What Kind of Inequality Matters?

Thomas Piketty’s book, Capital in the Twenty-First Century, a thorough analysis of the causes and effects of inequality, recently became an international best-seller. It’s not often that thousand page economic treatises attract popular attention, so clearly there’s something important to discuss here. Looking at some of the data on inequality, it’s not hard to see why many people are concerned. Here’s a chart showing the share of income held by the top 10% in the United States since 1910:

Notice where the two peaks occur – 1929 and 2009. I seem to recall something important happening in each of those years. Whether inequality was a symptom or a cause of the broader problems that led to the Great Depression and the Great Recession is an interesting question and definitely deserves scrutiny. For the purposes of this post, however, I want to address a simpler topic. Should we care about inequality on its own? And, more specifically, what kind of inequality should we care about?

For the first question, let’s do a simple thought experiment. You can choose to live in one of two societies. In Society A, everybody makes $50,000 per year no matter what their profession is. LeBron James and a janitor get paid the same amount. In Society B, average income is the same $50,000 per year, but it is now dispersed, so that some people earn less than average and some earn far more. Now assume that you are guaranteed to begin at average income (to avoid questions of risk aversion). Which society would you rather live in?

The answer to the hypothetical depends in part on whether you care about absolute or relative income. Does it matter if you are rich, or does it only matter if you are richer than others? In Society A everybody is on the same level, which might seem to be an appealing feature.

Except as soon as we start to think a bit harder, we realize that people in Society A aren’t equal at all. At least to some extent, differences in income do come from differences in effort. Some people work harder than others. Should people get paid the same regardless of effort?

Of course, this reasoning attacks a bit of a straw man. Hardly anybody would argue for full equality of income. But that doesn’t mean that there aren’t some situations where reducing income inequality could be helpful. I don’t believe in free will, which means that I think that where you are today is determined by circumstances you had no control over. But even with free will, it’s impossible to deny that some people are luckier than others. Some people are born into families with higher incomes or better connections. Some people are just smarter, or more talented. Two people can put in the same amount of effort and come out with wildly different outcomes. Isn’t there some justification for correcting these kinds of inequalities?

Now we need to bring in the second question: what kind of inequality matters? To this point, I have focused entirely on income inequality, but money is only as good as what you can buy with it. Somebody who earns $1,000,000 per year but saves $950,000 is no better off than someone who earns $50,000 per year (until they start spending those savings of course). We also need to consider a dynamic component to inequality. The chart above shows only a snapshot of inequality at one point in time, but there is large variation in earnings over a person’s lifetime. So a better measure of the kind of inequality that actually matters would be total lifetime consumption inequality (due to measurement difficulties, the question of whether consumption and income inequality move together is still under debate – see a nice survey here).

But we’re still not quite there. Why do we consume anything? Presumably because it makes us happy, or, in the words of an economist, because it gives us utility. Simply giving people more stuff might not actually help them at all unless it’s stuff they actually want. So shouldn’t we actually care about total lifetime utility? And as soon as we jump into the world of utility, the problem gets much more difficult.

Consider an extremely wealthy person. Incredibly talented and smart, he excelled in school, founded a business, and became one of the most successful CEOs in the world. He has a beautiful house, ten expensive cars, flat screen TVs, season tickets to the Patriots. He can buy anything you could ever want. Except he works all the time, hates his job, and has no time for his family or friends. Despite his money, despite his consumption, he is miserable.

Another individual earns far less. She isn’t poor, but she earns right around median income. She doesn’t have a luxurious life, but she can afford the basics. More importantly, she’s happy. She has a loving family, great friends, a job she likes. Would she be happier with more income? Probably. But she doesn’t need luxuries to live a good life.

How do we make this society more equal? Simply looking at income would suggest a transfer from the wealthy man to the average income woman. This transfer would of course reduce income inequality, but it would increase utility inequality. The woman is already pretty happy and the man is not. Taking money from him and giving it to her would only increase the happiness gap. Is this outcome desirable? I don’t think so.

Then maybe we should try to minimize utility inequality. But how? Taking money from the woman would probably reduce the woman’s utility and eventually it would be as low as the man’s, but giving it to the man would probably do little to increase the man’s utility unless he takes comfort in the fact that others are as miserable as he is. The woman’s happiness comes from pieces of her life that can’t be transferred to others. Despite being born with all the skills necessary to succeed, the man would likely view the woman as the more fortunate one.

In general, trying to equalize utility gives some strange implications. Let give a few more examples.

Two people work in the exact same job and get paid the same wage. Seems perfectly fair. But what if one of them enjoys working and the other hates it? In dollars per hour, they are equal. In utility per hour, one receives more than the other. Reducing utility inequality would require that people who enjoy their jobs be paid less for the same work.

Some people prefer living in cities while others would prefer to live in smaller towns. Houses in cities are usually much more expensive, which means to achieve the same utility, a city lover will have to pay far more. In this case, income equality greatly benefits people who hate cities. Utility equality would suggest transfers from people who love rural areas to those who love cities.

Consumption equality could also generate large utility inequality. If one person places a lot of meaning on material goods while another values other aspects of their life, they would need different levels of consumption in order to achieve the same utility. Should we give more to the materialist than the ascetic simply because giving to the latter wouldn’t help them anyway?

And even these examples ignore the largest problem with trying to achieve equality in utility – it’s difficult to measure and impossible to compare across individuals. I have trouble defining my own preferences and determining what makes me the happiest, I certainly don’t trust others to do that for me.

So utility equality is probably not an option even if it were desirable. But income equality almost certainly worsens the problem of utility inequality. The people who make a lot of money are much more likely to also be people who place a high value on money. Those who earn less are more likely to enjoy a simpler life. In fact, there is little evidence that the rich are any happier than the rest of us. Taking their money makes them even worse off while helping those who are already pretty happy despite their relatively low income. The happy get happier while the miserable get more miserable.

Notice that I have deliberately avoided using examples with truly poor people. I can certainly see an argument for redistributing income to the poorest. Nobody should have to live at subsistence levels if they are willing to work. But being concerned about poverty and being concerned about inequality are not the same. It is possible for a society to have zero poor people and still be incredibly unequal and also possible to be almost perfectly equal with everybody poor (as it was for most of the history of human existence).

Have we gotten any closer to answering the original question? What kind of inequality should we care about? If you’ve made it this far, it should be clear that there isn’t an easy answer. We often use the term “less fortunate” as a euphemism for poor people and that almost exclusively refers to poverty in a monetary context. We view income as if it came from a lottery and then aim to use redistribution to correct for discrepancies. Why is that? Aren’t people that can be happy despite low income really the most fortunate? Isn’t money just one of many factors that matter for a person’s happiness? And aren’t many of these other factors difficult to measure and even more difficult to redistribute?

If we answer yes to the above questions, reducing the kind of inequality we care about becomes a much harder task. Can we really correct the deeper inequalities that arise due to people’s preferences and talents – some of which will lead to higher incomes and some not? Or should we accept that inequality is an essential part of society, accept that treating everyone equally necessarily produces inequality in outcomes, that differences in wealth don’t necessarily lead to differences in happiness, and that correcting differences in happiness is almost impossible?

One of These Things is Not Like the Other Government vs Corporations

Facebook: “We are a nation of immigrants, and we all benefit when the best and brightest from around the world can live, work and contribute here. I hope we find the courage and compassion to bring people together and make this world a better place for everyone.”

Google: $4 million in donations to immigration causes

Airbnb:

Starbucks: Plans to hire 10,000 refugees

Lyft and Uber: After some controversy about eliminating surge pricing around JFK, Uber now plans to spend $3 million on affected drivers. Lyft will donate $1 million to the ACLU

Apple: “Apple is open. Open to everyone, no matter where they come from, which language they speak, who they love or how they worship. Our employees represent the finest talent in the world, and our team hails from every corner of the globe.”

Government:

Thank goodness we have a benevolent government to keep these evil corporations in check.

Why I’m a Libertarian

In a previous post I noted that libertarian ideas seem to be frequently misunderstood, that libertarians are sometimes labeled selfish, materialistic, and uncaring. In this post I hope to show that a libertarian worldview can come from a more virtuous principle: humility. Note that the title of this post is not “why you should be a libertarian.” I doubt it will convince anybody that is not already highly sympathetic to libertarian ideas, but I hope it can show that that (at least some) libertarians have good intentions. That I may be wrong, but I’m not evil.


A widely cited joke about Ayn Rand’s famous novel Atlas Shrugged goes something like this (I believe the original source was John Rogers here):

“There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.”

It’s a good joke, but I worry that many outside of libertarian circles take its message a bit too seriously. Libertarians live in a fantasy world where everyone shares our ideals and we never think about real issues, about real people. And it is perhaps unfortunate that Rand’s view, one which believes in an objectively correct morality, that aims to tell you that there is a right way to live and she knows it, has been associated so closely with libertarian thought more broadly.

I’m a libertarian because I don’t believe there’s a correct way to live.

Family is the most important part of my life. Others might place a higher weight on different relationships, with their friends, their students, their coworkers. Some may find their strongest bond comes from a higher being, so they let religion or spirituality take precedence over earthly concerns. Another priority could be helping those they don’t know, simply because they are less fortunate or in need of help. Devotion to their jobs, to their hobbies, to the pursuit of knowledge, to any other activity that they find fulfilling – each can also drive a person’s behavior. And of course, pure material pleasures occupy a place on everybody’s scale of value. All of these considerations play a part in deciding the actions that lead to a life worth living.

I’m a libertarian because I don’t want to tell you what’s most important.

A Harvard educated liberal from Massachusetts wants to convince you to support abortion because a woman has a right to her own body. An evangelical Christian from Texas says that killing a fetus is no different than killing a child. Neither can be proven right or wrong. Each wants to impose their values on the other. Drugs are immoral. Alcohol is immoral. Gay marriage is immoral. I disagree and I’ll try to convince anyone that believes otherwise to join my side. But I’ll respect your right to believe what you want as long as you recognize mine.

A person’s moral worth is determined by how much they produce for society. No, it’s determined by what percentage of their wealth they give to charity. Or maybe it’s how much they do for their family. How devout they are in their prayers. Everyone lives by a different code. How comfortable are you in saying that your code is the right one?

I’m a libertarian because you have as much right to your values as I have to mine.

In the 2012 Republican primary debates, the moderators asked Ron Paul if a libertarian society would let a person without insurance die (for the record, he said no). It seems like an easy question – of course we can’t let them die. Let’s ask a harder question. A cancer patient has six months to live. They can extend their life for an additional 5 years, but the procedure costs $5 million in addition to a significant amount of time from doctors who could be working on helping others. They don’t have insurance. Should they be allowed to die? What if they can only extend their life 6 months? 1 day? Where do we draw the line? And who draws it?

Global warming is real. It’s almost certainly caused by humans. It could very well cause catastrophic changes in the future. Our use of fossil fuels could be the source of substantial problems for future generations. But if we stopped using fossil fuels now, we definitely cause substantial problems for the current generation. How can we determine which is worse? How do we weigh the life of an individual against the lives of their descendants?

I’m a libertarian because everything is a tradeoff and I can’t value the costs and benefits.

We all want equality of opportunity. It’s a nice slogan. What does it mean? Some say it means education should be free for everyone – that it’s a basic human right. How much? What kind? Who pays? Some people excel in a standard classroom setup. They love to learn, they can sit down with a book and study. Others can’t. And that’s ok. To think that we can create equality of opportunity by placing everybody in the exact same environment may be pure in its intention, but it’s incredibly dangerous in its execution. We weren’t all created equal and that’s a great thing. Our differences are not something to be squashed out, but embraced.

I’m a libertarian because everybody has different strengths and weaknesses, because everybody has different needs.

Markets always fail. The conditions of perfect competition laid out in a standard economics textbook never hold in reality. Every firm has some monopoly power. Every good causes some externality. Collective action problems, public goods, asymmetric information – all pervasive issues that throw a wrench into the workings of a perfectly competitive economy. Couldn’t a government fix some of these problems? Doesn’t a planner have the ability to take a big picture approach and do what’s best for society instead of what’s best for each individual? It’s possible, but where does the knowledge come from? Where do we set the prices for the monopolist? How high is the optimal tax to prevent the externality? Can we design a mechanism to improve upon the free market outcome? Even in an economic model where everybody has identical preferences and production technologies are fixed the answers are not always clear. In the real world – good luck.

Someone made you king of the world. You want to make it better. So you call in teams of experts, the best from every field. You build supercomputers capable of running an unimaginable number of calculations every second. A coordinated, planned society led by the brightest minds available – how could the chaotic workings of the free market stand any chance? But soon you realize that even the simplest questions – like how much toilet paper to produce – turn out to be nearly impossible to answer. So you give up on your unified plan and try to just fix a few obvious problems. And yet each leak sealed opens up several more – the experts and their fancy computers do their best to predict people’s behavior, but there is simply too much left unknown. Without an overarching plan the ad hoc solutions continue to multiply and the end result is a convoluted, bureaucratic mess.

I’m a libertarian because knowledge is dispersed and I can’t think of a better way of collecting it than through the market process.

Liberty is not magic. It’s not a solution to any of the problems I’ve touched on above. But that’s exactly the point. When the questions facing society are this challenging it would be incredibly arrogant to assume that any one mind or group of minds could divine an appropriate solution. A society of liberty sidesteps these questions entirely. It allows individuals – with their unique perspectives and values, with their knowledge of their own specific time and place – to attempt to find solutions for their own much smaller problems. Most of these attempts fail, but a free market rewards those that work, letting the best rise to the top, creating a better world for all.

Maybe I’m wrong. Maybe individuals making decisions for themselves results in outcomes that are worse for everybody. Maybe governments are better at weighing the total costs and benefits to society than individuals acting on their own. Maybe a coordinated plan can figure out better answers to the questions facing our society than the spontaneous order of a free market. Maybe. And I’m happy to have those debates. But never say that I haven’t thought about these issues. Never say that I’m not worried about poverty, or the environment, or the thousands of other important problems that affect this world every day. Never question my intentions.

And never say that I’m a libertarian because I don’t care.

I’m a libertarian because I don’t know.

 

Study Finds That Nobody Changes Their Mind After Reading Fake News

You'll Never Believe What Trump Said About It

The title, in case you didn’t already guess, is fake news. There was no study. But think about your reaction when you read it. Raise your hand if you said “wait a minute, I always thought fake news was a huge deal but I guess this study proved me wrong. I’ll just change my mind without thinking about it at all.” Anyone? Yeah I didn’t think so. And if you aren’t convinced by a headline on a reputable publication such as this one (OK maybe not so much), are you really buying the fake headlines that the Pope backed Trump or that Hillary actually didn’t win the popular vote?

Recently there has been an uproar surrounding these fake headlines. Germany wants Facebook to pay $500,000 for every fake news story that shows up. California (of course) wants to pass a law that will make sure every high school teaches its students how to spot fake news stories. I wish those stories were themselves fake news, but they appear to be all too real.

Now there probably are some people who do read these fake headlines and don’t do their research. Maybe they’ll store it somewhere in the back of their mind and use it as evidence to support their positions in debates with their friends. But I suspect that the only people who believe a fake headline are ones who were already inclined to believe it before they read it. No study has been done, but I’ll make the claim anyway: Nobody changes their mind because of fake news.

(One qualification to the above point is that it may break down if real news were censored. Here I am thinking about a case where the government restricts the media so that propaganda becomes the only source of information. Obviously that would be a major problem)

Perhaps more concerning is that people also don’t seem to change their mind because of real news either. They don’t let the facts guide their positions, but instead seek out the facts that support the positions they already held. Is believing a fake news story any worse than only believing the stories that confirm your preconceived inclinations?

In other words, the problem is not fake news. The problem is confirmation bias. Everyone’s guilty of it. I certainly am. How could you not be? With the internet at your fingertips, evidence supporting nearly any argument is freely available. And I don’t just mean op-eds or random blog posts. Even finding academic research to support almost anything has become incredibly easy.

Let’s say you want to take a stand on whether the government should provide stimulus to get out of a recession. Is government spending an effective way to restore growth? You want to let the facts guide you so you turn to the empirical literature. Maybe you start by looking at the work of Robert Barro, a Harvard scholar who has dedicated a significant portion of his research to the size of the fiscal multiplier. Based on his findings, he has argued that using government spending to combat a recession is “voodoo economics.” But then you see that Christina Romer, an equally respected economist, is much more optimistic about the effects of government spending. And then you realize that you could pick just about any number for the spending multiplier and find some paper that supports it.

So you’re left with two options. You can either spend a lifetime digging into these dense academic papers, learning the methods they use, weighing the pros and cons of each of their empirical strategies, and coming to a well-reasoned conclusion about which seems the most likely to be accurate. Or you can fall back on ideology. If you’re conservative, you share Barro’s findings all over your Facebook feed. Your conservative friends see the headline and think “I knew it all along, those Obama deficits were no good,” while the liberals come along and say, “You believe Barro? His findings have been debunked. The stimulus saved the economy.” And your noble fact finding mission ends in people digging in their heels even further.

That’s just one small topic in one field. There’s simply no way to have a qualified, fact-driven opinion on every topic. To take a position, you need to have a frame to view the world through. You need to be biased. And this reality means that it takes very little to convince us of things that we already want to believe. Changing your mind, even in the face of what could be considered contradictory evidence, becomes incredibly hard.

I don’t have a solution, but I do have a suggestion. Stop pretending to be so smart. On every issue, no matter what you believe, you’re very likely to either be on the wrong side or have a bad argument for being on the right side. What do the facts say, you ask? It would only be a slight exaggeration to say that they can show pretty much anything you want. I’ve spent most of my time the last 5 or so years trying to learn economics. Above all else, I’ve learned two things in that time. The first is that I’m pretty confident I have no idea how the economy works. The second is something I am even more confident about: you don’t know how it works either.

Please Don’t Audit the Fed

Source: Wikimedia Commons

Rand Paul, following in his father’s footsteps, has re-introduced a plan to audit the Fed. Trump supports the plan and even Bernie Sanders voted for it the last time the bill was put up before congress. I have no idea why. There might be an argument for ending the Fed entirely. Larry White gives a good summary of the argument in this video. I’ve written about the American Free Banking System, which worked reasonably well in the absence of a central bank (although the evidence is mixed). And maybe ending the Fed is the ultimate goal of Fed audit supporters and this bill is just a symbolic victory. But it really does essentially nothing useful and could potentially have detrimental effects.

In the press release linked above, Thomas Massie says “Behind closed doors, the Fed crafts monetary policy that will continue to devalue our currency, slow economic growth, and make life harder for the poor and middle class. It is time to force the Federal Reserve to operate by the same standards of transparency and accountability to the taxpayers that we should demand of all government agencies.” Even besides the fact that there is no serious economic analysis I know of that says the Fed makes life harder for the poor and middle class, this statement is complete nonsense.

Does the Fed need to be more transparent? I have a hard time seeing how it possibly could be. The Fed already posts on its website more information than anyone other than an academic economist could possibly want to know. Transcripts from their meetings, their economic forecasts, justifications for interest rate changes – it’s all there in broad daylight for anybody to read. As David Wessel points out in an excellent Q&A on auditing the Fed, the Government Accountability Office (GAO) already knows everything important about most of the assets held by the Fed.

The only possible change that could come as a result of auditing the Fed is more influence by congress over Federal Reserve decisions. That’s terrifying. Whatever your opinion of the Fed, it’s impossible to deny that it’s run by incredibly smart people who have dedicated their lives to understanding monetary policy. That doesn’t make them infallible. I’m all for taking power away from experts, for decentralizing and allowing markets to control money. But if we’re going to allow a group of individuals to decide the policy, at least let them be people who have some idea what they’re talking about. You might not love Janet Yellen, or Ben Bernanke, or Alan Greenspan, but I can’t imagine anyone would prefer monetary policy to be run by congress. Think about the arguments over raising the debt ceiling. Do we want that every time the Fed tries to make a decision? I certainly don’t.

I can absolutely criticize monetary policy. The Fed has come in below its 2% inflation target consistently for about 10 years now even though unemployment had been far from the natural rate. Maybe an NGDP target would be an improvement over the current dual mandate. And maybe we don’t need a central bank at all. I’m not opposed to monetary reform. But I can’t get behind a bill that only appears to make conducting monetary policy more political.

Three More Reactions to Trump

This post will be the last on Trump for the foreseeable future, but I just wanted to highlight three excellent reactions to Trump’s victory.

First: An interview with Jon Stewart, who makes the current crop of late night political comedians look like amateurs. Two nice quotes:

I don’t believe we are a fundamentally different country today than we were two weeks ago. The same country with all its grace, and flaws, and volatility, and insecurity, and strength and resilience, exists today as existed two weeks ago.

I thought Donald Trump disqualified himself at numerous points, but there is now this idea that anyone who voted for him has to be defined by the worst of his rhetoric.

Second: A beautiful piece by Lyman Stone. Please read the whole thing, but here are a few highlights:

You did this. I did this. We showed politicians that vitriol and hatred were effective. In our Facebook rants, in our un-friending, in our mob-shaming, in our boycotting, in our isolation, in our chanting, in our occupying, in our insulting, in our violence and our counter-violence, in our preference for the shouted epithet over the whispered encouragement, in our love of charisma and wrath over decorum and respect: we did this.

The next time your activist friend tells you they’re renewing their passport because Trump is going to institute fascism, respond, “Oh, come on friend, you don’t know that. That’s just fear and paranoia speaking.”

When your friend angrily shares on Facebook about how Clinton is going to steal our guns, don’t click “Like.” Click the crying one, and leave a comment, “I worry about 2nd Amendment rights too: but dude, this is just fear and paranoia speaking. The President and Congress don’t even close to have enough legal power to take our guns even if they wanted to.”

every time I’ve successfully persuaded someone else of something meaningful, it’s because I took the time to listen, to communicate empathy, to assure them that I thought they were a valuable person.

And in the long run, it is only mutual sympathy and compassion that can save us from violent tyranny.

And finally: An essay (short book?) by Scott Alexander. As always with his essays, it’s long but worth it. A slice:

All this stuff about how he’s “the candidate of the KKK” and “the vanguard of a new white supremacist movement” is made up. It’s a catastrophic distraction from the dozens of other undeniable problems with Trump

So our different ways of defining “open white supremacist”, even for definitions of “open” so vague they include admitting it on anonymous surveys, suggest maybe 1-2%, 1-2%, 4-7%, 3-11%, and 1-3%.

But doesn’t this still mean there are some white supremacists? Isn’t this still really important?

I mean, kind of. But remember that 4% of Americans believe that lizardmen control all major governments. And 5% of Obama voters believe that Obama is the Antichrist. The white supremacist vote is about the same as the lizardmen-control-everything vote, or the Obama-is-the-Antichrist-but-I-support-him-anyway vote.

Politifact says that Hillary and Obama wanted a 700 mile fence but Trump wants a 1000 mile wall, so these are totally different. But really? Support a 700 mile fence, and you’re the champion of diversity and all that is right in the world; support a 1000 mile wall and there’s no possible explanation besides white nationalism?

Listen. Trump is going to be approximately as racist as every other American president. Maybe I’m wrong and he’ll be a bit more. Maybe he’ll surprise us and be a bit less. But most likely he’ll be about as racist as Ronald Reagan, who employed Holocaust denier Pat Buchanan as a senior advisor. Or about as racist as George Bush with his famous Willie Horton ad. Or about as racist as Bill “superpredator” Clinton, who took a photo op in front of a group of chained black men in the birthplace of the KKK. Or about as racist as Bush “doesn’t care about black people!” 43. He’ll have some scandals, people who want to see them as racist will see them as racist, people who don’t will dismiss them as meaningless, and nobody will end up in death camps.

Stop making people suicidal. Stop telling people they’re going to be killed. Stop terrifying children. Stop giving racism free advertising. Stop trying to convince Americans that all the other Americans hate them. Stop. Stop. Stop.

How Trump Won a Divided America It's About Discrimination, But Not the Kind You Expect

Required Reading: I Can Tolerate Anything Except the Outgroup by Scott Alexander (It’s long but it’s well worth it – way more important than anything I have to say)

In this election, as in every election I can remember in my lifetime, I was faced with two unappealing choices. President Clinton represented a continuation of many of the trends – more regulation, more spending, bigger government – that in my view have been slowly eroding the features that make this country great. President Trump, who explicitly promises to make America great again, plans on doing so through policies that will almost certainly have the opposite effect. So my choice was easy: none of the above (AKA Gary Johnson). I could have probably justified a Hillary vote on the presumption that she would be less risky than Trump, but, being in a state where the result was already decided, I saw no reason to compromise my values and vote for the (slightly) lesser of two evils.

And yet when I got to the voting booth and looked over the ballot, my hand hovered momentarily over Trump’s name. I have no desire to see Donald Trump as president of the United States. His policies are bad and his personality is worse. Still, for a split second my body and mind were in conflict. Despite everything I know about him, despite his economic illiteracy, despite his remarks about women, about Mexicans, something inside me wanted to forget all of that and vote for him anyway. At first I didn’t understand why. Now I do. And It has nothing to do with Donald Trump.

I grew up in Massachusetts and currently live in California. Throughout my life I’ve been surrounded by what Scott Alexander refers to as “the blue tribe” in the essay above. Most of my friends lean liberal politically. My professors even more so. And there’s always been some awkwardness when they find out I don’t. I’ve seen the look many times: equal parts bewilderment and disdain, something between how could you think that? and are you sure you know what you’re saying? Of course, the ones who know me well (usually) realize that in the end I’m on their side, that we both have the same goals despite differences in opinion on how to get there. But they can’t help that initial response.

I align most closely with Alexander’s gray tribe (if you didn’t do the required reading, the gray tribe essentially encompasses libertarians). I’ve become pretty good at emphasizing points of agreement with the blue tribe and downplaying differences (usually the first sentence after I tell people I’m not a Democrat is a quick “but don’t worry I’m not a Republican either”). I imagine “the look” for a true member of the red tribe is much worse.

What’s the image that comes to mind when you think of a Trump supporter? Maybe you think that they’re not America’s best. They’re people that have lots of problems and they’re bringing those problems with them. They’re bringing prejudice. They’re bringing hate. They’re racists. And some, you assume, are good people (In case you didn’t catch the reference). Maybe that’s an exaggeration, but I don’t think it’s too far off the mark for the way many people view Trump supporters. Is your vision of a Trump voter a thoughtful, respectful citizen? Or is it closer to that “basket of deplorables” that Clinton referred to?

What is discrimination? A simple definition is ascribing qualities to an individual based on assumptions about a group they belong to. We tend to apply the term mostly to race, or gender, or religion, but it’s broader than that. Democrats claim to be the party of tolerance, and in many ways they are. Blacks? Great. Mexicans? Welcome home. Gay marriage? Why not?

But how do they feel about Republicans? Social conservatives? Trump voters? Are Democrats still feeling so tolerant when it comes to the Red Tribe? Racial diversity, religious diversity, cultural diversity. All important. Ideological diversity might trump them all. And yet ideological discrimination has never been more severe.

Some call it the “smugness of the press” or of liberalism in general. Ross Douthat calls it the “Samantha Bee Problem.” Chris Arnade talks of the dominance of the “front row kids” over the “back row kids.” Jonathan Haidt warns of “The Righteous Mind.” They all come back to the same idea. We’ve developed a society based on bubbles. People live in the world they want to live in, they hear the ideas they want to hear, and they block out the rest. Recently, many people have sensed a shift in power in these bubbles, as liberals have seemingly taken control over much of the country. Watch the news or a Hollywood movie, visit a university or a major city. Based on these experiences, one might wonder why our elections are even close. Whether this shift in the balance of power is real or imagined, Trump was the response. Once again, I can’t explain it any better than Scott Alexander:

“It’s about the feeling that a group of arrogant, intolerant, sanctimonious elites have seized control of a lot of national culture and are using it mostly to spread falsehood and belittle anybody different than them. And Trump is both uniquely separate from these elites and uniquely repugnant to them – which makes him look pretty good to everyone else.”

Look at the exit polls. Obviously, most people that agree with Trump on the issues voted for him. At least 40% of the country was always going to vote Republican regardless of the candidate. Where Trump did surprisingly well was in capturing voters who didn’t like him all that much.  60% of voters said Trump is not qualified to serve as president. 18% of these people voted for him anyway. 70% of voters said Trump’s treatment of women bothered them “a lot” or “some.” He got 11% and 75% of voters in these categories respectively. Just looking across the issues, a majority of voters align more closely with Clinton on almost every one. Trump won anyway.

How did he do it? Probably the most revealing category showed that 39% of voters said the primary reason they voted was because their candidate “can bring change.” Trump won 83% of them.

This wasn’t a positive vote, but a negative one. Not a vote for Trump so much as one against Clinton. Not for deportation or tariffs or any specific policy, but against the status quo. Against the arrogance, the paternalism, the elitism. Against the look. And I think it’s misplaced. I don’t think Trump will bring the kinds of change that so many desire. But I can understand the impulse. Because for a brief moment standing at the voting booth on November 8, 2016, I felt it too.

 

It’s Not the End of the World

President Trump. A year ago I never would have predicted I’d be writing those words. I’m not happy to write them now. Trump is xenophobic, misogynistic, and racist. He supports economic policies that economists, a profession notorious for disagreeing about everything,  unanimously reject. His manner is crude, his speech unsophisticated, his words antagonistic and petty. Donald Trump is, as far as I can tell, a terrible human being. He could very well be an even worse president.

But we’re going to be ok.

The US government was specifically designed to prevent any single individual from having too much power. It was designed under the assumption that men are not angels. It was designed for Donald Trump.

There’s not going to be a wall. The 35% tariff on China is an empty threat. NAFTA is not going anywhere (the TPP might not be so lucky, but remember that Clinton was also against it). I would even be surprised if Obamacare is substantially changed. As bad as many of his ideas are, President Trump doesn’t write the laws. It is of course important to point out that Republicans also have control of both the Senate and the House, but these are largely the same people that have had control for the last 2 years. I expect a shift towards Republican ideas – lower taxes, fewer regulations – and those policies on their own might be worrying enough for many of you. But I do not expect any catastrophic changes. Let’s wait and see what happens before we go crazy. If there’s no use crying over spilled milk, there’s certainly no use crying over milk that has yet to be spilled.

Markets appear to feel the same way. After some concerns last night about the stock market going crazy, the results today seem much closer to business as usual. And I think this lack of chaos in stock markets is indicative of a broader theme: politics isn’t everything – not even close.

According to the state of my Facebook and Twitter feeds, Trump getting elected is the worst event that’s ever happened in the world (only slightly edging out Brexit). Take a deep breath. Regardless of the identity of the individual sitting in the oval office, the world moves on. Scientists will continue to make breakthroughs that improve technology, eliminate diseases, and help us deal with a changing environment. Entrepreneurs will continue to  look for new ways to please consumers as they create new products and new businesses. Writers will keep on writing, teachers keep on teaching. Amazing new things are created every day and one man won’t change that. Progress in this country has never come from politicians.

Your family is still there. Your friends are still there. Your career, your hobbies, your dreams – they’re all still there. For most people, the important aspects of their personal lives have little to do with the president. Is Trump’s election a step backward? I think so. Is it concerning that half of the country thinks it’s ok to elect a president like Trump? Of course. I’m not going to deny that there are deep rooted problems that remain in our society. But a Clinton victory wouldn’t have changed any of that. We need to work hard to solve these problems and that starts by understanding why so many voted for somebody whose policies are bad and morals even worse. I don’t think it’s primarily racism, and I’ll have more on this later. But for now go do something that makes you happy and be thankful that we live in a country that is strong enough to withstand a bad leader. It’s not the end of the world.

P.S. I’ve been wrong about Trump from the beginning, so I could easily be wrong here too. But Scott Adams (author of the Dilbert cartoon) has been right from the beginning and he agrees that Trump is not going to be so bad.

P.P.S. Here’s another good article that echoes similar themes

How I’m Voting California Ballot Propositions

voting_united_statesCalifornia has 17 new propositions up for vote on the ballot next week (the link has longer descriptions as well as arguments for each one). I had to do some research to figure out how I’m going to vote on each one anyway, so I figured I’d write down some thoughts here as well. In general my instinct is to reject unless given a good argument to accept, so we’ll see if any of them can convince me. I spent approximately 5 minutes deciding on each, so this analysis probably isn’t the deepest. Let me know in the comments if I’ve missed any good arguments on either side.

Proposition 51: Public School Facility Bonds

What it Does: Allows $9 billion in new borrowing to be used to improve education in California

How I’m Voting: No

Reasoning: California may be doing better in terms of budget these days, but debt levels are still not so good. Even Gov. Jerry Brown says no. Maybe if the money was going to a good cause it would be worth taking on more debt. But it’s going to education:

education_spending
Source

The $3 billion allocated to “modernization of school facilities” is particularly concerning. The school system has problems. More money is not the answer.

Proposition 52: Continued Hospital Fee Revenue Dedicated to Medi-Cal Unless Voters Approve Changes

What it Does: I’m not entirely sure. Apparently there is a fee paid by hospitals that goes to MediCal (California’s version of Medicaid). This proposition would continue that fee and would only allow it to change if voters agreed. A no would allow legislators to change it and potentially divert funds away from MediCal to the general fund

How I’m Voting: Yes

Reasoning: It looks to me that either way the money is going to be spent. If I understand correctly, a yes vote makes sure it is spent on healthcare for the poor rather than whatever politicians think is important. That seems better to me.

Proposition 53: Voter Approval Requirement for Revenue Bonds above $2 Billion

What it Does: Requires any infrastructure project that requires more than $2 billion in funding through bonds to be approved by voters first

How I’m Voting: Yes

Reasoning: Supporters refer to it as the “No Blank Checks Initiative.” Sounds good to me.

Proposition 54: Public Display of Legislative Bills Prior to Vote

What it Does: Requires laws to be posted online for 72 hours prior to a vote by the legislature

How I’m Voting: Yes

Reasoning: The opposition says “Prop 54 will throw a monkey wrench into the ability of our elected officials to get things done.” I thought they were trying to convince me to vote no. But seriously, increasing transparency in legislation is a welcome change.

Proposition 55: Extension of the Proposition 30 Income Tax Increase

What it Does: Extends a tax increase on incomes over $250,000 passed in 2012 for 12 more years

How I’m Voting: No

Reasoning: How about a tax decrease?

Proposition 56: Tobacco Tax Increase

What it Does: Increases taxes on cigarettes by $2.00 per pack

How I’m Voting: No

Reasoning: Current taxes are 87 cents per pack so we’re looking at a 230% increase. Here’s what the first study that comes up when you google “Do cigarette taxes work?” says about cigarette taxes: “Estimates indicate that, for adults, the association between cigarette taxes and either smoking participation or smoking intensity is negative, small and not usually statistically significant.” I’m already opposed to higher taxes in principle. Taxes that hit the poor the hardest and are allocated to specific government programs which are sure to be highly inefficient are even less appealing. I’m all for reducing smoking. The government isn’t the one that should be leading the charge. (Also perhaps most importantly I need my roommate to be able to pay his rent.)

Proposition 57: Parole for Non-Violent Criminals and Juvenile Court Trial Requirements

What it Does: Increases parole opportunities for non-violent criminals and allows judges to decide whether to try juveniles as adults

How I’m Voting: Yes

Reasoning: Seems like a no brainer. We put way too many people in jail. The opposing argument makes some scary claims that this is going to put rapists back onto the streets. I don’t buy it.

Proposition 58: Non-English Languages Allowed in Public Education

What it Does: Repeals a previous proposition that required English to be used in all classrooms and non-English speakers to take an intensive English training class

How I’m Voting: Yes

Reasoning: Would it be better if all students knew English? Maybe. But the reality is they don’t. If I’m a science teacher and I can teach my Spanish speaking students in their native language better than in English I should be allowed to do so. Get politicians out of the classroom and let teachers make the decisions.

Proposition 59: Overturn of Citizens United Act Advisory Question

What it Does: Nothing as far as I can see. It will “Call on California’s elected officials to work on overturning Citizens United v. Federal Election Commission and other similar judicial precedents…Proposition 59 would not legally require officials to act as the measure advises them to”

How I’m Voting: No

Reasoning: What? This should not be on the ballot. It’s a poll not a law.

Proposition 60: Condoms in Pornographic Films

What it Does: Ahem, just read for yourself (Don’t worry, link is safe for work, just a description of the proposition)

How I’m Voting: No

Reasoning: No comment, except maybe they should have waited 9 more propositions before proposing this one (sorry)

Proposition 61: Drug Price Standards

What it Does: Regulates drug prices to ensure state agencies pay no more than the Department of Veteran Affairs

How I’m Voting: No

Reasoning: I think we should move closer to a free market in healthcare. This proposition moves us further away. Is this analysis too simple? Maybe, but unless there’s a crystal clear argument in support, I’m not voting for price controls in any situation.

Proposition 62: Repeal of the Death Penalty

What it Does: Self-explanatory

How I’m Voting: Yes

Reasoning: I don’t feel comfortable deciding whether another human being deserves to live or not. That’s already enough for a yes, but then I read the support argument and found out there’s been 13 executions since 1978, but they cost $5 BILLION?! and that “a death row sentence costs 18 times more than life in prison.” I can’t imagine why, but it makes my decision that much easier. Also, remember that even for the most heinous crimes, it’s not their fault.

Proposition 63: Background Checks for Ammunition Purchases and Large-Capacity Ammunition Magazine Ban

What it Does: Self-explanatory

How I’m Voting: No

Reasoning: I’m not necessarily opposed to the idea of increasing the difficulty of getting a gun, but this just seems like putting another layer of red tape on top of the red tape that’s already there

Proposition 64: Marijuana Legalization

What it Does: Legalizes marijuana for recreational use for adults over 21

How I’m Voting: Yes

Reasoning: The drug war costs a ton and puts a bunch of people in jail for doing something that doesn’t harm anyone. Marijuana is safer than alcohol. Anyone that wants it can already get it with ease (if anything, legalization might make it more difficult for minors to get it although probably effect would be small). Easy vote for me.

Proposition 65: Dedication of Revenue from Disposable Bag Sales to Wildlife Conservation Fund

What it Does: Diverts all funds from the sale of bags to the Wildlife Conservation Fund. Currently stores are allowed to keep them I believe.

How I’m Voting: No

Reasoning: I wish I could just eliminate the fee altogether, but I definitely don’t want to turn it into a tax.

Proposition 66: Death Penalty Procedures

What it Does: Reforms death penalty legal procedures, shortening time legal challenges can take to 5 years

How I’m Voting: No

Reasoning: Let’s just repeal. If this gets more yes votes than 62 it supersedes it. I much prefer 62.

Proposition 67: Plastic Bag Ban Veto Referendum

What it Does: Bans plastic bags

How I’m Voting: No

Reasoning: I like plastic bags

 

Competition and Market Power Why a "Well-Regulated" Market is an Impossible Ideal

Standard accounts of basic economics usually begin by outlining the features of “perfect competition.” For example, Mankiw’s popular Principles of Economics defines a perfectly competitive market as one that satisfies the following properties

  1. The goods offered for sale are all exactly the same
  2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

    The implication of these two properties is that all firms in a perfectly competitive market are “price takers.” If any firm tried to set a price higher than the current market price, their sales would immediately drop to nothing as consumers shift to other firms offering the exact same good for a cheaper price. As long as firms can enter and exit a market freely, perfect competition also implies zero profits. Any market experiencing positive profits would quickly see entry as firms try to take advantage of the new opportunity. The entry of new firms increases the supply of the good, which reduces the price and therefore pushes profits down.

After defining the perfectly competitive market, the standard account begins to extol its virtues. In particular, a formal result called the First Welfare Theorem shows that in a perfectly competitive equilibrium, the allocation of goods is Pareto efficient (which just means that no other allocation could make somebody better off without making somebody else worse off). So markets are great. Without any planner or government oversight of any kind, they arrive at an efficient outcome on their own.

But soon after developing the idea, we begin to poke holes in perfect competition. How many markets can really be said to have a completely homogeneous good? How many markets have completely free entry and no room for firms to set their own price? It’s pretty hard to answer anything other than zero. Other issues also arise when we begin to think about the way markets work in reality. The presence of externalities (costs to society that are not entirely paid by the individuals making a decision – pollution is the classic example), causes the first welfare theorem to break down. And so we open the door for government intervention. If the perfectly competitive market is so good, and reality differs from this ideal, doesn’t it make sense for governments to correct these market failures, to break up monopolies, to deal with externalities?

Maybe, but it’s not that simple. The perfect competition model, despite being a cool mathematical tool that is sometimes useful in deriving economic results, is also an unrealistic benchmark. As Hayek points out in his essay, “The Meaning of Competition,” the concept of “perfect competition” necessarily requires that “not only will each producer by his experience learn the same facts as every other but also he will thus come to know what his fellows know and in consequence the elasticity of the demand for his own product.” When held to this standard, nobody can deny that markets constantly fail.

The power of the free market, however, has little to do with its ability to achieve the conditions of perfect competition. In fact, that model leaves out many of the factors that would be considered essential to a competitive market. Harold Demsetz points out this problem in an analysis of antitrust legislation.

[The perfect competition model] is not very useful in a debate about the efficacy of antitrust precedent. It ignores technological competition by taking technology as given. It neglects competition by size of firm by assuming that the atomistically sized firm is the efficiently sized firm. It offers no productive role for reputational competition because it assumes full knowledge of prices and goods, and it ignores competition to change demands by taking tastes as given and fully known. Its informational and homogeneity assumptions leave no room for firms to compete by being different from other firms. Within its narrow confines, the model examines the consequences of only one type of competition, price competition between known, identical goods produced with full awareness of all technologies. This is an important conceptual form of competition, and when focusing on it alone we may speak sensibly about maximizing the intensity of competition. Yet, this narrowness makes the model a poor source of standards for antitrust policy.
Demsetz (1992) – How Many Cheers For Antitrust’s 100 Years?

Although the types of competition outlined by Demsetz are a sign of market power by firms, they are not necessarily a sign that the market has failed or that governments can improve the situation. Let me tell a simple story to illustrate this point. Assume a firm develops a new technology that they are able to prevent other firms from immediately replicating (either because of a patent, secrecy, a high fixed cost of entry, etc.). This firm is now a monopoly producer of that product and can therefore set a price much higher than its cost and make a large profit. The government sees this development and orders the firm to release its plans so that others can replicate the technology and produce their own version. Prices fall as new firms enter and profits go to zero. Consumers are better off since prices are lower and they have a larger choice of products. (A similar story could also be told if the government simply mandated a lower price by monopoly firms).

But the story isn’t over. If I’m another entrepreneur (or even an existing firm) watching this sequence of events, I’m a bit worried. That new idea I was thinking about is going to cost a lot. If I had the possibility to make a large profit, maybe I would be willing to take the risk and go for it anyway. If, on the other hand, I knew for sure that even when I achieve success the government immediately reduces my profits to zero, am I still going to undertake that project? Not a chance. The potential for future profits is an incredibly important incentive for innovation.

Here’s another example from the real world that illustrates the opposite case. In the late 1990s, Microsoft tried to bundle Internet Explorer with their Windows operating system (essentially giving away Explorer for free). This move made it difficult for independent internet browsers to compete (Netscape was the market leader at the time). An antitrust lawsuit was brought against Microsoft and they were initially ordered to break up (which never actually occurred in the end as far as I know, but that doesn’t matter for the story). In the EU, they were required to provide a browser choice page when installing Windows.

In each of the two examples above, there is a clear tradeoff. In the first, consumers are better off in the short run (lower prices), but potentially worse off in the long run (less innovation). The second case is exactly the opposite. Consumers are worse off in the short run (they don’t get a browser for free) but potentially better off in the long run (more browser competition). Can we say for sure whether regulation helps or hurts in either case? Can we even say whether the regulation would push the market to be more competitive or less? I don’t see how (but which browser you are using right now despite the relatively lenient restrictions on Microsoft might give some indication).

I’m not saying regulation is never a good idea in theory. But in practice, it turns out to be really hard. Even in the cases above where it is obvious that a firm is trying to take advantage of monopoly power, it remains unclear whether a move closer to “perfect competition” will result in an increase in actual competition. You can of course pick apart the stories above and come up with some regulatory scheme that balances present and future costs and benefits. But doing so in general would require governments to have even more information than the already ridiculous knowledge assumptions implicit in the perfect competition model. It’s easy to point out imperfections in markets. It’s much harder to figure out what to do about them.

Notice that I haven’t necessarily made an argument against regulation. The takeaway from this post should not be that markets always work or that regulation always fails (I’ll leave that for future posts!). My point is simply that pointing out a flaw in the free market does not automatically imply an opportunity for a regulatory solution. The question is much more complicated than that.

But having said that let me leave you with one final thought. Markets are incredibly dynamic. Whenever the market “fails,” all it takes is one clever entrepreneur to come up with a better method and correct the failure. When government fails? Well, maybe we can come back to that in ten years when they get around to discussing it.