. This is really a statement that I make about all trade: For many, many years the United States has suffered through massive trade deficits; that’s why we have $20 trillion in debt.”

This statement is complete nonsense. The trade deficit with South Korea or any other country has absolutely nothing to do with the US government’s $20 trillion debt. The debt is the consequence of perennial budget deficits that derive from the US spending a ton of money on military, social welfare, and other government programs.

The trade deficit isn’t really a debt at all. It simply represents the fact that the US buys more goods from foreign countries than they buy from us. In the short run, a trade deficit is almost certainly beneficial for the US. As Milton Friedman eloquently explains in a video I posted a while ago, what a trade deficit really means is that foreigners are giving us real goods and services in exchange for pieces of paper. We get TVs from Japan. All they get are US dollars.

However, a more careful criticism of trade deficits recognizes that trade deficits can be good for the country in the short run, but represent a cost in the long run. Noah Smith articulates such a point in this post, where he argues that the trade deficit is a “loan of real goods and services.” He gives the example of somebody in the US buying a car from Germany. If the US citizen pays in dollars, he calls this an IOU to Germany. At some point, a German will use the dollars to buy goods and services from the US. Even if the dollars were used to buy an asset like a stock, eventually that stock will be sold and the dollars from the sale will be used to buy goods and services. His logic makes sense. Every dollar must eventually come back to the US in some form or another at some point.

But thinking of the trade deficit as a debt seems to me to be either misleading or completely wrong. One confusing point here is that the trade deficit is a flow, while debts are stocks. What is the value of the debt the US has to repay? The stock of all goods and services ever imported minus all goods ever exported? The current stock of foreign dollar holdings? I’m not sure there is any consistent definition of what this debt is that we are supposed to repay. Even if there were, I don’t think the idea of the trade deficit as a debt is meaningful.

Let’s flip Noah’s story. Assume a Chinese citizen really wants to buy Apple stock since they think it will increase in value. They need dollars to buy Apple stock so they exchange some Yuan for dollars and buy stock. At the same time, Apple needs to buy parts from China to make iPhones, so it imports them, trading dollars for Yuan in the process. For simplicity, assume these two transactions exactly cancel out. Where are the IOUs here? Does either country owe a debt to the other? It certainly doesn’t seem like it to me. The stock of dollars and Yuan in either country is exactly the same as it was before the transaction.

It is even clearer that the trade deficit is not a debt if we consider what happens if Apple suddenly goes out of business. The value of their stock goes to zero and their imports also go to zero. The trade deficit that was created by Apple is gone and no US goods were ever given to China. I imagine Noah considers that analogous to defaulting on a debt, but I don’t buy that analogy at all. Does he think Apple owes a debt to all of its shareholders or just its foreign ones? Isn’t the risk of Apple’s stock price falling inherent in its purchase? If you still aren’t convinced, Daniel Ikenson also has an excellent rebuttal to Noah’s article.

The other important point to keep in mind that is implicit in the example above is that foreign countries don’t just buy goods and services from the US. They also buy assets (stocks, bonds, etc.) or invest directly by building their own factories and capital equipment here. The current account (goods and services) and the capital account (assets) are always in balance by definition. A current account deficit is always offset by a capital account surplus.

This fact means that there are two ways we can frame the US’s large trade deficit. It could be that Trump is correct and we are really just falling behind in competitiveness. Nobody wants US goods anymore so they don’t buy our exports while we eat up their imports (which again is not necessarily bad – we get goods and they get paper). Or it could be that the US is home to many of the safest and best performing assets in the world. Other countries are dying to invest in US companies (and treasury bonds) and the result is a huge capital account surplus. One statistic won’t tell us which story is more accurate, but I think it’s pretty safe to say that we don’t have to be too worried (either now or in the future) about the trade deficit.

Let the Facts Decide on Minimum Wage

Basic economic theory has very clear predictions on what should happen to a labor market with a minimum wage. If we assume an upward sloping labor supply curve and a downward sloping labor demand curve, a minimum wage will cause demand for workers to fall while supply increases. The result: an excess supply of workers, also known as unemployment.

The real world is obviously much more complicated than the standard Econ 101 textbook story. Perhaps the most important difference is that there is not just one equilibrium wage. No two jobs are exactly the same. Workers with different skill levels will face different labor markets. Location matters. The list of reasons why the real world doesn’t conform to the simplifying assumptions of economic theory is potentially endless.

However, those caveats do not necessarily invalidate the intuition of basic economics. I don’t think it’s a controversial statement that firms will attempt to substitute away from an input when its cost increases. In this case, that input is low skilled workers. As minimum wage increases, so does the necessary productivity of a worker who wants to be hired. A worker who only produces $10/hr of value for an employer will never be paid $15/hr regardless of the level of the minimum wage. Their choice is not between 10 and 15, but between 10 and 0 (unemployment).

But can we be sure that workers are actually paid based on their productivity? Couldn’t it be that they are simply being exploited, with firms pocketing the additional profits they generate? Under this scenario, an increase in the minimum wage could increase wages without hurting employment.

Here we see the limits of theory. Under some assumptions a minimum wage is good and under others it is bad. The clear next step is to look at the facts. Do minimum wage laws hurt or help low wage workers in the real world? Luckily, due to recent experiments with a $15/hr minimum wage in some cities, we have plenty of data to work with.

Supporters of minimum wage laws will be happy to find out that cutting edge research shows we have nothing to worry about (here’s the link to the full study). The increase in Seattle minimum wage to $13 (15 is being phased in over time) hasn’t had severe disemployment effects. There was a minimal decrease in employment, but overall, “results show that wages in food services did increase — indicating the policy achieved its goal.” So take that Econ 101. Minimum wage is great. Case closed.

Well, not quite. Because this morning, just 6 days after the study above came out, we have a new study looking at the exact same natural experiment (although with a different data set). The results are not so nice. They find that “the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

Now what? Theory gives us conflicting results and so does data. How can an unbiased observer make a decision about the truth? Well, to be sure of the results of the studies above, they would need to sift through around 100 pages of dense statistical analysis. But of course, anybody untrained in statistics would first have to take a few classes to have any idea what they were talking about. And even with that training, they’d need to take a close look at the datasets used, weigh the pros and cons of each methodology, decide whether the results can generalize to other places, etc. Maybe after about two years of hard work they’d be able to have a qualified opinion on the two studies (never mind the dozens of other studies that have been done on the topic).

What is actually more likely to happen? Everyone who supported the minimum wage will cite the first study and look for flaws in the second (I would bet anything that Arin Dube – one of the biggest minimum wage scholars to support an increase – is scouring it right now looking for something to criticize). Everyone against minimum wage will do the opposite. Both will pretend they are letting the facts decide.

Who Says No? A Climate Change Compromise

Many on the left are up in arms over Trump backing out of the Paris agreement. Ignoring the fact that the agreement says that countries are free to set their own targets and their own policies and is largely symbolic anyway, let’s work under the assumption that liberals actually believe that this policy is disastrous for the earth’s future. In fact, let’s start from the (perhaps ridiculous) assumption that everybody in this debate is being intellectually honest.

Then Republicans have a great opportunity. Offer Democrats a compromise. The United States will re-enter the Paris agreement. And they’ll go even further. Democrats will be given full control over all matters of the environment. Carbon taxes, cap and trade, clean energy subsidies, whatever they want. Completely blank check.

In return, Republicans get everything else. They can pass whatever tax code they want, any deregulation they want. Democrats will have no say in healthcare, no control over education, no input at all over any issue except climate.

So my question is: who says no? Republicans (and Trump) have to go back on one of their key issues and allow the Democrats free reign. But for sucking up their pride on one thing they get everything they’ve ever wanted for a whole range of others. And what about the Democrats? Sure they’d be sacrificing a lot. In their view, we’d be significantly worse off in the short run. But isn’t that worth saving the world? If the results of climate change are truly catastrophic, isn’t it worth some people in the richest country in the world not having health insurance? Isn’t it worth middle class Americans being required to take out student loans to attend college?

Now maybe there are some issues that are as important as climate. If you think Republican control of the military would lead to nuclear war, then of course that can’t be part of the deal. Fine, keep that one. I’ll even throw in gun control, another issue that seems to be of vital importance for the left.  You can come up with your own list of some other issues you would never want to compromise on to save the world. But that list should be very small.

So who says no? I can’t imagine any Republican ever denying the above compromise. But I also doubt a single Democrat would take it. If that prediction is right, we are left with three possible conclusions. The first, which I think we can rule out, is that Democrats believe giving Republicans complete control over anything would be worse than the end of the world. The second, which could be true, is that they believe they can convince Republicans of the correctness of their view without conceding too much. Considering their lack of success to this point, and the apparent urgency with which they believe something needs to be done, this also seems unlikely. So we are left with the third, and in my opinion most likely, option: Despite their rhetoric, Democrats are simply not that concerned about climate change.

Outrage on Net Neutrality

In a previous post I agreed with Bret Stephens that complete certainty about an issue doesn’t help convince anybody that your view is correct and may in fact work against the argument. I extended his point by arguing that not only do people express complete certainty that their ideas are right, but they also tend to find the idea that anybody could think differently completely outrageous. However, I don’t think climate change was the best example to prove that point. If you truly believe that climate change will cause catastrophic changes, you might have a right to be outraged. There is a much better example: net neutrality.

Senator Al Franken recently claimed that the FCC’s plan to roll back some of the regulations on net neutrality would be a “major step to destroying the internet as we know it.” Other reports in the media have had a similar tone: there go those idiot Republicans again trying to convince people that we don’t need the government involved in every aspect of our lives. Perhaps the worst offender is Gizmodo, who I follow for tech news, not to see articles like this one. Now, I suppose it’s possible that a writer for Gizmodo knows enough to have a strong, well qualified opinion on a topic like internet regulation, but I expect their knowledge on the topic is pretty close to mine. And I will freely admit my own ignorance on the topic. I have no idea whether net neutrality is a good idea.

To be clear, just as Bret Stephen’s article was not about the correctness of climate change, this post is not about whether net neutrality is a good idea. Instead, it is about the complete certainty with which its proponents appear to believe it’s a good idea. If you are well read on net neutrality, I’d be happy to hear a more qualified opinion on why this issue is so clear cut. From my perspective, however, the issue is not an obvious one at all and the goal of this post is to sow the seeds of uncertainty for those who haven’t tried to think through the issue in at least a small amount of detail.

I do think I understand the basic argument for net neutrality. Without net neutrality, its supporters argue, internet providers will be free to offer different prices to access different websites on the internet. Right now you pay a fixed price to your internet service provider for access to any website on the internet. ISPs are not allowed to treat bandwidth from one website different from any other. Without this guarantee, it is possible that internet providers could charge more for people who want to access popular websites. You pay $30 per month for internet, but if you want Facebook access too that’s gonna be another $5. Want Netflix too? Well maybe you can get the entertainment package for an extra $15. Even worse, if Comcast wanted to push its own video service, it could completely shutdown Netflix for its customers, leading to higher prices and lower quality service. Special treatment could also go the other way. Large companies could pay to receive faster access to their websites while small startups struggle to survive.

One of the most common ways to summarize the changes is to say that it would make the internet look more like cable TV (see this article for example). Expensive bundles, premium content, bad service. Who wants that? And that does sound bad. But hold on a second. Why do we hate cable TV service? Isn’t the main complaint that you have to buy a bunch of channels you don’t want? If I only want to watch ESPN I can’t buy just that, I have to buy the whole sports bundle. Now, it’s true that net neutrality makes these kind of bundles illegal, but it also makes selling access to individual websites illegal. With internet you only have one choice: buy everything or nothing. Perhaps this method makes more sense for internet than it would for TV, but it’s not immediately obvious that it’s better. It could be that net neutrality leads to inconvenience, higher prices, and worse service. It could also be that it leads to heavy internet users paying more than light users. That doesn’t seem so bad to me.

The good news is we don’t have to guess what the internet would look like without net neutrality. If you don’t know already, take a guess when you think the rules that currently uphold net neutrality were put into place. If you’ve heard any of the horror stories I imagine you would think that the internet has always had these kinds of regulations. You probably don’t remember the internet being a price gouging wasteland in all the time you’ve been using it so the rules must have gone into place in the 80s or 90s at the latest. There’s no way that net neutrality regulations were passed within the last 3 years right? Well…

So we pretty much know exactly what would happen if we get rid of net neutrality. We would destroy the internet as we know it and replace it with the internet of 2015. Why is that a big deal again?

Of course, as I’ve already admitted, I have no idea what I’m talking about on this issue. I think I am barely qualified to talk about macroeconomics, which I study many hours per day. So let’s defer to the experts. Maybe this article about how the effects of net neutrality are minimal. Or this one that shows that there is insufficient evidence to make a strong case that net neutrality rules are needed. The supporters of net neutrality aren’t the only ones making unsubstantiated claims. The claim that net neutrality reduces investment is probably overblown.

I’m sure you can find other articles to support either side. That’s not the point. The point is that net neutrality is not climate change. There is no 97% consensus here. And even if there was, even in the worst possible case, we end up not with the world ending, but with a slightly more expensive internet. The outrage remains regardless. In today’s political climate, every issue has to become a battleground and the urgency of the arguments appears to bear little correlation to either the size of the issue (because everything is a catastrophe) or the probability a person has the correct view (because obviously you are right about everything).

Some Thoughts on Universal Basic Income

People who oppose redistribution from the rich to the poor generally give two types of arguments against it. Perhaps the more obvious argument comes from a natural rights perspective – the person who created the wealth has a right to do whatever they want with it. However, if you don’t believe in free will (as I don’t), then this reasoning doesn’t make much sense. If you weren’t truly responsible for the circumstances that led you to create the wealth in the first place, why should you get to keep all of it? Shouldn’t some of it go to all of the people that had any influence on getting you to that position?

The stronger argument derives from incentives. Taking from the productive to give to the unproductive makes being unproductive far more attractive and we end up with a society where perfectly capable people choose not to work because they expect others to support them. Any attempt to solve poverty needs to deal with this issue, which makes designing anti-poverty measures difficult.

Our current welfare system has some checks in place that attempt to circumvent incentive problems, but it doesn’t solve them completely. Many of our current welfare programs involve cutoff levels where benefits begin to be reduced and eventually disappear altogether. This type of program introduces an implicit marginal tax on low income earners. Not only do they have to pay a higher official tax rate as their income rises, but they also lose some of the benefits they received at a lower income.

A simple way around this problem is to never phase out those benefits – to give them to everyone. This idea forms the backbone of the Universal Basic Income (UBI). One of the most complete proposals for a UBI comes from Charles Murray (yes, the same Charles Murray who gets kicked off college campuses because of his dangerous right wing ideas). In his version (laid out in his book In Our Hands), each American over the age of 21 would receive $13,000 per year in benefits unconditionally. Of this money, $3,000 has to be spent on health insurance, but the rest comes with no strings attached.

Of course, such a plan would be incredibly expensive. However, as Murray points out, our current system is already expensive. According to his calculations, if we eliminated our entire welfare system (including Social Security and Medicare), we could more than pay for the UBI. Getting rid of these programs would be difficult politically, but Murray offers several reasons why doing so would be desirable for almost everyone. Most notably, he estimates that poverty would be all but eliminated under his program vs the approximately 15% that remains under our own system.

Murray’s justification for some level of redistribution is similar to my own:

Inequality of wealth grounded in unequal abilities is different. For most of us, the luck of the draw cuts several ways: one person is not handsome, but is smart; another is not as smart, but is industrious; and still another is not as industrious, but is charming. This kind of inequality of human capital is enriching, making life more interesting for everyone. But some portion of the population gets the short end of the stick on several dimensions. As the number of dimensions grows, so does the punishment for being unlucky. When a society tries to redistribute the goods of life to compensate the most unlucky, its heart is in the right place, however badly the thing has worked out in practice
Charles Murray (2016) – In Our Hands

If we accept that some redistribution is desirable, a UBI seems like a more efficient way to carry it out than our current welfare setup. One common argument against the UBI is that it doesn’t make sense to waste resources on the rich. Bryan Caplan has given some arguments along these lines and argues that phasing benefits out gradually would avoid the implicit marginal tax rate problems without needing to give benefits to everyone. And it makes sense. If our goal is to eliminate poverty why not focus our efforts there?

But I don’t think that argument really works when you consider that a UBI is inextricably linked to the tax system. A UBI doesn’t look so universal after you consider that the rich are going to be paying for almost all of it. Everyone might get a check for $13,000, but top income earners pay far more than that in taxes. Their net benefit from government programs would still be strongly negative even after receiving the UBI. Depending on your perspective towards redistribution, this feature could actually be a negative, but given that redistribution is going to happen anyway, the UBI seems like a more efficient way of actually doing it.

It’s obviously not without fault, but I do think a UBI would be an improvement over our current system and I definitely recommend reading Murray’s book (it’s not that long) to anyone who wants to help the poor but believes we can do better than we do now.

 

Climate of Complete Outrage How the Reaction to Bret Stephens Proves His Point

The New York Times recently caused a stir by hiring Bret Stephens, a conservative journalist, for their opinion page. Stephens holds many views that clash with some of the sacred cows of the progressive movement. These ideological breaches include criticizing Black Lives Matter, saying that campus rape is not an “epidemic,” and denying that climate change will result in catastrophic changes. Naturally, his hiring has brought forth the ire of the left, and the recent publication of his first article has caused an explosion of hatred across my Twitter feed. If you haven’t already, go read the article here before continuing.

Now, just for a few minutes try to put aside any pre-existing biases you have and let’s look at Stephens article as objectively as possible. The article, titled Climate of Complete Certainty, does not argue that climate change is a hoax (“None of this is to deny climate change or the possible severity of its consequences”). It doesn’t claim that we should reject any attempts to mitigate the effects of a changing climate. Its message actually has very little to do with climate change itself. Instead Stephens attempts to make a broader point about intellectual discourse: nothing is ever certain, and pretending that it is will never convince somebody on the other side. Arrogance does not induce agreement.

It doesn’t seem like anybody listened. The responses have instead ranged from further asserting that climate change is real (which Stephens didn’t deny in this article), threatening to cancel NYT subscriptions, and attacking Stephens himself. This kind of reaction is exactly what Stephens warned about. Rather than engage his argument with a reasonable response, his opponents don’t give even a sliver of probability to the idea that he might have a point.

Disagree with the left and you’re not just wrong – you’re an idiot. You’re not just uninformed – you’re ignorant. You’re not just a skeptic – you’re evil. Some people might be 100% sure that climate change is real and that we need to do something about it right now to prevent catastrophic consequences. The reality is that some people aren’t so sure.

Perhaps it is true that the evidence is against climate skeptics. Maybe they don’t have a great argument to support their side. And certainly the scientific consensus seems to be that global warming is likely to be a major problem (although for everyone who likes to use this argument as the end of the discussion, I hope none of you agreed with Gerald Friedman’s analysis of Bernie Sanders’s economic plan either – the consensus among trained economists was just as strong against his calculations). That’s not the point. Regardless of whether you believe climate skepticism is stupid or not, the best way to convince somebody their ideas are stupid is not to tell them they are stupid. Instead the first task should be to understand why they think differently than you do.

But there’s an even bigger problem here. The certainty in the correctness of ideas also leads to outrage at the notion that anybody else could believe otherwise. And it’s not just climate. After Brexit passed last year, JK Rowling tweeted “I don’t think I’ve ever wanted magic more.” Really? Never? Even in the worst possible case of the effects of Brexit I can’t imagine it shaving more than a couple percentage points off GDP. From the UK. One of the richest countries in the world. Maybe magic could’ve helped with terrorist attacks, or disease, or starvation, or Syria, or the millions of other atrocities that occur on this earth every day. Nope. Brexit is the worst thing that’s ever happened. Well besides Trump. And whatever Paul Ryan said most recently. And this article. Wait, how many worst things ever can there be?

When every little point of dissension results in this level of vitriol, what is left for truly important issues? If we treat Trump like Hitler, what do we do in case of an actual Hitler? I don’t want to claim excessive outrage is the exclusive domain of the left either. Hillary Clinton’s emails. The Benghazi attack. Colin Kaepernick kneeling for the national anthem. Outrage from the right at all of them. Everything has become a game where it doesn’t matter how trivial the issue is as long as the other side comes out looking bad.

This is not debate. In a debate each side offers their perspective and their reasoning. The goal is to change minds, to convince the other side that your evidence is more compelling than theirs. More and more it seems that nobody actually wants that kind of discussion. The goal for many today doesn’t appear to be to change anyone’s mind. It’s much simpler: crush the dissenters (or maybe cut them open HT: Vitaly Titov).

But if you really want to change minds, I have a few suggestions. Don’t start with “How could you think that?” but “Why do you think that?” Don’t argue from outrage, but from compassion. And don’t attack Bret Stephens. Listen to him.

Equality, Value, and Merit

A common argument against absolute equality is that individuals should be paid based on merit. Should somebody who works 80 hours a week earn the same amount as somebody who sits on their couch and watches TV all week? Even the most ardent supporter of redistribution would have a hard time answering yes. One of the alleged benefits of a free market economy is that it does a pretty good job allocating resources to those who work for them. Reading Hayek, however, I find it interesting that his defense of unequal outcomes explicitly denounces the idea of meritocracy. Value, not merit, is what should determine a person’s reward.

Some clarifications are in order. “Value” and “merit” are not well defined concepts. Let’s take an example to see the distinction between these two concepts. Imagine 2 students are studying for a math exam. One student studies 8 hours per day all week for the exam, but math has never been his strength and he ends up with a hard earned B+ on the exam. For the other student math has always come easy. He takes a quick look at his notes for a couple hours the night before and breezes through with an easy A. We might say that the first student deserves a higher grade than the second. If we graded based on merit we would want to give the higher grade to the student who worked the hardest. Of course, this grading system makes no sense when we consider that a grade is meant to represent a student’s knowledge of the material. Even though he didn’t work as hard, the second student knows math better and therefore deserves a higher grade.

The same arguments can be applied to an economic context. If two entrepreneurs each develop a product, a meritocratic society might suggest paying each based on how much work they each put into its creation. However, this criteria doesn’t consider the fact that consumers might place different values on the two products. If we want to maximize the benefits to society, we don’t actually care whether a product was created by a team of people and 2 years of strenuous research and development or by a guy coming up with ideas in the shower. All we care about is the value of the two products to the consumer. In Hayek’s words, “it is neither desirable nor practicable that material rewards should be made generally to correspond to what men recognize as merit…we do not wish people to earn a maximum of merit but to achieve a maximum of usefulness at a minimum of pain and sacrifice and therefore a minimum of merit” (The Constitution of Liberty, 157, 160).

It might seem unfair that talented people tend to earn more than the less talented. The handsome actor already gets good looks and fame. How is it fair that he also gets a big paycheck? And it’s not fair. But that doesn’t mean it’s not desirable. Because without that paycheck, without that incentive, maybe he wouldn’t have become an actor at all, and the opportunity to create a product that millions would have enjoyed is gone. It’s not fair that Tom Brady gets paid so much to play a game, but the only reason he does is because so many love watching him play. The alternative might not be that he gets paid less and still plays, but that he doesn’t play at all because his incentives to work hard and become a great player are diminished.

Another problem with a meritocratic society is that merit is hard to measure. Going back to the math example, I said that one student studied more than the other. But maybe his studying was not as efficient. Maybe he was actually on Facebook half the time, or didn’t focus on the right problems. And there are other factors. Maybe the second student paid better attention in class or had worked harder in previous classes and therefore didn’t need to work as hard now. Even if we wanted to reward the students’ merit, doing so would be a challenge. Similarly, looking at two products tells us little about how much work and how much effort went into the creation. What we can see is how much people like each product (by looking at how much they pay for it).

One of the greatest benefits of a market economy is that it pushes people towards the tasks that other people actually want them to do. In Hayek’s words, “If in their pursuit of uncertain goals people are to use their own knowledge and capacities, they must be guided, not by what other people think they ought to do, but by the value others attach to the result at which they aim” (The Constitution of Liberty, 159). By rewarding value over merit we ensure that people can only earn money by offering something that others desire. Everybody acts in their own self-interest, but the market usually ensures that that interest also aligns with the interests of others. Potential earnings act as a signal that shows what society values and attempts to regulate the market will almost certainly mess with these signals.

With this perspective, it is difficult to find a reason to care about others’ wealth. Steve Jobs, Bill Gates, and Mark Zuckerberg only got rich by offering a service that other people valued. Their contribution to society is likely far greater than any monetary compensation they received. Encouraging others to continue in their footsteps, to innovate and invent, is more important to the welfare of society as a whole than any attempts to redistribute their existing wealth. In fact, attempts to accomplish the latter discourage the former. I disagree with Ayn Rand on many points, but I think the overall theme in Atlas Shrugged is about right. When society feels like it can take anything it wants from the producers, they might decide that it’s simply not worth it any more, leaving no wealth left to redistribute at all.

 

Interesting Paper on Inequality and Fairness

As a followup to my recent post on inequality, I wanted to highlight some recent research by Christina Starmans, Mark Sheskin, and Paul Bloom on fairness and inequality. Based on a survey of lab experiments and evidence from the real world, the paper argues that people don’t actually care about unequal outcomes as long as they are perceived as fair.

They highlight several studies that show that in laboratory settings people (even children) are likely to distribute resources equally. However, in many of these settings, equality and fairness are indistinguishable. Since none of the participants did anything to deserve a larger portion, participants could simply be attempting to create a fair distribution rather than an equal one. And experiments that explicitly distinguish between fairness and equality do find that people care more about the former. For example, people were not unhappy with allocations that were determined randomly even if the outcome ended up being unequal as long as everybody began with an equal opportunity. Children who were asked to allocate erasers as a reward for cleaning their rooms were more likely to give the erasers to those who did a good job.

In reality people also seem to prefer an unequal distribution of income as long as it is perceived to be fair. In surveys, while people’s perception of the true income distribution is often highly skewed, their ideal distribution is not one of perfect equality. Of course, looking at these surveys does not necessarily tell us much about what the “best” income distribution would be, but rather the one people (think they) prefer. As I argued in my last post, I think too much weight has been placed on income or wealth inequality when really all that matters are differences in people’s happiness or utility. The evidence presented here does not go that far, but it does suggest that people realize that different behavior should lead to different rewards in some cases.

One reason that I think the debate has focused mostly on income or wealth inequality rather than on fairness or another measure of inequity is due to issues with measurement. Everybody has different ideas about what is fair so it’s easier to frame the question in terms of something that can be easily reported numerically. We may want to reconsider our acceptance of those statistics as a meaningful representation of a social problem. The whole paper is well worth reading and it opens up some interesting questions about human behavior. I will have at least one more post related to inequality coming in the next week or so.