Pandemic diary 2020-03-24: Toying with collapse

Lately, the President is talking up the notion that we “can’t let the cure be worse than the problem itself”. He’s toying with relaxing the suppression measures that are, for the moment, our best hope of collective survival.

Let me elaborate on that.

Too often, discussions about COVID-19 are framed in very individualistic terms. What is the true mortality rate? If X people will die, is preventing that worth a tradeoff of Y GDP?

Even on very optimistic assumptions about the mortality rate and pessimistic assumptions about economic cost, the answer to that question should be “Yes”. But that’s not what I want to write about.

COVID-19 is not just a disease that is infecting us as individuals. It has infected us as a society. The financial fallout, the flailing markets, these are the social equivalent of a mid-grade fever, an unpleasant and uncomfortable side effect of the work our society is performing to suppress and defeat the infection. There may be ways of reducing the unpleasantness without impairing the effectiveness of the response, various forms of economic stimulus or monetary loosening as a kind of social tylenol. Maybe those are worth considering. Some have been tried. But nothing would be more stupid, more suicidal, than to suppress the immune response in order to suppress the fever.

That is what ending our isolation now — what sending everybody back to offices, schools, restaurants, beaches, and bars — would amount to. It might well relieve the “fever” short term. The stock market is up this morning! But it radically increases the likelihood that the patient — our polity, our society — dies.

How would that happen? What’s the microstructure of this purported social collapse? How would putting people to work again be bad?

We desperately need people to work. All of us staying home will not save us. But some people’s work is much more critical than others’ to our society’s collective viability. We obviously need medical personnel to work. For them to work effectively, we desperately need the people who are capable of producing and ramping up production of PPE (“personal protective equipment”) to work. Perhaps more desperately, we need our agricultural and food supply chain to be producing the calories and nutrients each and all of us need to get through this. We need grocery store clerks, stockers, shoppers (for delivery and pick-up orders) to work. We need truck drivers a-truckin’. We need Amazon and UPS and FedEx, permitting us to get what we need with minimal opportunity to cough on one another. We need fire departments and police. We need the digital platforms and communications infrastructure. We need people delivering essentials to the elderly. We need the people who can develop and ramp up testing, tracking, and treatment. We desperately need people to work.

But if you are not one of these people, your staying at home — working as much as you can if you can or not at all of you can’t — is not “waste”. It is making a huge positive contribution to our society, by delaying the moment when it will be impossible to persuade a critical mass of these very essential workers to do their jobs, because many of them are sick and the rest of them are too afraid of getting sick.

Whatever the final mortality rate turns out to be in places that retain control and never let the illness rate outstrip the capacity of their health care system, even if it is “only” one percent, if the outbreak proceeds through the population towards “herd immunity” levels, pretty much everyone will personally know someone who dies, like 20 people whose illness is severe enough to at least require supplementary oxygen to keep them breathing, and four or five people who required the incredibly unpleasant ordeal of mechanical ventilation. In a peak that outstrips health care capacity, many more than one of those twenty severe acquaintances will die. They will be dropping like files, all at once. However much you shout that the individual risk for a twenty-something is low, under these conditions, most people just won’t go out. We know people are bad at weighing their risks, fearing a shark attack from an occasional ocean swim more than the much more likely auto accident during a daily commute. People you personally know suffering and dying around you will be much more salient, and much more terrifying, than any risk you have ever experienced. Exhortations by the best and brightest — who would, after all, have permitted this to happen, in whom no great trust by this point would repose — will not be effective. The factories that should be producing the equipment that might save doctors’ will be too understaffed to function, let alone increase production. The trucks will slow to a trickle. The groceries will close.

People will stay in while they can, scrounge out when they are hungry, loot closed stores or their neighbors’ shelves if that’s what it takes to survive. Armed groups will form self-protection militia, or predatory gangs, depending on how you want to look at it, depending how desperate they become. People will be very sad, each and every survivor grieving loved ones, and very angry. People who are ordinarily good will find themselves doing terrible things, because against the backdrop of what has been done to them, it feels justified.

The continent on which the United States sits will endure the pandemic. So will the majority of the population (though possibly a much less overwhelming majority than many people imagine). But the to-some-degree civilized society we have inhabited? The well-oiled economic machine the President claims he wants to save? Democracy and the Constitutional order? The unity of these United States? They may well not survive this event. And at the individual level, the mortality rate will be much much higher than 1%, Wuhan’s 4%, Italy’s 8%.

Those are the stakes.

All of this is preventable. We don’t need to let this happen.

Most of us can stay at home, and be vigilant about social distance. We can buy enough time for essential workers, the heroes of this play, to ramp up PPE, health-care capacity, and testing capacity while keeping us all fed. We can distribute resources — cash, food, however we do it — so that most of us can stay at home without starving.

Once we are prepared, we can test pervasively, and only isolate the people who need to be isolated. We can use IT tools, which even on a voluntaristic, opt-in basis can be extremely effective at tracing contacts when an infection is discovered, as long as infections are infrequent. In two or three months, we can go back to a somewhat slower version of ordinary life, if we can just keep calm and carry in now. And within a period of a six to 18 months, we can expect effective treatments and/or a vaccine to appear, and then we can get back to our ordinary, beautiful, lives. Our perhaps sadder, wiser, ordinary, beautiful, lives.

I love you.

Predatory precarity

I was reading Matt Stoller’s newsletter this morning:

To put it into words, the problem we have is corruption in the government contracting world, aided by immense amounts of useless overpaid make work. In 2011, an antitrust attorney did a report on how we overpay for government contracting. In service of ‘shrinking government,’ policymakers chose to set up a system where instead of hiring an engineer as a government employee for, say, $120,000 a year, they paid a consulting firm like Booz Allen $500,000 a year for a similar engineer. The resulting system is both more expensive and more bureaucratic.

Here’s one example I grabbed from a public government contracting schedule. The rate negotiated by the government’s General Services Administration for Boston Consulting Group is $33,063.75/week to get a single relatively junior contractor.

I’m certainly with Matt on general disgust at the gorging of the trough by the contactor-consultancy complex, and have long favored rebalancing government employment away from contractors, back towards directly employed civil servants. So, yay. That’s the correct position, and it’s an easy one to take, so I take it.

But it is a bit too easy. The Boston Consulting Group may be charging $33,063.75 per week for the services of a single kind-of-bright conformist straight out of business school. But that kid, he isn’t getting paid $1.7M a year. He’s probably “only” paid 10% of that. From that take, his managers and their managers, their assistants and his, not to mention of course the firm’s shareholders, are all getting a piece of that sweet government slop. And all those guys and gals, they are living in places like Arlington, VA, and some of them have families and mortgages on houses they indebted themselves perhaps millions of dollars to inhabit.

There are people at the top of the American food chain who are stupid rich, for whom questions of making ends meet and financial security are laughably distant. People like that, they are easy to deal with. If it was “us” (whoever the fuck we are) versus only them, politics would be easy. We’d have taxed the billionaires to pay their fair share a long time ago.

But most of the people towards the top of the American food chain are not stupid rich, but stupidly rich. They “make” sums of money that by any fair reckoning, obviously in a global context but even in an American context, are huge. But they plow that affluence into bidding wars on incredibly (if artificially) scarce social goods. Nobody “needs” to live in Arlington (or my own San Francisco). No one’s kid “has” to go to private school (or for the more woke among us, notionally public schools rendered exclusive by the cost of nearby housing). If you make price your first priority in, say, shopping for preschool or daycare, perhaps you can find something reasonable.

But most of us, if we are no longer free, young, and single, if we are rich enough to pay the vig you have to pay to be sure your kid’s preschool will in fact be “safe” and “nurturing”, well, we pay it. If we haven’t rigged our housing choice so that the local public school is good enough, we pay up for a private school. If we can afford to be choosy, if we are really rich, we pay up for the private school that devotes significant resources to the searches and scholarships that deliver, in Nikole Hannah-Jones memorable words, a “carefully curated integration, the kind that allows many white parents to boast that their children’s public schools look like the United Nations.” It is extraordinarily expensive to be both comfortable and some facsimile of virtuous. You’ll never see as many rainbow flags as you see in Marin County.

The point of this is not that you should have sympathy for the Arlingtonians (or San Franciscans). Fuck ’em (er, us). But you are missing something important, as a matter of politics if nothing else, if you don’t get that the people who are your predators financially are, in their turn, someone else’s prey. Part of why the legalized corruption that is the vast bulk of the (dollar-weighted) US economy is so immovable is that the people whose lobbyists have cornered markets to ensure they stay overpaid are desperately frightened of not being overpaid, because if they were not overpaid they would become unable to make all the absurd overpayments that are now required to live what people of my generation (and race, and class) understood to be an ordinary life. It’s turtles all the way down, each one collecting a toll and wondering how it’s gonna pay the next diapsid.

Perhaps the most straightforward examples of all this, much more sympathetic than Boston Consulting Group swindlers, are doctors. It’s well and good to rail against health insurance companies and big pharma, and really, fuck ’em so hard they disappear into perpetual orgasm and we never have to encounter them again. But we know that healthcare in the US is exorbitantly expensive compared to anywhere else, and we also know, even if it is not shouted as loudly in political stump speeches, that a big part of this is that doctors are paid roughly twice as much in America as they are paid elsewhere in the developed world.

But what would it mean, really, to cut US doctors’ salaries in half? In theory, if you are the most imperceptive sort of economist, it means they could live as well as doctors do in Europe, which is not so bad. US doctors are paid twice as much in what is imaginatively described as “real terms”, so they should be able to purchase the same goods and services with their income as their European peers do. Where’s the problem?

But economists’ “real terms” do not measure the realest terms at all, the social relations in which the dance of our production and consumption is embedded. If you cut doctors’ salaries in half tomorrow, they would have to sell their mortgaged, absurdly expensive homes. At half their present salary, doctors would no longer be able to afford to live amongst “peer” professions like lawyers, management consultants, middling corporate executives, and the employees of surveillance monopolists. Doctors would fall precipitously from the social class, embedded in geography and consumption habits, to which many of them even now cling only precariously. More calamitously, they would lose the capacity to produce or reproduce membership in that social class for their children, often the most expensive amenity American professionals seek to purchase.

Doctors in France don’t have this problem because they live in a society less stratified than the one that we are unfortunate to inhabit. In societies in which the lives and prospects of the rich and less rich are not so divergent, people can afford to be a bit less rich. After all, even in the United States, the problem is not scarcity in a straightforward economic sense. We can build, to a first approximation, as much great housing as we want. The skills required to care for and educate kids are reproducible. They could be elastically and economically supplied. The scarcity of a slot at Harvard (and that slot’s many antecedents, all the way back to birth) has little to do with some ingrained incapacity to educate wonderful teachers.

The solution to the problem of “positional goods”, which are inherently zero-sum and inelastically supplied, is supposed to be the infinite multiplicity of social dimensions over which we can measure our positions (ht Arjun Narayan). The most famous exposition of this view is perhaps David Brooks’ from On Paradise Drive:

“Know thyself,” the Greek philosopher advised. But of course this is nonsense. In the world of self-reinforcing clique communities, the people who are truly happy live by the maxim “Overrate thyself.” They live in a community that reinforces their values every day. The anthropology professor can stride through life knowing she was unanimously elected chairwoman of her crunchy suburb’s sustainable-growth study seminar. She wears the locally approved status symbols: the Tibet-motif dangly earrings, the Andrea Dworkin-inspired hairstyle, the peasant blouse, and the public-broadcasting tote bag… Meanwhile, sitting in the next seat of the coach section on some Southwest Airlines flight, there might be a midlevel executive from a postwar suburb who’s similarly rich in self-esteem. But he lives in a different clique, so he is validated and reinforced according to entirely different criteria and by entirely different institutions… [H]e has been named Payroll Person of the Year by the West Coast Regional Payroll Professional Association. He is interested in College Football and tassels. His loafers have tassels. His golf bags have tassels. If he could put tassels around the Oklahoma football vanity license plate on his Cadillac Escalade, his life would be complete.

It’s hard to know, from this excerpt, which of these two is richer, the anthropology professor or the payroll guy. Both crouch together in the eternal middle class of unreserved coach seating on a Southwest Airlines flight. And in that skyward netherworld, On Paradise Flight, Brooks would be right. When there are not objective correlates of anyone’s definition of positional status, each of us can choose whichever measure of position flatters us most. We need agree only that is it gauche to try to impose our values on others for us all to live as happiest and best, quietly pitying our inferiors even as we cheerfully pass along a bag of pretzels.

But what it means to live in a stratified society, precisely what it means to live in a stratified society, is that there are objective correlates to position along dimensions that individuals and communities cannot themselves choose. There are positional dimensions whose importance is a social fact, not arbitrary, but real as social facts are, by virtue of their consequences. In such a society, positional goods with desirable correlates, inherently scarce and inelastically supplied, become extremely valuable. In some societies, those goods may be rationed by custom, or by heredity, by caste or race. But to the degree that a society is “liberal” and capitalist, they will be price-rationed, as they largely (but incompletely) are in our American society.

In a stratified, liberal capitalist society, the ability to command market power, to charge a margin sufficiently above the cost of inputs to cover the purchase of positional goods, becomes the definition of caste. When goods like health, comfort, safety, and ones children’s life prospects are effectively price-rationed, individuals will lever themselves to the hilt to purchase their place. The result is a strange precariot, objectively wealthy, educated and in a certain sense well-intended, who justify as a matter of defensive necessity participation in arrangements whose ugliness they cannot quite not see. In aggregate, they are predators, but individually they are also prey, and they feel embattled. So long as the intensity of stratification endures, they will feel like they have little choice but to participate in, even to collude to entrench, the institutions that secure their market power and their relatively decent place.

Reforming government contracting, controlling medical costs, breaking up big-tech, opening the professions to international competition, these sound technocratic, even “pro-market”. But under present levels of stratification, the consequences of these things would be a revolution, whole swathes of society accustomed to status and political enfranchisement would find themselves banished towards a “normal” they used to only read about, opiate crises and deaths of despair, towards loss of the “privilege” it has become some of their custom to magnanimously and ostentatiously “check”. Did I say they? I mean we, of course.

But of course, not doing these things means continuing to tolerate an increasingly predatory, dysfunctional, stagnant society. It means continuing deaths of despair, even as we hustle desperately to try to ensure that they are not our deaths, or our children’s. Even for its current beneficiaries, the present system is a game of musical chairs. As time goes on, with each round, yet more chairs are yanked from the game.

The only way out of this, the only escape, is to reduce the degree of stratification, the degree to which outcomes depend on our capacity to buy price-rationed positional goods. Only when the stakes are lower will be find ourselves able to tolerate, to risk, an economy that delivers increasing quantity and quality of goods and services at decreasing prices, rather than one that sustains markups upon which we, or some of us, with white knuckles must depend.

Lower the stakes.

p.s. While I was writing, the wonderfully pseudonymous “Lester Burnham” tweeted me this, which seems related.

The externality lens

Will Wilkinson has written a provocative paper that tries to explain a remarkable regularity in American politics. Wilkinson writes:

[T]here is now no such thing as a Republican city. “As you go from the center of cities out through the suburbs and into rural areas, you traverse in a linear fashion from Democratic to Republican places,” Stanford political scientist Jonathan Rodden has observed. The electorate is typically equal parts Democrat and Republican at about 900 people per square mile, according to Mark Muro of Brookings. The exact number varies a bit from place to place; higher in more Republican and lower in more Democratic states. Overall, majorities tend to flip from blue to red roughly where commuter suburbs give way to “exurban” sprawl. That’s where the political boundary of the density divide is drawn.

Higher population density predicts higher Democratic vote share even in small cities in deep red counties in deep red states.

Wilkinson explains this “density divide” by suggesting the process of urbanization sorts people with relatively fixed prior characteristics (ethnicity, ethnocentrism, personality type, educational attainment) into different geographies, and then ghettoization within now more homogeneous places further entrenches those differences. Wilkinson’s perspective is worthy of careful consideration. I’m not writing to dispute or endorse his view, but to offer an alternative explanation that might or might not complement it. (Our tendency to like debates hot—and to attach our egos to this view or that—often leaves us arguing hypotheses as though they are mutually exclusive when, in social affairs, they usually are not.)

A very simple explanation for Wilkinson’s density divide might have to do with people’s intuitions about the pervasiveness of externalities. People who live in dense places correctly perceive that the things their neighbors do blow back upon them. If a neighbor wants to tear-down her single family home and replace it with a midrise apartment building, the typical urbanite doesn’t think “it’s her property, she can do what she wants”. She goes straight to the planning commission to complain about parking and shadows. If someone wants to open up a strip joint, a gun range, even a posh bar in a dense city, urbanites instinctively understand that those choices will have consequences for people other than the entrepreneur and her clients, and demand a regulatory process to balance the external costs (and benefits, at least in theory) against the benefits that business stakeholders would enjoy. This view, that most potential actions have significant repercussions for people who do not voluntarily choose to participate in them, we’ll call externality pessimism.

In more rural areas, libertarian intuitions seem more sensible. For many actions, external costs decline pretty directly with distance. In places sufficiently sprawled that parking is rarely an issue but nearly all interaction is mediated by an automobile journey, a kind of hermetically sealed, climate-controlled pod-world serves as both an insulator and diffuser. The external cost to you if some kind of eyesore becomes your “neighbor” is much less if your neighbor is well down the road and you just have to drive past it than if it is literally adjacent to your home. The dangers you (or at least wussy urbanites like me) might fear from rough clientele at a gun range are attenuated if the clientele doesn’t actually congregate anywhere in particular, because once they step from the parking lot into their vehicles they are everywhere and nowhere at once. Gun ownership itself looks very different from the perspective of someone living in the countryside, for whom policing and eyes-on-the-street mutual supervision cannot be relied upon and an unintended stray bullet is unlikely to hit anything more vulnerable than a tree, than within a city. In an urban context, the external costs of pervasive gun ownership are large. Weapons might fall into the hands of lunatics and criminals, and there are always lunatics and criminals nearby. Incautious shots intended recreationally could harm or kill someone. The petty conflicts that are ubiquitous in urban life, that in the ordinary course of things flare hot and then are quickly forgotten, might needlessly escalate to tragedy, when the satisfying punctuation of a trigger is near at hand. People who live in sprawl or genuinely rural places just don’t bump into one another as much. Their homes are their castles. Driveways and garages, cul-de-sacs and long ribbons of asphalt, serve as moats. A real sphere of privacy exists, where in general the effects, good and bad, of people’s actions are mostly restricted to those within the household. If we accept that, except in extreme circumstances, households are best placed to see to their own interests, then there is not much call or place for external regulation. What people do with and on their own property is, to a good approximation, their own affair, and meddling by outsiders, whether well-intended or corrupt, is likely to do more harm than good. This is externality optimism. If the costs and benefits of people’s choices are fully internalized, they can be left to do whatever they wish.

If we think not so much about the current, Trumpified Republican party (there will be another lens for that!), but the coalition that used to flatter itself as the Party of Reagan, Wilkinson’s density divide becomes largely explainable in terms of where people understandably sit between externality optimism and pessimism. By virtue of direct lived experience, people living at high densities perceive nearly all actions as interactions and seek (though rarely find) a competent and fair regulatory framework to mediate conflicts of interest. People living at low densities experience a world much closer to Econ 101 models: interaction is not the default, and when it is sought, markets can coordinate mutually beneficial outcomes. External regulation is counterproductive.

Many of my readers will, I think, see this as an unduly charitable read of even the pre-Trump Republican Party. Maybe. One of my aims in this exercise is to find bases for some charity between factions, without which I think we have a great deal to fear. Still, let’s go through why I also think the pre-Trump Republican Party was misguided in its externality optimism, despite (I claim) how understandable that optimism may have been from the lived experience of individuals who affiliate with that party.

Once upon a time, a person’s direct lived experience may have served as a sufficient proxy for the forces that affect people’s lives. But that time has long passed. Technology and the scale at which our economy and finance has become organized mean that we all live in a crowded city, whether we notice it or not. Urbanites, in a sense, have an unearned advantage because our direct experience forms intuitions that better match a reality that in fact we all share than those that might be formed in salubrious isolation on a Wyoming ranch. Consider this phenomenal story by Claire Kelloway (ht Matt Stoller) on the tremendous squeeze Big Ag has placed on predominantly Republican farmers.

Market concentration is what I refer to as a power externality. At every step of the way, firms like Monsanto may have gained their market strangleholds via notionally voluntary transactions, all parties to which believed in their interest. But the accumulated effect of those transactions is to increase the bargaining power of just a few firms and undermine the bargaining power of future counterparties, who may not have consented to any of the earlier transactions. For example, much of what is sought by the acquirer in a merger is a better “market position”. That benefit is internal to the transaction: Both the acquirer and the target often understand its economic value, and price negotiations determine how the benefit will be shared. But the benefit of a better market position, which translates to increased monopoly or monopsony power, is created by increases in revenue from future customers or reductions of payments to future vendors, all of whom are not parties to the merger. Antitrust regulation, in this sense, can be understood to be much the same as land use regulation in cities. It exists to balance the interests of transactors who internalize benefits against costs the transaction will impose upon third parties.

Farmers aren’t stupid. They fully understand how and by whom they are being squeezed, and their ex-urban perspective on gun rights notwithstanding, countering the power of Big Ag might be a way for Democrats to make inroads into rural America (as Kelloway argues). This kind of vulnerability helps to explain Republican operatives’ enthusiasm for emphasizing “culture”, which allows them to highlight the small, the kind of controversies rank-and-file voters might experience very locally, and call attention to the absurdity and perniciousness of meddling by governments or self-appointed do-gooders into matters where the rural peace would best be kept by leaving people alone and perhaps building good fences.

Climate change is another domain where I think the externality lens can help us understand how the parties have sorted. Droughts, violent storms, floods, and heat waves do not discriminate between rural people and city dwellers. These catastrophes are indifferent to the culture wars that flamboyantly mark our tribes. But people from lower density environments just intuitively have less reason to believe in weird, counterintuitive consequences of apparently benign actions. Urbanites are constantly arguing over prima facie good things. (Housing for the humans is good but it is bad!) They frequently make and consider counter-intuitive cases with appeals to indirect effects. That’s less common for people who live at lower densities. Republican politicians almost constantly emphasize—because their constituents are receptive to them—notions like “common sense”. A simple version of common sense often works pretty well in low density environments where the (directly perceptible) consequences of most actions are experienced by the people who voluntarily participate in them. People formed by lower densities have stronger priors to overcome before they concede the existence of invisible but urgent consequences to what seem like ordinary, and very valuable, activity. Given the stakes for America’s huge oil and gas industry, (at least) one of America’s two political parties was always liable to be climate reactionary, regardless of the evidence. Of the two parties, perhaps climate skepticism finds a more natural home among Republicans than Democrats not because rank-and-file Republicans are anti-science, but because their reasonably formed priors render the burden of evidence for “spooky action at a distance” higher than for density-addled Democrats.

It is easy for people like me (and most likely for people like you, dear reader, although I hope not all of you) to conclude that it is Republicans who are basically mistaken, afflicted with an externality optimism that may be understandable but is in fact unsupportable in the contemporary world. I think that’s true, but not quite the right lesson to draw. For while externality pessimism is more suited, descriptively, to the modern world than externality optimism, in a prescriptive sense there is perhaps no project more important than restoring or creating contexts within which externality optimism would be correct and adaptive.

Wilkinson writes, “There are no Republican cities.” An obvious retort by Republicans might be, “There are no well-governed cities.” Among larger cities, at least within the United States, I think the retort is broadly correct. You don’t have to endorse the slander against my remarkable native city by this moment’s unfortunate President to concede that the problem of effective governance remains pressing and unsolved in America, at the municipal level as much as any other. America’s most prosperous cities are far from immune. Governance is the world’s most pressing unsolved problem. We need new ideas and “petrie dishes” that enable creative experimentation and hopefully progress. We are, for now, just terrible. The scale and scope of diverse modern polities has outstripped our capacity to govern.

So, arguably one of the best approaches we have for now, is to try to reorganize our affairs so we need governance less. That’s a quite different claim than to argue for “small government” in the world as it is. As poorly governed as our cities currently are, it would be idiocy to argue for less government where in fact the reality of pervasive externalities demands extensive regulation and negotiation. But, to the limited degree that it is possible without making ethically abhorrent or materially intolerable trade-offs, encouraging ways of organizing ourselves that render externality optimism a less deluded intuition would mitigate some of the harms of our incapacity to govern.

The first-best solution, of course, would be to get better at governing, at every scale and level. If the problem of governance were solved, if we knew how to i) coordinate the provision of public goods at any scale, with ii) widespread legitimacy and minimal dispute over the distribution of benefits and obligations iii) across diverse constituencies while iv) upholding liberal values, the possibilities that would be unlocked for human flourishing are unfathomable. And though we may never fully achieve all that, governance is a practice, an institution, a social technology. It is susceptible to improvement. We can make progress.

But in the meantime, altering circumstances where we can, so we require governance less, so that the stakes of political conflict are lower, may be a helpful stopgap. That sounds like, and is, a very Republican kind of insight. But it’s also the basis for a lot of small-is-beautiful intuitions among lefties. And it’s the basis for these words, by John Maynard Keynes in 1933 (ht Tyler Cowen):

To begin with the question of peace. We are pacifist today with so much strength of conviction that, if the econornic internationalist could win this point, he would soon recapture our support. But it does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country’s economic structure by the resources and the influence of foreign capitalists, and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary. The protection of a country’s existing foreign interests, the capture of new markets, the progress of economic imperialism–these are a scarcely avoidable part of a scheme of things which aims at the maximum of international specialization and at the maximum geographical diffusion of capital wherever its seat of ownership. Advisable domestic policies might often be easier to compass, if the phenomenon known as “the flight of capital” could be ruled out. The divorce between ownership and the real responsibility of management is serious within a country, when, as a result of joint stock enterprise, ownership is broken up among innumerable individuals who buy their interest to-day and sell it to-morrow and lack altogether both knowledge and responsibility towards what they momentarily own. But when the same principle is applied internationally, it is, in times of stress, intolerable—I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.

I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.

Do read the whole thing. It is a remarkable essay.

We are left, I suppose, with externality pessimism of the intellect, externality optimism of the will. Until we get better at governing.

Update History:

  • 27-Apr-2019, 3:40 p.m. EEST: “Technology and the scale at which our economy and finance has become organized meansmean that we all live in a crowded city”; “…the retort is broadly truecorrect.”; “externality pessimism of the mindintellect, externality optimism of the will”; “But oneOne of my aims in this exercise…”; “TheThese catastrophes are indifferent”; “…once they step from the parking lot into their vehiclevehicles…”

Prologue: Lenses

Lately I’m thinking a lot in terms of what I call “lenses”. By lenses, I mean something quite similar to, but a bit mushier than, what Julia Galef and her colleagues call a “double crux“. In a nutshell, a double crux is a narrow point of contention that can be found to account for a broader disagreement. If we are arguing about, say, whether it is wise to permit construction of high-end condominium towers in increasingly unaffordable cities, we might find that we would agree with our opponent if we shared their view on the largely empirical question of “induced demand”. One party opposes permitting the towers, because she believes that building them will draw in new high-income residents from elsewhere, doing little for affordability as new supply is matched to new demand. The other party believes that demand conditions are not so much affected by high-end new construction, so the new units would be taken by current residents, allowing their older units to “filter” as new supply to lower income clienteles. The two agree that if they took the opposite view on this narrow question, they would switch sides on the broader question.

There are a lot of virtues in finding double cruxes, but the one I will emphasize has to do with a kind of intellectual charity. By identifying a narrow, relatively anodyne source of disagreement, the parties take what feels like a value-laden, almost tribal conflict and reframe the disagreement in terms of a judgment call people might understandably disagree about. Instead of the rival parties coming to see themselves as almost alien to one another — one virtuous, the other “bought” in some fashion, one reasonable the other impervious to logic — the two parties reframe one another as rational people with similar values who disagree over an unclear fact about the world.

In practice, in the context of a hot argument, I think it is pretty difficult to find clean double cruxes. Even when one has putatively been agreed, one or both sides is likely to accuse the other of being impervious to the evidence they can marshal on that new, narrower question, and so of being unreasonable or worse after all. For the most part, I think, the humans come to their judgments via a complicated miasma of personal perceptions, interests, and values, second-hand evidence (“scientific” and otherwise), communal identities, and idiosyncratic intuition. Syllogistic argument serves more as a backfilled means of by which we try to summarize and communicate all that than as the source of our views. Before we can actually be persuaded by syllogistic argument (sometimes we can!), we have to find a new equilibrium that reconciles and integrates the new views into the complicated psychosocial ecology that forms us and that we help to form. I don’t think this is necessarily bad. It may often be the case that beliefs and perceptions that emerge from this complicated miasma are more functional, even more accurate, than those we produce trying to be evidence-based and rational. Formal rationality is limited by the scope of the tools we invent as forms of reason and the inputs we consecrate as admissible evidence. That is likely to constitute an almost infinitessimal fraction of the space of potential decision-making processes. Our messy ids were ruthlessly selected by natural and social selection to manage existential threats to our individual and small-group existences. There is no doubt that our “guts” can be very badly misled under circumstances — like the formalized, media-saturated, large-scale societies in which we presently subsist — that diverge from where they evolved. And even when our guts work as advertised, they may produce judgments that might in some narrow sense be functional but that fall ethically outside of contemporary norms (and so are no longer adaptive in contexts where those norms are socially enforced). Using physiognomic markers to discriminate between in- and out-groups may have been a functional strategy among warlike hunter-gatherer tribes, but represents a kind of racism most of us today hope to ensure is not adaptive to pursue in contemporary contexts. Nevertheless, I think we know of ourselves (and, more recently, of the “artificial intelligences” we now produce in our image) that restricting decision-making to what we can elaborate or justify using tools of formal rationality is simply inadequate to the task of producing decisions in real time that are functional in the world. The other stuff is unruly and sometimes awful. But we need it.

“Lenses” are my attempt to adapt the admirable charity of looking for double cruxes to this more naturalistic account of belief formation and decision-making. Rather than a specific conjecture, disagreement about which is sufficient to account for a particular dispute, a “lens” is a broad intuition that I think differs across social and intellectual tribes. Like double cruxes, these intuitions are more anodyne, more obvious to all as judgment calls about which people might understandably differ, than the bitter disputes they serve some role (I claim) in motivating. Rather than explain variation in positions on specific disputes, they help explain how and why we sort ourselves into communities of radically divergent and contending worldviews.

Identifying a lens isn’t the same as saying there is no right or wrong answer. Some broad intuitions about the world may be more factually supportable, and others plainly mistaken. More commonly, some intuitions are right in particular contexts and wrong in others, and much of our tribalism may be explained by extrapolating too universally from “guts” that were correct in some accustomed circumstance, but that fail when extended in time, over geography, or across social groups. Part of the fun of this project is identifying my own intuitions, and imagining how varying those might place me into different groups with different worldviews.

I hope that thinking this way can help facilitate a kind of cross-group empathy. Some of the social fissures and political conflicts we’re currently experiencing derive from differences in material interests or deeply-held values that no amount of empathy can bridge. But most of our conflicts are not that, I think, except indirectly in the sense that those whose material interests are threatened sometimes work to inflame conflicts among people whose interests might otherwise be reconcilable and opposed to their own.

I don’t, by the way, think there is anything original in this, and to the degree there is anything good in it I’m happy to attribute it to Galef et al’s project, which I’ve admired for a while. My “divergences of broad intuition” might be reframed as “different distributions of priors”, and could be identified as plain old double cruxes under a Bayesian rather than syllogistic rationality. “Lenses” are also perhaps related to Arnold Kling’s “axes“.

More than a thousand words have passed and I suspect that you, dear reader, still have no clue what I am talking about. Things may (or may not!) become clearer when I provide some examples of “lenses”. Let’s, um, see! Very soon, I hope.

Update History:

  • 27-Apr-2019, 12:35 p.m. EEST: “It’sIt may often be the case that beliefs and perceptions that emerge from this complicated miasma are more functional…”

Ethereum for humans

Note: I do my best to keep interfluidity noncommercial, but this post is kind of an ad. I also hold “Ether” as a speculative asset, so the post could be interpreted as talking my book. I am sorry about all that. I hope you find this interesting anyway.

A bit pathetically, much of what I have been doing for the past two years is working on a software project called sbt-ethereum.

When I began, I thought it’d be a few months’ work, and would enable me to do what I’d hoped to do, which is publish little economic experiments or toys in a way that many interfluidity readers could, if they wished, try out and interact with. Unfortunately, my software philosophy is “go slow and make things, and oh fuck I’m running out of money”, and that’s exactly what I’ve done.

Nevertheless, I am quite devoted to my little project, and hope that perhaps some of you will be interested. It scratches lots of my personal itches.

First off, there is Ethereum itself, which captivated me a few years ago as a potential space for institutional experimentation. Technological change has, thus far, been utterly eviscerative of civil society. In theory, we should all be able to communicate and coordinate so much more easily than before, this should be a wonderful golden age for community, cooperation, and coordinated action. In practice, quite the opposite has occurred. By removing the frictions that protected various localisms, we made a world so flat and seamless that mega-institutions, the kind that like to move fast and break things and make a lot of money, could easily dominate and have done so. Our lives and hopes are attention plankton in the baleen of the whale, and even while we are drawn into the suction, we know in our plankton hearts that it is killing us. What we need now is not an ever more open, ever more endless ocean of connection, but defensible reefs upon which durable human communities can deposit themselves and give themselves form. We need to be able to create barriers, to create stakes that render our attention committed and less susceptible to footloose “engagement”, we need to design structures and rules that regulate and sustain those communities, and mechanisms to enforce them.

Ethereum (along with perhaps its many imitators and successors) is a weird, deeply imperfect technology, but it could be a playground (or petrie dish) for this kind of thing. It lets one define, in software, relationships between events that can be human interactions and flows of economic value. Human community transcends money if it is worthy of the name at all, but relationships embedded in flows of economic value usually form the bones and sinew on which the softer flesh of human intercourse grows. Families, for example, are not “about the money”, but they are among other things arrangements that pool economic resources and arrange flows to individuals who do not directly receive flows from the bigger, wider world. Extended families grow weaker as resource pooling beyond nuclear family boundaries becomes less common, a phenomenon for which (like most social phenomena) causal arrows go both ways. Communities and resources are related and interdependent. A “community” materialized only as a Facebook group will always be a weak and shallow thing. Tools like Ethereum, at least in etheory, could enable people to define economic institutions conducive to durable and effective communities, at scales as small as families or as large as social movements, and to administer them in ways that are transparent if not always fair.

But this project (which I describe as “intentional community” in perhaps ill-augered homage to an earlier movement to carve out local spaces), requires a tremendous amount of experimentation, at small scales. It should be easy and cheap to try things out. So far, understandably but to my disappointment, actually existing Ethereum development has been focused on millions-of-dollar start-up scales rather than hundreds-of-dollar group-arts-budget scale. There were the ICOs that, for a moment, could raise infinite money from a buzzword; the “fat protocols” that venture capitalists use to seduce themselves and their not always lovely worldviews into the space; and now we have the “DeFi” (“decentralized finance”) vision. Flows of economic value do shape, form, and deform human communities. So far the scent of big money fast has largely structured the Ethereum community, not for better but for worse in my view, though I am grateful for my own speculative gains and for the (not unrelated) continuing vitality of the space.

sbt-ethereum, this software I’ve been working on, is designed to encourage very bare-bones Ethereum projects. Someone, by definition a coder, has to write the “smart contracts” — the Ethereum programs that coordinate interaction and value. But once such a smart contract exists, sbt-ethereum “repositories” should be usable, and potentially modifiable and customizable, by a much broader range of technically comfortable users.

sbt-ethereum emphatically is not a GUI, web, or mobile app. It is, on the contrary, text-based software that defines its own, fairly weird but hopefully accessible, command line. One reason, in my view, why institutional experimentation with Ethereum has been both slow and unproductive is a premature fetish for “Web3 dApps“, which often strive to be as close as possible to the current generation of web/mobile applications that both serve and oppress us, except backed by “communities” defined by smart contracts rather than the narrow interests of some ordinary firm. Building a beautiful website is an expensive, high-overhead activity, and for all of that work, the peculiarities of interacting with Ethereum, which is quite different from the database-and-payments-provider back-end of your ordinary Uber, can’t help but poke out uncomfortably. sbt-ethereum encourages users to explore and interact directly with smart contracts from its internal command line. A smart contract alone is sufficient to be a usable application, a workable experiment. Just deploy it and play, no JavaScript, or Swift, or even HTML necessary or desired. sbt-ethereum‘s main usability tool is the <tab> key.

sbt-ethereum is not intended for the mythical mass end-user. It is intended for the people who invented the personal computer, and then invented the modern internet, and then disappeared. It is intended for hobbyists. And also for researchers. If you are an economics professor, or an economics student, it is intended for you. Make game theory less theoretical. Invent some games and play them amongst yourselves with real money. Iterate on them, publish them for others to play with. Describe and theorize what you see.

sbt-ethereum is, to me, also about human agency. I am an old curmudgeon, so perhaps it is just that. But I view the current generation of computing as dystopian. I hate my mobile apps, even as I am dependent and addicted to them. When the web first came to be, a prominent feature was “View Source”. Users were invited to look at a web page and understand how it was made, so that you could make your own. Just prior to the emergence of the web was the desktop publishing revolution, which let anyone with a computer produce publications of a quality that only recently before would have required professional typesetters. I remember during heady quasi-Marxey college conversations gushing about how now we owned the means of production in the form of our spiffy Macintoshes. Computing now feels utterly infantilizing. You can publish anything you want, as interchangeable content, fodder for vast machines built by Jack and Mark, control over which becomes theirs. Beyond “social media”, publishing has re-professionalized, and professionals are in the business of exclusion and difference, of profiting from what others cannot do.

My software, like this blog, is a throwback. I sometimes joke that sbt-ethereum is “Ethereum for the 1970s”. Its UI would be basic on a green-screen terminal. But the software that sits beneath the nostalgic phosphorous is powerful. Professional quality, I hope.

But I do not write it for professionals. I write it for amateurs. It is free software. I hope that you will give it a try. For most readers, I suspect this talk of smart contracts and institutional experiments will sound abstract and vague, hard to make sense of. I hope I’ll publish some little toys, the kind of ideas that got me started on this in the first place, sometime soon.

Update History:

  • 27-Apr-2019, 1:00 p.m. PDT: “Our lives and hopes are attention plankton in the krill baleen of the whale…” (note: i posted this update history entry late, at about 4pm, about 3 hours after the update. i was out and just fixed the embarrassing mistake from my mobile. sorry!)
  • 3-May-2019, 12:30 a.m. PDT: Add missing hyphen to “group-arts-budget scale”; “publish them for other others to play with”; “control over which becomes utterly theirs”

Three levels of controversy over MMT

One thing I think worth pointing out about the recent MMT controversializing is there are (at least) three levels, related but distinct, at which these arguments take place.

The first is the argument that people mostly pretend they are engaging. Is MMT “good economics”? Is its characterization of the economy empirically accurate? Does it yield useful predictions that other perspectives on economic phenomena might not? If a philosopher king took an MMT economist’s advice, would the policy outcomes be virtuous?

This is definitely an important component of the discussions, but although it sometimes pretends to be, it is far from the only piece.

A second argument concerns the political economy of MMT, as opposed to conventional Keynesianism or other “left-ish” approaches. In this actual world where there is no philosopher king, but a restive public, entrenched elites, and a cumbersome political system whose arcane workings are determinative of policy, would characterizing the economy in MMT-ish terms, in the public and/or the technocratic sphere, yield better results or worse than other descriptions?

Obviously, this is related to the first question on the quality of MMT as “pure” economics. If MMT-ish views are politically potent, but the policies they recommend would bring catastrophe, that shouldn’t count as a point in MMT’s favor. But among the center-left to leftish groups among which this controversy rages, there is a fair amount of overlap in near-term policy goals. Most of these groups would like to see tax rates on the wealthy raised, as a means of addressing inequality, not (just) as a matter of public finance. Most support Medicare-For-All, or at least some reform of status quo ObamaCare that would be substantially more aggressive about universality and affordability. Most want, if not the Green New Deal, some form of much more muscular climate policy.

There are differences too, of course. The MMTers are famously supportive of a job guarantee or employer of last resort program, where others favor seeking full employment more conventionally by running the economy “hot”. Some on the left favor a UBI or universal dividend, policies towards which MMTers have been less than gently skeptical. Some worry that MMTers would discredit otherwise good programs by failing to tax sufficiently, causing high inflation or debilitating interest rates that could open the door to a crushing reaction.

Still, there remains a lot of overlap, and an important component of the debate is whether MMT or more traditional views will be better politically at delivering the goods that many of us can agree we want. MMT economist Pavlina Tcherneva’s riposte to MMT-skeptical Doug Henwood is extraordinary in this regard:

Henwood does not acknowledge that one of the most effective ways of engaging in this struggle is to render the wealthy obsolete — as in, we will stop pretending that we need them to pay for the good society. In a world with a sovereign currency and modern monetary and fiscal institutions, we never really did, and we sure don’t now. And the public needs to know it. That’s the MMT message.

For the record MMT, as Henwood acknowledges, has always argued for taxing the wealthy to address the problems of inequality and political power, but we also offer a different kind of empowerment — one that comes with lifting the veil of money.

I would say that Henwood (like other “tax-the-rich-to-pay-for-progress” lefties) is tethered to the wealthy by an imaginary umbilical cord that holds his progressive agenda hostage to his oppressors. To me, this is the definition of a self-induced paralysis.

Time to cut the cord. MMT has a profound emancipatory power and the Left would do well to awaken to its potential.

And here is MMTer Randy Wray:

Henwood wants us to believe that Government needs inequality. We’ve got to cater to the rich. They get to veto our progressive policies. If there weren’t rich folk, we’d never be able to afford a New Deal. We only get the policies they are willing to fund. If we actually did tax away their riches, government would go broke.

As [MMT economist Stephanie] Kelton puts it, people like Henwood think money grows on rich people.

For far too long left-leaning Democrats have had a close symbiotic relationship with the rich. They’ve needed the “good” rich folk, like George Soros, Bill Gates, Warren Buffet, Bob Rubin, to fund their think tanks and political campaigns. The centrist Clinton wing, has repaid the generosity of Wall Street’s neoliberals with deregulation that allowed the CEOs to shovel money to themselves, vastly increasing inequality and their own power. And they in turn rewarded Hillary—who by her own account accepted whatever money they would throw in her direction.

Today’s progressives won’t fall into that trap. “How ya gonna pay for it?” Through a budget authorization. Uncle Sam can afford it without the help of the rich.

And, by the way, they’re going to tax you anyway, because you’ve got too much—too much income, too much wealth, too much power. What will we do with the tax revenue? Burn it. Uncle Sam doesn’t need your money.

Henwood replies by Twitter:

Me: tax the rich to feed kids and save the planet.

Randy Wray: “What will we do with the tax revenue? Burn it. Uncle Sam doesn’t need your money.”

Which makes for better politics?

me: “Fewer Lamborghinis, more bullet trains. Fewer Hamptons houses, more public housing.”

Wray: “burn their money”

On purely economic terms, this is a case where the MMTers clearly have the right of it. MPC (“marginal propensity to consume”) effects are real, not a mere artifact of an empirically invalidated Permanent Income Hypothesis. As Dean Baker reminds us, short of near wholesale confiscation, taxing the income at the gilded heart of America’s top inequality is a poor way to free up real resources that would otherwise be consumed. You’ve got to tax more normal people, whose spending is sensitive to changes in income. You can’t actually pay for bullet trains by displacing Lamborghinis. You want to tax the very rich anyway.

But “Fewer Lamborghinis, more bullet trains” is still a great slogan!

So, which is better as politics, the pop-MMT “Fuck the rich, yes we can, just do it!” or Henwood’s “Melt Lamborghinis, make mag-levs!”? I don’t know. But I think it’s an important question. Even if you think MMT economics is total bullshit (to be clear, I don’t), it may still, as Brian Beutler argues, be

useful because it’s a specific, articulable way of describing national finance that provides Democrats an answer to starve the beast… Democrats must either come to grips with the nature of their opposition, and prepare themselves—whether it’s through embracing MMT or just pure political grit—to use power on a level playing field with Republicans, or leave us stuck on the seesaw until, eventually, Republicans win. The left is either going to beat conservatives at the game of chicken they have forced us into, or it is not.

Tcherneva, the MMT economist, provocatively asks on Twitter:

Suppose a very progressive govt says “Yes, #MMT is right, we have all the financial resources we need” and starts working on implementing a #GreenNewDeal, #JobGuarantee, #M4A etc etc. What’s the worst that could possibly happen from the POV of all fervent Left MMT critics?

If you think MMT is good politics but bad economics, it may be worth asking whether there isn’t some tweak or reform that would render the economics acceptable and retain the good politics. And advancing that project of reform might, all things considered, be a more virtuous project than ostentatiously dissing MMT under the banner of your own economic views.

Or not! If you think that MMT is just snake oil, that the economics is so bad it will undermine and discredit any policy undertaken in its name, then ostentatiously diss away! We all have hard choices to make.

Which brings us to the third level of MMT controversializing. Economics debates are often passionate, and frequently become too personal. But MMT debates are stuck on infinite recursion, and they take place in a thunderdrome entirely their own. The depth of the resentments between veteran partisans is astonishing. MMT arguments escalate almost immediately to thinly veiled campaigns to publicly expose ones opponent not merely as mistaken, but as a fraud, an idiot, a hypocrite, or a traitor to some Left cause. Like members of hostile tribes doomed over centuries to share the same tiny valley, each side points to perfidies and massacres perpetrated by the other, the Twitter horde that harassed for weeks, the line taken out of context and publicly mocked. I’m not here to adjudicate those claims, to decide who started it or who is ultimately to blame. But at this point it is simply there, ubiquitous, on all sides of every MMT-related controversy.

Which does matter as you read this stuff. All persuasive writing is susceptible to motivated reasoning. But given the duration and the depth of resentments on both sides of MMT debates, I advise fresh readers to take the strength of writers’ assertions with boulders of salt. I urge seasoned readers to do their best to muster some openness and goodwill towards the side you think you disagree with. Often the disagreements are smaller than you think.

Love your enemy. Who is not your enemy, not remotely.

Update History:

  • 3-Mar-2019, 10:35 p.m. PDT: “would yield bring catastrophe, that wouldn’t shouldn’t count as a point…”; “groups among whom which this controversy is live rages“; “…infinite recursion, and in my experience they are take place in a thunderdrome…”; “MPC effects (“marginal propensity to consume”) effects are real”

MMT streetfighting

It’s nice to see that some of the traditions of the old economics blogosphere have carried into this ugly new world where everyone is a professional and markers of status and quality crowd out most vestiges of joy, and most useful conversation. In particular, it seems that every few years we still get a recrudescence of MMT wars — arguments over the shard of post-Keynesian heterodoxy that goes by the name “Modern Monetary Theory”. MMT has gained new prominence recently. They say AOC name-checked it! And that, of course, is the chattering-class equivalent of throwing a sheep into a piranha tank. Watch the waters roil! Care to take a dip? People who seem to really like me on Twitter keep trying to push me in. The water’s nice, they say. It’s getting hot out here.

For now, I’m just going to curate a list of some recent contributions to the scuffle. (I may add more.)

I hope I’ll offer a few small comments in later posts.

The opportunity cost of firm payouts

Perhaps the first useful lesson of economics is to think about costs in terms of opportunity. The cost of some action is the cost of the most valuable opportunity you have forgone by taking that action as opposed to some other. When you shell out $100 to buy some novels or porn or whatnot, the cost to you is not the loss of the piece of paper which no longer burdens your wallet. The cost is all the other stuff you might have purchased with that $100 that you’ve just blown on your Thomas Pynchon habit. If, by some mischance, there is a general inflation, so that both your income and most prices rise, but for some reason the price of Pynchon remains unchanged, even though it will cost the same $100, your next hit of literacy and pretension will feel much cheaper than the first, because you’ll forgo a lot less food and rent for the purchase.

A lot of left-ish proposals these days, including high marginal tax rates at high incomes and bans on share buybacks, are about increasing the cost to firms of making payouts to rich shareholders, thereby reducing the opportunity cost of other uses of the money. Some of these proposals I think are solid. Some I think half-baked. [1] But the basic logic behind the proposals is missed I think by a lot of smart commentators.

Firm managers and shareholders face choices about what to do with each $1 of revenue. Some choices are easy. The first zillion dollars go to cover liabilities they incur over the course of operations, paying suppliers, employees, rent or interest to capital providers. But then they face discretionary choices. Should they invest a dollar in expansion or new business lines? Should they increase the cushion in their payrolls above the absolute minimum their labor force might accept, paying an “efficiency wage” in the lingo for a happier, more devoted, potentially more productive workforce? Should they “pay” that dollar by not receiving it at all, by reducing prices, purchasing the goodwill of customers and potentially a bit of market share? Should that dollar be paid into some low-risk “cash equivalent”, to purchase extra insurance against hard times or just put off the decision? Or should they make payouts to shareholders, and let shareholders decide the best use of the dollar?

Under the model of capitalism that Milton Friedman famously championed and that became the “shareholder value” revolution, the presumption was that the best thing a firm can do is maximize shareholder financial welfare. Anything else, anything that might benefit employees, customers, or any other stakeholder was deemed an “agency cost”, an inefficiency. And you can make a strong theoretical case for this: If you believe that capital markets are high quality information systems that govern economic production, that shareholders allocate resources to their best possible uses to the benefit of society as a whole, then the ideal policy would be to return every dollar of unencumbered revenue to shareholders, and let shareholders choose to reinvest (or not) in potential uses at new or existing firms. That may be impractical, but what became the conventional standard was that managers should retain in the firm only what shareholders would have reinvested themselves, and disgorge the rest to find some more efficient use elsewhere.

However, if you do not believe that shareholder interests and the public’s interest in aggregate welfare are well aligned, this case breaks down. Then you might prefer firm managers to do things other than make the level of payouts that shareholders would prefer. You might prefer that they accede more easily to labor demands, or that they lower prices to customers, or that they invest more in speculative research and development, or that they delever their balance sheets and even build up cash cushions to reduce the probability of a disruptive insolvency with its attendant unemployment and the possibility the state will need to bail out pensions or depositors.

It is reported ad nauseam, when people point out that the US did very well under the high top marginal tax rates that prevailed from World War II through the 1980s, that those high rates were rarely paid. People bring this up as though it was some kind of policy failure. No, it was then and would be again quite the point of the policy. The purpose of very high tax rates at very high incomes is not to generate revenue. It is to make costly the practice of making payments to people who are already very rich relative to other things the payers could do with their money, and so reduce the opportunity cost of doing other things. If paying $1 to shareholders costs $1 of potential goodwill derived from better work conditions, maybe shareholders take the $1. If paying $1 (after tax) to shareholders costs $10 in worker goodwill, maybe shareholders let their lackeys indulge the help. Maybe not! Firms have all kinds of choices, and shareholders may try to have firms smuggle wealth to them through Luxembourg or ZCash or whatever. But that is costly too, and can be made very costly with determined policy and aggressive enforcement. All controls leak, but often they are effective anyway, because their purpose is not to keep anybody dry but to alter the relative costs of things.

Very high top tax rates are a means of encouraging “predistribution” rather than the tax part of tax-and-transfer redistribution. Their purpose, their very point, is to create those “agency costs” that economists from the 1970s until now have derided and demanded be ruthlessly excised from corporate practice. But every “agency cost” to shareholders is income to someone else, whether that takes the form of luxury offices and stupid jet travel for firm managers or better work conditions at higher pay for more employees. The ideologically tendentious presumption of the economics profession post-1970s has been that agency costs yield no real benefits, that they look much more like luxury offices for the C-suite than predictable schedules for service workers. But that was always just presumption, and historical experience does not support it. It is, I will admit, not a slam dunk case, it is only suggestive, that the ruthless efficiencies of contemporary labor markets and the shattering of union power happened just after we, in relative-to-prior-period terms, dramatically subsidized payouts to shareholders over other uses of funds. But it is suggestive. And it is plausible that “Treaties of Detroit” and Bell Labses, that corporate practices generally which favor workers, customers, and other stakeholders, are easier for companies to “afford” when shareholders have to give up less to purchase them. Which is precisely the effect, in the most basic economic terms, of taxing payouts to shareholders heavily. [2]

You can believe, if you like, that in fact the neoliberal case for shareholder primacy is correct, that shareholders allocate capital well on behalf of society as a whole and we should celebrate payouts as a way of directing resources to their best uses. That was once my view, and it is perfectly coherent, at least in theory, though I think experience has refuted it. You can argue, if you like, that firms would do worse things with the money than they do now, if they didn’t make payouts to shareholders. But it’s hard to believe, I think, that dramatically increasing the opportunity cost of payouts to shareholders will not result in some substantial reduction of payouts in favor of other uses of funds. Maybe it’s time to see (and also to shape, via other policy) what those uses might be.

[1] In particular, with respect to buybacks, if we are trying to discourage payouts, I’d want to include dividends in the plan. It might do a bit of good to discourage buybacks, but mostly payouts would just shift to dividends I think.

[2] Very high top tax rates are not precisely taxes on payouts, but the majority of shares are held, directly or indirectly, by very wealthy individuals, so from a corporate control perspective, the effect is much the same.

Update History:

  • 6-Feb-2019, 5:00 p.m. PDT: Fix bad footnote link that was ‘[*]’ but should have been ‘[2]’; “…capital markets are high quality information systems that govern economic production system, that…”; “Firms Firm managers and shareholders”

Continuous elections

Right now we are the in the midst of the midterms, the news cycle is flying at us like hypersonic shrapnel, and we are bleeding. On the one hand, one does not want to give in to false flag conspiracizing. On the other hand, many of us believe that the 2016 election was significantly affected by manufactured news cycles. The slope between implausible conspiracy (“pipe-bomber dude was planted years ago by the deep state!”) and plausible manipulation of the news cycle (the “caravan”) becomes slippery. It’s not surprising that we all end up in different places, depending on our priors. And this is “just” a midterm. After next Tuesday, the 2020 Presidential cycle begins in earnest.

It feels like election season never ends. But I want to submit that the problem is that it does end, with a very high-stakes election. The integrity of our elections has, thank goodness, become a subject of active public concern. The ways we draw district lines, the ways we form voting rolls, the susceptibility of our voting machines to malfunction or subversion, all demand scrutiny and reform. But there is another vulnerability, hiding in plain sight: the fact that our elections all take place basically on a single well-known day.[1] A short, sharp manipulation of the news cycle, if well-timed, can tilt electoral outcomes. Many people plausibly blame Hillary Clinton’s loss on a letter by James Comey released a week prior to the 2016 election. Perhaps that was not intentional manipulation, but similar events past or future might be.

It seems obvious to me that political actors of every party and creed do their best to exploit this open vulnerability in our electoral system, working to manufacture coverage or even newsworthy events likely to motivate their own electoral base in the immediate run-up to an election. To the degree electoral results turn on this contest, they seem likely to reflect the cleverness (or deviousness) of campaign operatives much more than any colorable expression of the “will of the people”. It’s hard to come up with a justification, even under very naturalistic theories, why this would be a desirable form of democratic deliberation.

Less apocalyptically, the quality of representation is undermined by a predictable election cycle. In the run-up to an election, often inaccessible public figures become suddenly more available and accessible. It is a commonplace that Senators’ willingness to take unpopular votes depends upon whether they are near the beginning or the end of their six-year terms. That might be intended in Constitutional theory, but in practice, in my view, unpopular votes are less likely to reflect dispassionate deliberation on behalf of the polity and more likely to entail privileging the interests of the elites that dominate either political party. Even in theory, however “insulated” we decide Senators should be from vicissitudes of the mob, this cyclicality in time of popular responsiveness seems undesirable. Ideally, our representative would not be “there for us” only during the short season when they are soliciting our votes. They would be there for us all the time.

For a variety of reasons, I think it a good idea that we introduce into our voting system a greater element of stochasticism, of structured, intentional randomness. This may be counterintuitive — sure, a manipulated news cycle may not express the will of the people, but how could a random number? The deep fact of randomness is that while an individual “draw” may be noise, random selection has characteristics that are well defined, widely understood, and intuitively accessible. When statisticians want to examine a population, they take a random sample and characterize that. With good randomness and a reasonably large sample size, it becomes extremely unlikely that the characteristics of the sample will fail to represent the broader population. This fact is already a part of our political process. Pollsters, who affect electoral possibilities as well as characterizing them, seek (very imperfectly) random samples of likely voters. We select juries largely by lottery, on the theory that this is a good way to get a representative sample of ones “peers”. There have been a variety of democratic experiments with sortition, simply choosing by lot, picking random names from the phone book. Perhaps overcynically, many of us might consider that an improvement over our present, professional political representation.

I do not favor sortition for the constitution of our legislatures. There is a lot to be said for choosing among representatives who express an interest in and commit to doing the work, and to some kind of voting process that ideally filters for quality. What I do favor is an idea called “lottery voting” or “random ballot“. I really encourage you to read the first link, a very readable academic note by Akhil Reed Amar which introduced the idea. You should also read this essay by David MacIver (ht Bill Mill). In a nutshell, everybody votes in the way they currently do for their preferred candidate. Then we throw the ballots in a big hat, and draw the winner like a bingo hall door prize.[2] You’d never want to use lottery voting to elect a President. Who knows who you might pick? It’d be totally random. But for a large legislature, lottery voting will predictably yield proportional representation along whatever axes or characteristics are salient to voters, not just formal political parties. Further, lottery voting is immune to gerrymandering, and every vote always has equal influence. (This is decidedly untrue of conventional “first-past-the-vote” voting, where the statistical effect of a vote — the difference in the probability of a candidate winning with and without an additional vote — depends very much on the closeness of the election.) There are lots of reasons to love lottery voting, including the conventional case for proportional representation, which I very desperately endorse. (See Matt Yglesias and Lee Drutman.) Not to let the best be the enemy of the good, I’d favor American experiments in more common forms of proportional representation (multimember districts, party lists), but lottery voting really is the gold standard. It is simple, effective, resistant to entrenchment of incumbents or capture by political parties. The US House of Representatives should be selected by lottery voting today. At the very least, we should start experimenting in some state houses.

One interesting characteristic of lottery voting is there is no need that elections be simultaneous, or even take place at known predictable times. Suppose we had an electoral system that looked like this: Every month, 5% of the voting roll is randomly selected to cast a ballot for a representative. There’s no big election day: Any time during their month selected voters can come in and cast their vote. After the balloting period has passed, one ballot is randomly selected, and then a virtual coin is flipped that comes up heads only one time in 24. If the coin comes up heads, the current representative is replaced with the randomly selected ballot. If not, that month’s ballots are thrown away, and the representative’s term continues. Under this system, on average, a representative’s terms would be 24 months, but there would never be a period when a representative is more or less near an election. Whatever persuasion incumbents (or their political parties or PACs or dirty tricksters) want to engage in to see to their reelection, they’d have to do basically all the time. Challengers also could arise at any time, but would want to make their case continually. That would become a very different enterprise than existing elections, which engender an avalanche of marketing in sprints. People who wish to become representatives would want to become prominent and popular within their communities, or become endorsed by popular civic organizations (including but not just political parties), in ways that are sustainable over time.[3] Is this a good idea? One might argue that it would just make elections more expensive to contest, and so increase the influence of money. But lottery voting by its nature is much less susceptible to vote buying. Your ads can win 60% of the vote and you still have a 40% chance of losing.

There are definitely trade-offs to this idea of continuous elections. I’m much less confident of it than I am of the virtue of lottery voting in general. But stochastic, continuous elections would remedy very real flaws in our electoral system: its nonrepresentativeness of our views over time, its provocative susceptibility to manipulation of our views over short periods of time. You might fear that, rather than eliminating the hypermanipulative, sometimes fictional news cycles that divide us during election season, continuous elections would incentivize partisan provocation all the time, which would be bad. But lottery voting by its nature reduces the incentive of political parties to polarize us. If the major political parties disgust us, under lottery voting one can choose some other party to vote for without throwing away ones vote. The strategy of demonizing “the” other party just doesn’t work in multiparty systems. No one has to vote for least-worst. As Matt Yglesias put it, “It would be better to have a country where everyone is voting for a party they are genuinely enthusiastic about, and then because no such party commands majority support, the leaders need to do some bargaining.”

Also, under lottery voting in any form, turn-taking is likely. Even a very popular representative might have to sit out a term, because of some random throw of the dice. In order to protect local interests, districts would want to sustain institutional knowledge and legislative effectiveness by keeping some professional staff permanently, rather than replacing all Congressional staff with copartisans each time a seat changes hands. Members of even a very dominant political group within a district would experience interregnums during which their interests would be entrusted to the hands of someone whose views might differ quite radically from their own. Even as proportional representation would liberate citizens to vote their very diverse genuine preferences, these institutional facts would encourage compromise and common ground. Certainty of power breeds the confidence to be cruel. Susceptibility to chance reminds us that, whatever our differences, we must all depend upon one another.

[1] Early and mail-in voting complicates this story a little bit, stretching the single voting day perhaps to a few weeks, more a short season than a day. But a short season is not so different than a day, and even in states where mail-in balloting is prominent, traditional election day ballots remain crucial to outcomes.

[2] In practice, we might not use a big hat. There are very robust, almost-impossible-to-corrupt ways of generating public random numbers, involving cryptographic commitments by multiple parties. As long as any of the parties is not corrupt, that is, as long as all the parties do not collude, we can generate a fair random number. We’d use that sort of procedure, and choose a ballot like a winning lottery ticket.

[3] You would want this to be an election among known candidates, not a procedure by which everyone nominates themselves or a friend as write-ins. To prevent that kind of thing, Amar suggests “It might…be necessary to put into the twirling basket only ballots cast for candidates receiving more than, say, one percent of the total vote.”

Update History:

  • 30-Oct-2018, 12:30 p.m. PDT: “under which why this would be a desirable form of democratic deliberation.”
  • 30-Oct-2018, 12:35 p.m. PDT: “…or become endorsed by popular civic organizations (including but not just political parties) within their communities…”
  • 30-Oct-2018, 3:55 p.m. PDT: “…rather than replacing all Congressional staff completely with copartisans…”; “draw the winner from it like a bingo hall door prize”; “The US House of Representative Representatives” remove scare-quotes from “note”


Matt Bruenig has published an excellent proposal that the United States charter a large sovereign (“social”) wealth fund and use its profits to fund a universal basic dividend. It has provoked a flurry of thoughtful responses, see Mike Konczal, Matt Yglesias, Peter Gowan, Owen Davis, Peter Barnes, and Kevin Drum. (Bruenig has published a response to Konczal. I’m adding links to further discussion in an update section below.)

I. Could a SWF fund a UBI?

As regular readers (of this irregular writer) know, I enthusiastically favor a UBI. A “universal basic dividend” is not quite the same thing. The idea in a nutshell is that the Federal government would charter an investment fund, of which each adult US citizen would be granted an share. The shares could not be sold, redeemed, or bequeathed, but they would pay a dividend from investment proceeds. The government might seed the fund by selling underutilized land or assets, or by a simple grant financed by the Treasury. Thereafter, new contributions would be made from a variety of dedicated tax streams and from the compounding of undistributed earnings. Initially the dividend would be quite small, but over time, it would grow.

Would it eventually become a “full” basic income, covering the $1K-ish per month UBI advocates often kick around? Maybe, but not for decades. Bruenig proposes paying out roughly 4% of fund value annually, assuming total returns would generally be higher than that. To generate a $12K per year UBI for US adults in 2018 dollars, the fund would need to grow to about $75T. (Inflation and population growth will increase that gross number, but they will also increase the scale of contributions, so I think that for an intuition that’s a good start.) I mistrust aggregate balance sheets — I think they are largely meaningless — and I especially mistrust the Fed’s Flow of Funds Table B.1. Derivation of US Net Worth, which I consider incoherent. Nevertheless, on the presumption that a canny astrologer is superior to no lodestar at all, we can take for scale the Fed’s B.1 estimate of US Net Wealth — $93T — and its (less incoherent) B.101 estimate of total household and nonprofit sector assets — $116T. (Household assets indirectly include business sector assets, since households own businesses.)

Basically, on these numbers, the fund would have to grow to hold something like 64% of all assets, or 80% of US “net worth”, to finance a “full” UBI at a 4% per annum payout rate. That sounds… drastic. But it should be taken as a flawed baseline to start thinking from, not as the final word on anything. In particular, the value of financial capital is largely institutionally determined. In a world where the state largely corners the market on it, do capital prices rise as private sector actors compete for the crumbs the solidarity funds leave behind? If so, the share of ownership required to fund a $12K UBI would fall, somewhat. But if, as in theory, financial asset production is price elastic, that same $75T could become a much smaller share of total assets (though not necessarily of net worth) as the financial sector produces new assets to satisfy demand without expanding valuations. Would public ownership via the investment funds cause businesses to behave in ways both less predatory and less profitable? Then the total market value of assets might deflate, leaving the share necessary to fund a UBI even larger. Alternatively, public ownership could cause firms to reign in exorbitant CEO salaries, payouts to well-connected professionals (lawyers, financiers, consultants, etc.), and shearings by insiders and activist investors, rendering them more profitable to long-term shareholders, and rendering firm shares more valuable. This would reduce the share of assets that would be required for a UBI-sized dividend. Note that it is entirely possible for the fund to grow larger than the total value of US assets — it can (and should) diversify into international assets as well, which should become more plausible over time as the United States’ share of global economic activity is likely to decline. However, if the program is successful in the US, it’s likely that “social welfare funds” will explode from their current Nordic ghetto and become widely adopted by wealthy countries. So, “in equilibrium”, we should expect most financial assets to be owned by these funds, if we mean for them to finance anything as ambitious as a UBI.

One important lesson of our little thought experiment is that a straight-up $1K/month UBI — the kind I am glad to propose and advocate, that would be financed conventionally via tax, debt, money, or cuts to other spending — would never be mostly a transfer from “capital” to “working people”. We live in a society with tremendous inequality in what gets scored as “labor income”, but what is really returns due to the scarcity of very particular institution-specific skill sets, or monetizations of social and political connections, or all kinds of other things many of us would code as rent-extraction. My first framing of UBI is as a “fixed/floating swap on highly variable income”, most of which we call wage income, not capital income. An income-tax financed UBI is a form of insurance in which people give up some of the upside on their potential earnings for a fixed income that can serve as a base. Ex ante it is insurance, ex post it becomes a redistribution over all income, not just from “capital”, which makes it much more plausible to finance. “Labor” (much too broadly defined) still constitutes the majority of total income. Financing something as big as a UBI only from the income we code as “capital” means taking most of that. Also, it’s worth noting that even if our SWF grew large enough to generate dividends at the scale we might desire for a UBI, a universal basic dividend would be less effective as insurance than a fixed, Treasury financed UBI, as dividend payments would be be “procyclical”, decreasing when the economy does poorly and recipients are most likely to experience shortfalls of other income. Bruenig’s proposal mitigates this somewhat by proposing the dividend rate be based on a 5-year average asset-base, rather than fluctuating with a single year’s performance.

There is no need to make a “full UBI” an arbitrary lodestone or hurdle for an SWF dividend. The Alaska Permanent Fund pays out roughly 10% of what I am calling a $12K/year “full” UBI, and it is an enormously successful program. A $100/month UBI might not sound like much to most of my readership, but it would completely end $2/day cash poverty in America, and would be a huge deal to those who need help most. A UBI means equal payments in dollar terms, but is highly progressive in terms of welfare as commonly modeled, as the poor get a much bigger benefit from a small income than the wealthy do. If we are collectively uncomfortable with the degree of public ownership implied by a $75T social wealth fund, we could rather quickly (in about a decade) ramp up a fund that would generate an Alaska-sized payout. Doing so would not foreclose the prospect of financing “the rest” of a UBI, or a job guarantee, or anything else via other tools. The only constraint would be “fiscal space”. But a strength of the social wealth fund structure, perhaps its main strength, is that it may create new political space for redistributive taxation.

II. On the political effects of a SWF+UBD

“Taxing the rich” polls well. But “sending your money to Washington” probably doesn’t. A clear advantage of a social wealth fund attached to a citizens’ dividend is that it makes a great destination for potentially popular redistributive taxation. It’s the usual bourgeois morality tale about saving — start with a little, keep contributing, watch it grow, enjoy pride of ownership — as a national project. Dedicating tax streams to the SWF neutralizes objections that “Washington politicians will just waste it”, assuming the fee ratio can be kept low. Initially the dividend will be small — for the first few years it should probably just be zero — but each citizen would have her notional net-asset-value that she can watch grow. (Bruenig proposes that there literally be an app for this.) We will all have cause to cheer a good year on the stock market.

Which brings us really to the bloody heart of the controversy that surrounds this proposal. Maybe it is true that a dividend-devoted SWF could render redistributive taxation more palatable, but mightn’t the same enthusiasm trick the working class into acquiescing to predatory corporate behavior in the name of increased profitability? This is Mike Konczal’s most serious objection. If we imagine an Alaska-scale SWF, you can argue that this proposal would be a terrible own-goal for those of us concerned with remedying social stratification. The rich are always trying to persuade the rest that what’s good for the stock market is what’s good for America, what’s good for us all. That’s mostly a lie. Decimating labor unions was good for stock markets, good for profitability, but bad for any hope of an equal society. Fracking every goop of hydrocarbons out from the Earth might lead to outsized S&P 500 performance for a few years, but would end up being a bad deal for most of us. Concentration and monopoly power are good for profitability, but are terrible for almost everyone in their roles as consumer and worker, and are destructive of economic dynamism and growth. If everyone suddenly sees themselves as a shareholder — while the true benefits of shareholding continue to go disproportionately to the affluent — then the plan just becomes a warmed-over version of George W. Bush’s “ownership society”.

Bruenig’s rejoinder — also serious — is that when “capital” becomes the broad public, it will recognize its own interest and cause firms to behave differently. An Alaska-sized fund, while it might only hold 6% or 7% of total US assets, would likely hold disproportionate positions in the larger, more liquid, firms that dominate the economy. “The public” would then be a 10% or 20% shareholder in blue-chip megafirms. And given the dispersion and passivity of shareholders in large public companies, a 10% to 20% interest can exercise considerable influence over the operation of the firm. So we have to consider a balance of two opposing effects: From the outside, the broad public might identify more with business interests, which at this scale would not meaningfully be its own, and so become less sympathetic to labor, environment, anti-trust, social-justice, and other forms of activism that might otherwise hold firms to account. But from the inside, the broad public would have more direct influence over corporate behavior. Which of these effects would dominate is, I think, anybody’s guess.

If the SWF grows towards full-UBI scale, it ceases to be meaningful to talk about an interest of “capital” distinct from the broad public, or at least distinct from the broad public as constituted by the management of the SWF, via legislative mandate. In theory, the conflict between capital and workers will have finally been resolved, as the workers and the capital owners will be the same people. But, in practice, whether big or small, how would the SWF vote its shares?

A lot of us, I’d venture to say most of us, are pretty cynical about the capacity of our “democratically elected government” to represent even a loose caricature of a general public interest. We presume our representatives and regulators are usually bought, or captured by lobbyists with gentle words that sound like sense but are really industry dollars. We presume they are seduced by revolving doors and the demands of a donor class. Do we really want these slimeballs managing — potentially mismanaging — our industries?

Bruenig, in his proposal, has one smart response to this:

It is fair to worry that the government might make bad shareholder votes from time to time, but not reasonable to think that very affluent people will on average make better shareholder votes than a democratically-elected government.

Put a little more cynically, the government might do a shitty job of representing a broad public interest, but current shareholders aren’t even trying, or pretending to try. They are voting outright the narrow interests of the those whose corruption we fear. Whatever echoes of a general interest find their way through all that corruption would represent a step up from the status quo of explicitly plutocratic corporate governance.

There’s another take on this that I think comes through in Kevin Drum’s cri de coeur. Instead of contrasting a (good) public interest against a (bad) plutocratic interest, one might instead worry over the distinction between (good) commercial interests and (bad) political interests. In one mythology of capitalism, one that I myself have held dear, the secret of our collective economic intelligence is that businesses are governed by commercial incentives and constraints and disciplined by the prospect of failure. Political bureaucracies, on the other hand, face incentives and constraints that are largely endogenous to how they happen to be constituted, from the demands of always somewhat ridiculous electoral contests to accidents of who happens to know whom and how favors are traded. The coupling between political choices and the quality of actual outcomes is squishier than a spent condom, and always refracted ex post through a capricious contest over who must be blamed. Ultimately, in this view, the behavior of such bureaucracies is mostly arbitrary with respect to the actual outcomes and interests to which they are putatively devoted, and can only really be understood in the context of parochial circumstances and interests within, and the outside forces that strive to shape those.

In this account, Bruenig’s story about democratic representation being at least a step up from outright plutocratic control makes a category error. “Democratic representation” wouldn’t be that at all. It would just inject into business management a kind of political id, tangling the resources of productive enterprise in politically faddish boondoggles or the corruption not of monied interests but backscratching self-important mandarins. In economist dork-speak, the trade-off between plutocratic and broader public interests might constitute a kind of Pareto frontier, and we might wish to shift to a place on that frontier that traded away plutocratic interest for more of the broad interest. But throwing political bureaucracies into the mix wouldn’t execute that trade. Instead it would drag us into the chill interior, where neither party’s interest is efficiently served and potential welfare is left to rot while the betentacled idiot blathers and drools.

I have some sympathy for this account, but I no longer consider it as disposative as I would once have. First, it is clear to me that very large firms bear a great deal of resemblance to the political bureaucracies that their captains so malign. Large firms, just like states, are run as bureaucracies, and the people within them are governed in a day-to-day way by the same sort of careerist and interpersonal arcana that drive public bureaucrats. Large firms very frequently do not face sharp and immediate commercial constraints. How many years before it succumbed to formal bankruptcy did General Motors truck on with negative book equity? And then, of course it was disciplined by the terrible indignity of a bail out. Obviously, large banks have been proven to face what economists euphemistically refer to as “soft budget constraints”. How much money does Google — excuse me, Alphabet — waste on the bizarre pet projects of its increasingly extraterrestrial founders? Where is that vicious market discipline? Of course, stock markets could turn on Google — excuse me, Alphabet — at any moment, and the firm’s managers (who do not actually face the bracing discipline of potential bankruptcy on any bureaucrat’s relevant timeframe) could suffer some embarrassment. This strikes me as analogous to the risk faced by politicians that some gaffe or issue upon which they are poorly positioned will subject them to the erratic ire of the media-activist blob and jeopardize their electoral prospects. The governance of large firms and states is more alike than different. In both cases, they effectively exercise power and achieve important goals not from some extraordinary capability of decision-making, but by virtue of extraordinary resources that render mistakes survivable and enable them to succeed despite the pathologies that come with management at scale.

If large firms are like states in their (non)quality of decision-making, they are also like states in another way. Their choices provoke consequences that seriously affect the welfare and interests of large groups of people — workers, customers, vendors, taxpayers, breathers. It may be tenable to claim that small firms are, to a first approximation, purely private affairs. But the choices of Facebook and Google, Exxon and Ford, can affect the welfare of far-flung and indirectly connected stakeholders more powerfully than most decisions of sovereign states. As a practical matter it may be difficult to arrange, but as a substantive matter, the cause of welfare demands representation by broader stakeholders in large firm governance for precisely the same reason it demands representation within states. Without such representation, important interests will be overlooked. In some imaginary world of myriad firms tightly constrained by competitive markets whose individual pursuit of profit would as if by an invisible hand find equilibrium at general welfare, this sort of representation would be unnecessary and superfluous. We do not live in that world.

Libertarians do object, but this logic is perfectly conventional in practice. Many kinds of firms face increasing regulatory scrutiny as they grow large. One might ask (as I think Mike Konczal implicitly does) why formal public representation should be necessary, since after all the state already has this means of exercising control — regulation — which requires no stock ownership or board members. In an idealized world, it would not be necessary. Regulatory powers leave the state with extraordinary ability to exercise control over firms.

But in reality, regulatory power is insufficient. If you are concerned about the informational problems associated with the state mucking around with commercial decision making, you should be even more concerned with regulatory control, as regulators make broad choices that affect whole industries under circumstances wholly divorced from context or specificity of circumstance that might in practice render those choices ineffective or counterproductive. Because of this lack of context, regulation should and generally does restrict itself to imposing guard rails or broad mandates. In practice — from the perspective of the broad public, not just whining firms — the exercise of regulatory authority is costly, and states are wise to use that authority warily. But that leaves a great deal of space where a public interest would like to assert itself, but for which regulation is too blunt an instrument.

Also, for all the imperfections of the US Congress, the regulatory state is much more plutocratic than the legislative state. Broad public interests are most likely to have a shot when an embarrassing public spotlight is thrown on legislators, when well-publicized votes are token by the most visible rule-making bodies of the land. Narrow interests capture the regulatory state because it is too vast and boring for the improvised supervisory capacity of diffuse interests to monitor or contest. Regulatory vigilance does not survive what Minsky called “periods of tranquility”. Concentrated interests are relentless, diffuse interests depend fatally upon the caprices of the news cycle. Captains of industry seem to hate regulation, because they are bound to hate whatever regulations find favor in the public’s eye. They are not so deregulatory in the shadows. Quite the contrary.

This is why we suddenly find ourselves talking about “codetermination“. Where regulation would impose course-grained constraints on actors that we hope will yield better overall outcomes, representation of new interests on corporate boards changes the nature of the actors themselves, in hopes that their interests will become more aligned with a broader group of stakeholders. Bruenig’s share-voting SWF would represent a slow transition to codetermination in another form. Worker democracy is imperfect, but looking to Scandinavian countries or Germany we may become persuaded that election of workers to corporate boards is valuable, even though worker interests might in theory have been asserted through labor regulation instead. The same might be true in America, not just for workers but for the broad public.

I find myself surprisingly comfortable with these ideas (once I would not have been), so long as they are restricted to larger firms. For smaller firms, there really is a “because freedom” objection. Large, public firms are run by officers appointed by a committee elected by a population. Changing the composition of that population alters the purposes to which the firm and its officers bend themselves, which were never rightly their own. It restricts no one’s freedom. The actions of closely-held firms might seem extensions of the will of a small number of people, and those people certainly might consider being forced to cede that perfect control an abridgment of their freedom. But claims to liberty can only be accommodated to the degree to which they don’t infringe upon the rights of others. The larger a firm becomes, the more market power it achieves (among consumers, vendors, or workers), the more its choices affect the welfare of others. Libertarians with their fables of procedural legitimacy hate to acknowledge this, but there is no bright line between what is voluntary and what is coercive, and all of us, as individuals or businesses have some capacity to coerce. In the name of liberty, we must overlook that when the scale of potential coercion is small relative to the actor’s liberty interest. But it is also in the name of liberty that we must not fail to note when the scale of an actor’s ability to coerce is large so that their actions implicate the liberty interests of many others. Those who value their own liberty above all else must tolerate modest scale and power. Those who wish to captain large and powerful firms must tolerate some abridgment of their liberty to do with those firms as they will. Whether in the public or the private sector, there are and should be trade-offs between power and freedom. Power demands constraint.

We began this section by pointing out how an SWF could create political space to enact more redistributive taxation. Let’s end by pointing out something a bit less obvious and a lot more powerful. A sovereign — er, social — wealth fund is a taxation machine. It is an automatic taxation monster. It takes the miracle of compound growth that capitalists are always on about and turns it into a miracle of compound taxation, effectively taxing wealthier cohorts (those who would otherwise own the SWF assets) an ever increasing share of income year after year without requiring any new legislation, and with minimal distortion of investment behavior.

To see how this works, let’s imagine that we want to simulate the flows of an SWF+UBD. We’ll imagine a very simple scenario. Let’s define a “notional” SWF. The SWF is going to be financed by a tax enacted just once, which will yield $1T in Year 0. The tax take will grow with nominal GDP, which we will model as growing at 5% annually. Beginning at the end of Year 1, the SWF will make payouts. For simplicity, we will base payouts and returns on the end-of-prior-year balance. That is, we are conservatively assuming that the taxes we collect within a year are unavailable until the year following. We will assume a constant rate of investment return of 8% per year. Echoing Bruenig’s proposal, we will have the SWF payout 4% of the prior year balance each year.

However, instead of actually forming the SWF, let’s say that the government were to decide that there’s no need to intervene in the miraculous private sector with actual state ownership, that the assets can remain, um, efficiently managed in private hands but the government will simply use the tax system to reproduce the flows an SWF would generate. As it would if it actually formed the SWF, in Year 0 it would enact a tax, which would raise $1T. At the end of Year 1, it would have raised an additional $1.05T from the same tax. The notional SWF would have enjoyed the same $1.05T a new contribution. However, the notional SWF, if it had actually been constituted, would have also earned $0.08T as investment returns. In order to simulate the SWF flows, the state would have had to adopt a new capital tax of $80B. In Year 2, we have the same effect again. The originally enacted tax now raises $1.1025T, and the new Year 1 tax brings in $84B (assuming that both grow in line with GDP), for a total intake of $1.1865T. However, investment returns on the prior year SWF balance of $2.09T would have yielded $167.2B, which when added to the same take of $1.1025T from the initial tax, yields an inflow of $1.2697T. So, to bring the total inflows in line with what an SWF would have done automatically, the government would have to impose a new tax of $83.2B.

And so on. Each year, to reproduce the same net flows from private capital holders as would “naturally” have occurred had there been a SWF, the state would have to enact a brand new tax, in addition to still collecting the taxes enacted in prior years. Under our assumptions, each year’s new tax is slightly smaller as a share of GDP than the prior year’s, but in reality, that would depend upon investment returns, gdp, and dividend payouts. Whenever investment returns net of dividend payouts exceed GDP growth, the effective new tax that would need to be imposed on capital holders becomes larger as a share of GDP than the prior year’s tax. (Here’s the little Mathematica simulation the numbers in this section are drawn from: [pdf][nb])

We can all, as Mike Konczal put it on Twitter, “spitball” about politics. But I think it fair to say that it would be difficult to sustain the political will to cumulatively impose new taxes on capital holders, every year, year after year after year over a period that might span decades. But the “gimmick” of actually using the proceeds from a single tax, enacted once and continued indefinitely, to purchase capital assets, generates the same effect as this compounding tax schedule in a way that seems natural and inevitable and legitimate under the norms of present-day capitalism. If we accept that other capital holders get to enjoy the miracle of compound returns, why shouldn’t a fund owned in equal shares by all citizens get to enjoy the same? Actually constituting a SWF delivers a regime of effective taxation that, I think it is fair to say, ordinary politics simply could not.

Further, the effective taxes embedded in an actually constituted SWF are efficient, in the usual economic sense of not distorting anyone’s behavior. If we actually tried to impose new capital taxes every year to simulate the inflows of a SWF, capital holders would be scrambling to find ways of squirreling away funds that evade the ever increasing taxation. With an actual SWF, only the initially enacted taxes that finance annual contributions are potentially distortionary. The investment decisions that would be distorted by the annual additional taxes are made directly by the SWF, which does not face any tax. The reduction of potential distortion achieved by actually constituting an SWF is considerable, as the cumulative magnitude of these additional taxes eventually overtake the annual contributions tax (after about 15 years under our assumptions) and continues to grow indefinitely. (While the fund does not face tax distortions, it invests as an agent of its citizen shareholders, so we do have to worry about managing agency costs. But that is a problem for most private investment as well.)

III. On the macroeconomic implications of a SWF+UBD

In Part I of this catastrophe, I considered whether a SWF-financed universal basic dividend could finance a UBI. Implicit in that discussion was that having a SWF accumulate 64% of the nation’s assets would be a heavy lift — “drastic”, I called it. But we’ve failed to really consider Bruenig’s proposal until we acknowledge that, for his purposes, this kind of scale would be a virtue, not a problem. Bruenig is, as we all should be, concerned about the incredible inequality of wealth in the contemporary United States (and, indeed, in most countries, including the Nordics which are much more wealth-unequal than they are income-unequal). Bruenig’s reasoning is pretty straightforward — if the SWF comes to hold all the wealth, and if every citizen has an equal share of the SWF, then wealth inequality is pretty much over. Of course he does not claim that the SWF would displace all private ownership of everything. But, as a matter of arithmetic, the greater the fraction of total wealth that is held by the SWF, the less inequality there will be for any given distribution of the remaining wealth.

As we indicated previously, however, there is no reason to think that the value of total assets would be invariant to the existence of a giant sovereign wealth fund. “Value” is remarkably protean. It is not some stable stand-in for anything we might understand as real wealth. So-called crypto assets have a market value of $195B as I write, yet a lot of economists would argue that their real economic value is decidedly negative, since they stand in for no obvious real economic resource and cause the waste of tremendous electricity. (FD: I work in crypto and don’t think this.) Crypto is not unique in having no fixed measure for its price. As Steve Roth has shown, valuation increases that can’t be mapped onto any conventional accounting of real resources dominate other forms of ex nihilo financial asset creation (like new government paper or bank lending) and account for between 15% and 25% of comprehensive income year after year.

Ceteris paribus, as the economists like to say, if a public investment fund came into asset markets with new money, much of that purchasing power would go towards bidding up the price of productive real assets rather than to efficiently capturing them in the name of equal citizens. That’s a problem for Bruenig’s story in two ways: First, the more “richly” assets are purchased, the less likely they are to be retain their value and perform well going forward, impairing future dividends. Secondly, if the new purchases are matched by asset appreciation, they will be less efficient at taking a share of national wealth and so reducing wealth inequality. Suppose total assets are worth $100 today, and the SWF comes in with $20 hoping to buy a 20% share. If those purchases drive the total value up to $200, however, the SWF obtains only a 10% share of (ex-SWF) national assets. The work of reducing wealth inequality has been significantly thwarted.

The lesson from this thought experiment is simple, and one Bruenig is likely to find congenial enough. To the maximum degree possible, purchases by the SWF should be matched by policies that diminish other flows into capital. To put that more straightforwardly, the SWF should be financed via taxes on flows that, if not taxed, would have been devoted to the purchase of financial or capital assets. This has a triple benefit: assets are acquired, the prices at which they are acquired is advantageous and likely to yield attractive returns, and wealth-inequality-generating purchases by private parties are displaced. Bruenig proposes a variety of revenue sources for a SWF, and many of them are rather ostentatiously levies on “capital” in a political sense, taxing activities of the financial sector like trading, M&A, and funds management. Maybe that’s a good idea. There are arguments for things like a “Tobin Tax” quite apart from the revenue it might raise. However, economically speaking, there is no need to restrict oneself to this kind of “look ma, it’s capital!” finance. Nearly all of very high incomes goes into purchasing financial assets and capital goods rather than financing consumption. Straight-up progressive income taxation — say a new high-income tax bracket or a surcharge on incomes above $1M — would be a fine source of revenue for a SWF. As we saw in Part I, distinctions between income derived from “capital” and “labor” are increasingly arbitrary, and restricting revenue sources to things clearly labeled “capital” is limiting from the start and will provoke entrepreneurial relabelings, like the “carried interest” loophole that asset managers famously use to get their income relabeled as tax-advantaged long-term capital gains.

However, some of the sources of finance that Bruenig proposes, such as using government debt or monetary seignorage to buy assets, might be counterproductive to the goal of reducing wealth inequality. These would constitute new rather than displaced money vying for financial assets, which would almost certainly bid up prices of existing assets or provoke the issuance of new assets. Particularly if existing asset prices are bid up, it’s not obvious that this wouldn’t exacerbate rather than reduce wealth inequality, given the extreme concentration of asset ownership and how SWF purchases might reshape the distribution of ownership. Trying to time asset purchases countercyclically might seem to mitigate this concern, but even there SWF purchases would be helping sustain wealth inequality that market movements themselves might otherwise undo. At any time in the cycle, purchases financed by taxes on funds that would otherwise go into assets would yield better pricing for the fund than money or debt finance.

Beyond reducing wealth inequality, how else would private-capital-displacing social wealth funds affect the economy? There are a lot of big questions here. After all, capital is more than moneybags to its owners. It is also the seed-corn for new economic activity. Historically we’ve relied on a mix of grass-roots bootstrapped risk-pooling, bank finance, and wealthy private capitalists to finance new businesses. This proposal would, by design, make the wealthy private investors ever scarcer. Bank finance, in the United States at least, has been eviscerated as a source of capital for entrepreneurial ventures whose assets do not serve readily as loan collateral. A combination of industry consolidation and regulatory constraint has rendered “soft-information”, “relationship” lending increasingly risky to, and rare among, bank decision-makers. Ideally banks are cooperative enterprises through which communities undertake the risks of their own development, but American banking institutions are simply no longer suited to that model. If we undertook to replace private capital with public wealth funds, the question of entrepreneurial finance is one we would have to design new institutions (or remedy old ones) to address. But we need to do that anyway: The existing system, under which capital allocation decisions are made disproportionately by a smallish number of segregated, socially homogeneous rich people is bad, both ethically and economically. Get on the right TED stage and billions will flow to your fashionable tech venture. But who will finance some business in Peoria that could absolutely be profitable in that very local context, but that would not much make sense to the globetrotters at Aspen Ideas? One answer is that the proceeds of a universal dividend, once expropriated from the faddish elite and spread widely among the public, might find its way to “crowdfund” local business everywhere. But we still have very few institutions that seem able to facilitate this sort of development. (This is one of the reasons why I work in crypto these days.) In my view, grassroots small-business finance is already an urgent problem. It would become more urgent if we eliminated the quixotic plutocrats to which entrepreneurs currently appeal, but replaced them with a bureaucracy of index fund managers. “Social wealth funds” should concern themselves from the start with questions of capital development, not view their mission as mere allocation among a menu of pre-existing public assets.


Constituting a SWF, like organizing a job guarantee, is one of those ideas that could be wonderful or terrible depending on the implementation. It is easy to imagine the management of such a fund becoming captured by the financial industry. I am sure that clever financiers could devise compelling arrangements and accounting standards under which the formal fee ratio paid by the SWF would be lower than a Vanguard index fund while the public’s returns are quietly bled away by predatory intermediaries. Bruenig’s “American Solidarity Fund” could become a cesspit of corruption. To prevent that, it would have to be managed in an exceedingly transparent way, and should probably be organized with a great deal of internal competition. Balancing the vigorous policing of corruption against the need to accept growth-promoting risk — which means tolerating failures that ex post one might argue were ill-conceived and perhaps corrupt choices to begin with — strikes me as challenging. (Remember Solyndra?)

Further, as Mike Konczal emphasizes, a SWF is a long-term bet for a country that has acute short-term problems. If constituting a SWF were to occlude priorities like Medicare For All or ensuring full employment (via a job guarantee or other mechanisms), that would be bad and probably not worth the trade.

But there is no reason to think that it must displace other priorities. It is likely to create new space for redistributive taxation rather than vying for a fixed-size pie. In principle, a SWF+UBD has some extraordinarily desirable qualities. It turns the very mechanism by which capitalist dynamics concentrate wealth into a few hands into a means of disbursing wealth widely. It begins small and grows over time, which gives the citizenry and political system time to develop the institutions necessary to manage it (and leaves it disciplined, in its early years, by the risk that a hostile administration will liquidate it). It does not require wholesale reorganization of the everyday workings or ideological underpinnings of present society. Small-scale free enterprise and the contest for greater affluence remain intact, but the range of outcomes becomes compressed. There can be fewer billionaires if there are not so many billions of private wealth in private hands; there can be fewer desperately poor if we all derive some income from the collective trust fund. I think that this sort of compression, but not elimination, of variation in economic outcomes is desirable. It maintains incentives to produce, as economists conventionally understand them, while not allowing those incentives to become so extreme, so desperate, that they become incentives to cheat, to steal, to prey on one another.

Plus, as Matt Bruenig is at pains to point out again and again and again, social wealth funds are not some untried thing. They have worked pretty well for Norway and Alaska. Although you might object these are special cases because of oil revenues, the inequality-reducing capital accumulation machinery of SWFs will function regardless of source of funds. Overall I think this is an idea worth supporting.

Update: Here are two critiques of Bruenig’s proposal from a socialist perspective: “‘One Weird Trick’ to Building Socialism” by Frank Little and “A Quick and Easy Way to Forget about Socialism. Thanks to @BlueIvyRedWorld on Twitter for pointers to both. The question of whether SWFs would increase citizen support for or dependence upon exploitation of foreigners and noncitizen immigrants strikes me as especially worth considering. The second piece references an older piece by Doug Henwood, “Pension fund socialism: the illusion that just won’t die”, also worth reading.

Update History:

  • 12-Sep-2018, 1:10 p.m. PDT: Drop unclosed scare quote on “public ownership”; “…if our SWF grew large enough to generate dividends at the scale we might desire…”; “…would not meaningfully be its own, and so become less sympathetic…”; “If the SWF grows towards full-UBI-scale full-UBI scale, it…”; “…the government might well do a shitty job of representing…”; “…ridiculous electoral contests to the accidents of who happens…”; “…can affect the welfare of far-flung and indirectly connected stakeholders…”; add closing semicolon to “&mdash” wannabe entity; “Large, public firms are run by a officers”; “Those who value their own liberty above…”; “…could create political space to enact more distributive redistributive taxation.”; “As it would have if it actually formed the SWF…”; “would ‘naturally’ have occurred had there been an a SWF”; “…concerned about the incredible inequality of wealth of in the contemporary United States (and, indeed, of in most countries…”; “…they will be less efficient purchases are at taking a share…”; “…lending increasingly risky to, and rare among, bank decision-makers.”; “Constituting an a SWF, like…”; “Balancing the task of vigorously vigorous policing of corruption against”; “I think that this sort of compression, but not elimination of variation in economic outcomes…”; “pretty well for the Norway and Alaska, and although. Although you”; “…special cases because of oil revenues, their the inequality-reducing capital accumulation machinery works of SWFs will function regardless…”
  • 13-Sep-2018, 11:50 p.m. PDT: Added bold update with some critical pieces suggested by @BlueIvyRedWorld (Thanks!), and a pointer to the update section from the introductory paragraph.