Republican primaries

Friend-of-the-blog David Shor gets into trouble for two distinct reasons. One is “popularism”, which provokes arguments about how poll-driven and message-disciplined Democratic electoral politics ought to be. The other is simply prediction. Shor is a Cassandra. Here’s Ezra Klein characterizing his views:

Democrats are sleepwalking into catastrophe. Since 2019, [Shor has] been building something he calls “the power simulator.” It’s a model that predicts every House and Senate and presidential race between now and 2032 to try to map out the likeliest future for American politics. He’s been obsessively running and refining these simulations over the past two years. And they keep telling him the same thing.

We’re screwed in the Senate, he said. Only he didn’t say “screwed.”

In 2022, if Senate Democrats buck history and beat Republicans by four percentage points in the midterms, which would be a startling performance, they have about a 50-50 chance of holding the majority. If they win only 51 percent of the vote, they’ll likely lose a seat — and the Senate.

But it’s 2024 when Shor’s projected Senate Götterdämmerung really strikes. To see how bad the map is for Democrats, think back to 2018, when anti-Trump fury drove record turnout and handed the House gavel back to Nancy Pelosi. Senate Democrats saw the same huge surge of voters. Nationally, they won about 18 million more votes than Senate Republicans — and they still lost two seats. If 2024 is simply a normal year, in which Democrats win 51 percent of the two-party vote, Shor’s model projects a seven-seat loss, compared with where they are now.

Sit with that. Senate Democrats could win 51 percent of the two-party vote in the next two elections and end up with only 43 seats in the Senate.

I’m not a fan of “popularism”. I agree with Shor’s view that Democratic Party activists, particularly on social issues, constitute a weird, vanguardist community that often fails by placing its own concerns and unpopular remedies before serving the actual preferences of the demos. But public opinion polling is a bad tool, both because it measures whatever it purports to measure poorly, and because serving the demos requires a richer understanding of the public’s predicament than answers tossed off in response to decontextualized multiple choice questions. I think in practice polling is as likely to mislead as to help. Our political parties require sociological change. They cannot remain platoons of ideologues supported by plutocratic philanthropy, joined at the hip to canny lobbyists and dealmakers, and serve the public well. There is no technocratic quick fix to that. The parties have to change. Democrats are no worse than Republicans in this regard, but that won’t save them.

Though I often take issue with Shor’s prescriptions, there is no one in US politics I trust more on description. If David Shor thinks Democrats are “screwed… [o]nly he didn’t say screwed” in the Senate, I believe him. And I’m not alone. It’s pretty much a commonplace, when I talk to people involved in Democratic politics, that from 2023 on, for the forseeable future, Democrats will have little means of exercising political power at the national level. Of course Democrats should be careful not to let that be a self-fulfilling prophecy. Human affairs are unpredictable and pessimism can be hubris as much as optimism. But the possibility that the United States will be governed by Republicans or else entirely gridlocked for the next decade seems like one we should be thinking about and taking seriously.

Apocalypticism doesn’t constitute taking it seriously. A loud, small group of politically active Democrats may think that Trump is basically Hitler and the contemporary Republican Party is basically Trump, ergo Republican political power is the holocaust, what’s the point talking about rearranging deck chairs in a gas chamber? But if we are trying to describe the actual world, holocaust is a tail risk, not the modal scenario. Under Republican control as much as Democratic, the range of possible outcomes, for the polity we share and for the world in which it is embedded, is large. A politicosocial formation that prides itself on being adult, mature, serious, and devoted to reason owes the world more care than “après nous le déluge”. It may or may not be true that government at the Federal level will be dominated by the Republican Party for the foreseeable future. We oughtn’t concede that, but can we plan for the contingency? If it happens, what would make the world a better place?

The Republican Party, like the Democratic Party, is a big tent, an awkward coalition. Not everyone is Marjorie Taylor Greene. Mitt Romney is a fucking plutocrat, but he also proposed a better child allowance than any Democrat did. The fortunes of MSNBC and Fox News may depend upon salacious culture wars, but the actual welfare of most human beings depends much more on the material choices our government will make. Eclipsed by all the circus there is a great deal of heterogeneity within both coalitions on those questions.

I don’t have the answer, but a clear point of leverage in our system is the primary process. There should be no jurisdiction in the country where there is not a basically decent person with good views on material questions on the Republican primary ballot. To be credible at all, to not be a “RINO”, that person will be disagreeable on a variety of issues. In most jurisdictions they will be some shade of pro-life. They will be LGBT quietist at best, advocates of “content of their character” race-blindness at best. But a person can be unusually supportive of labor without being a RINO. They can be a devoted antimonopolist without being a RINO. They can take climate change seriously. They can, like Romney, agree that families require and deserve material support, since every child is and ought to be a mouth without a job.

We make idiots of ourselves if the finest distinction we can draw is between Democrat and Republican. If Shor’s analysis is right, we’ll need a lot of the better Republicans. We should be thinking about how to encourage them to join primary contests, and how to help them win.

Then, if you are a vote-blue-no-matter-who Democrat in a red or purple jurisdiction, you should register as a Republican so you can support the better candidate in the primary. Democrats will produce a candidate. (Please, Democrats. Produce a candidate.) There will be some-who-blue you’ll still vote for in the general. Regardless of what party ID you’ve registered under, you can enthusiastically support the better candidate. Ticket splitting and cross-party voting are glorious traditions in American politics that are worth reviving.

But if you are a person of conscience, and if it is in fact probable that the US will be structurally tilted towards Republican rule for the foreseeable future, you are not proving your virtue by absenting yourself from the forums that will shape what Republican rule actually means. 2025 will come, not the apocalypse. A world not in fact ended will require strategic, constructive engagement. If we are serious and not merely partisan, we should be building effective ways to provide it under plausible foreseeable futures.

A loan is income plus basis

This week the Biden Administration briefly considered a “billionaire’s tax” on unrealized capital gains of the very wealthy. Something like this is clearly necessary. The very wealthy are the people it is crucial to tax, because one of the most important (badly lapsed) functions of taxation is to compress the wealth and income distribution. Civilized society does not survive outrageous dispersion of outcomes. But for now, the very wealthy are effectively immune to income taxation, because they can simply borrow against appreciating assets rather than sell them and realize what the tax code recognizes as income. Eventually loans must be repaid, and so some assets sold, but “step-up basis” means taxes deferred this way ’til death are never paid upon wealth that accumulates behind the veil of an asset.

Taxing unrealized gains is the most straightforward solution. Jesse Eisinger argues we shouldn’t consider it that unwieldy. But… it’s kind of unwieldy, and kind of ugly. In order to tax unrealized gains, we need to be able to quantify them. When zillionaires hold their wealth as publicly traded common stock, we can just mark it to market. But if we were to impose an unrealized gains tax, the rich would likely flee from price-transparent shares to more bespoke, less liquid assets. Who can know how much their value has appreciated? Taxing unrealized gains sets up an endless war over valuations between the wealthiest people in the world and the tax authority, exactly the kind of struggle tax authorities have historically surrendered.

Rather than an unrealized valuation tax, I’ve long been partial to the idea of treating use as collateral as a realization event. When Mr. Burns takes a loan, pledging assets marked in the contract at a value of 1.56 zillion dollars, tax the appreciation inherent in that 1.56-zillion-dollar valuation as income, and then set the cost basis of those assets to 1.56 zillion (so that if Burns does sell the assets some time in the future, he is not taxed twice on the same appreciation). I thought this was a novel idea, but the infinitely knowledgeable Carlos Mucha disabused me of that. We’ve been doing it in some contexts since the 1970s.

Still, there’d be a lot of wiggle room by which zillionaires could squirm free. Lenders might compete to offer low collateral marks. More straightforwardly, since zillionaires’ personal spending, however extravagant, cumulates only to a fraction of their overall wealth, they are creditworthy. They can simply ask their bankers for unsecured loans. No use of assets as collateral, no realization, no tax.

So here’s a simpler, more bulletproof idea. When a wealthy person takes a loan, they are electing that means of generating cashflow against the alternative of selling some assets and paying the capital gains tax. Let’s make those two ways to generate cashflow equivalent for tax purposes. How would we do that? Well, we’d tax loan proceeds as income, and increase the cost basis on the borrower’s asset portfolio by the amount of a loan.

Let’s try a concrete example. Mr. Burns owns shares of ZeroCarbon, Inc. worth 10 zillion dollars. He needs one zillion dollars to deck out his dungeon. Suppose he sells 12.5% of his holdings in ZCI. (He acquired the shares years ago, for basically nothing, when he founded the firm.) He realizes 1.25 zillion from the sale, but pays Uncle Sam 20%, or 0.25 zill, raising the cool $1Z. If, some time later, he decides to sell the rest, he’d realize $8.75Z more in gains, but pay $1.75Z in taxes, netting $7Z more, or a total of $8Z, as the tax man takes 20%.

Now suppose he borrows. Under our proposal, he pays 20% on the loan proceeds, so he has to borrow the same $1.25Z and pay the same $0.25Z if he want $1Z in cash flow. But we add $1.25Z to the cost basis of his remaining portfolio. If, after a while, he decides to sell out and retire to Cuba, he sells all $10Z worth, pays back the loan of $1.25Z, but only pays tax on ($10Z – $1.25Z =) $8.75Z, leaving a tax bill of $1.75Z. Whether he borrows or sells, he pays the same $0.25Z on the initial cash flow generation, and $1.75Z on the eventual liquidation. Borrowing is, for tax purposes, the same as selling (although Mr. Burns’ forward-looking risk and income are affected by the choice). [*]

In practice, we don’t have to worry about what portfolio assets we add basis to. Any personal loan would be taxed as income, but the borrower would be granted a tax asset that could be deducted from the proceeds of any future capital gain. These kinds of assets exist already. For example, if you take an overall loss on your investments in a year, you acquire a “carryforward”, a right to deduct the amount of that loss from the gains in future years. A loan would simply be treated as an event that generates both income and generic capital-gains basis.

This would close the billionaire’s loophole. But what would it do to regular people? When Marge takes a mortgage to buy a home, should she have to inflate the value of the loan to cover an income tax hit, and console herself with an offset against future capital gains that she doesn’t anticipate realizing any time soon? No, probably not. But that is easy to fix. Up to a lifetime limit of $X, a household should be able to elect the current status quo — borrowings go untaxed, but no tax asset is issued. Beyond $X of borrowing, the new tax accounting would become mandatory.

How big would $X have to be to hold normal people harmless under this new scheme? Not so high. Add the price of a middle-aged (not “starter”) home and a bunch of college debt. We’ll presume transactional credit card debt (ie paid off quickly and without interest) is excluded, and assume like $100K of revolving hell. For most of the country, that takes you to maybe $600K. (Note that you don’t need to worry about moves and new mortgages, because the homeowner can plough the proceeds from her last home into the new home to avoid unnecessary borrowing.) If, my dear unrepresentative reader, you think of people who go to expensive schools and get graduate degrees and become homeowners in high-priced metros, then we add those items up and we get to maybe $1.5M. So we could make the lifetime limit of untaxed borrowings like $2M, and 99% of not-super-rich people would lose nothing from this change. (We’d have to decide how much to raise the threshold over time to accommodate inflation, or resist raising it to help counter leveraged tuition and home-price appreciation.) For some people of ordinary means, this change would be a tax cut, because we would gain an option to be taxed at low rates on borrowed cash in low-income years, but deduct from future capital gains in high income years.

But for the super rich? They’d now be taxed on what we think of as income, on the money they take from the empires they build in order to spend and live. A $2M exemption would be a rounding error to them.

This proposal wouldn’t raise as much as taxing unrealized gains, if we imagine unrealized gains can be effectively taxed. Zillionaires typically borrow to spend far less than their assets appreciate. As long as step-up basis remains in place, the difference between what tycoons borrow over their lifetimes and the value of their assets at death would remain untaxed. However, at least the funds they take for personal use would be taxed in a clean, hard-to-contest way. And we can counter step-up basis a bit by insisting that as long as basis steps up with death, tax assets accrued from loans must disappear with it. A better tax regime would keep basis at actual cost through death and let tax assets pass to heirs. But if we are fudging in favor of rich families with the step up, there’s no reason why they should also be able to add past tax payments to that fictional appreciated basis. Whinings about families having to sell the farm to cover the tax bill would not apply. The taxes would already have been paid. Tax assets would simply disappear, nothing would have to be liquidiated to raise new cash.

Treat loans as income plus future basis. It’s a simple, clean way of taxing people who currently live extraordinarily well and contribute effectively nothing for it. I think it’s worth considering.


[*] I’m presuming loan proceeds are taxed at the same rate as capital gains income for this exercise. They could also be taxed as not-tax-advantaged ordinary income, in which case the effect of the change would be to encourage outright sales rather than leveling the playing field between selling and borrowing against appreciated assets.

Blame Hollywood

People blame Hollywoood for “coarsening the culture”, for drugs and violence, for normalizing sexual deviance, for terrible intellectual property law, for liberal or even socialist politics. But, as a general rule, the most powerful social effects of a thing often derive from what does not trigger our ideological allergies, from what slips through without irritation or objection. I think we’ve been harmed by a cliché we barely perceive, that we dismiss as banal if we notice it at all.

Hollywood’s theory of conflict is a heroic tale, good versus evil. But more than that is smuggled into the formula. The heroism takes the form of good guys crushing bad guys. Once the evildoers are killed, imprisoned, or otherwise neutralized, normalcy is restored, and that is the happy ending. Good follows from the elimination of evil, naturally, inevitably. Like a splinter, the bad need only be removed and the body will heal to a preordained shape whose correctness we can take for granted. Destruction is grit and heroism. Construction takes care of itself.

With its infamous “Mission Accomplished” in 2003, the Bush Administration was transparently reaching for this trope. The bad guys were crushed, so the credits could roll. The happy ending was upon us. Events, and then the Administration’s political opponents, quickly made a mockery of that presumption, but not of the cartoonish narrative framework, to which all factions in American politics are slavishly devoted. The problem was the bad guys had not, after all been crushed. They came back, and back again, like a Fast and Furious franchise. What remained, always, was to “complete the job” of defeating evildoers, despite how ridiculous that seems when you put it into words this way.

It’d be great if the Hollywood formula was just a technique by which cynical consultants manipulate plebes for approval and votes, with no one serious actually believing it. But this is Kool-Aid we have all drunk, a formula American politicians plainly believe, or at least govern as if they believe even when the plebes aren’t looking. The American public didn’t demand “debaathifation” in Iraq. Americans, after all, pride ourselves in frequent bathing, in stark opposition to places so perfidious no fries shall be named for them. No public groundswell compelled the Bush administration to expel the entire civil service of the newly conquered country from public life and condemn their ethnic group to marginal status. But debaathification was necessary, as a matter of “moral clarity”. Debaathification rhymed with denazification, and we had all grown up on Raiders of the Lost Ark and those newsreel-style World War II movies. The Baath were evil. They had to be purged, not included, not appeased, in the new Iraq. So we enjoyed sequel after sequel, ISIS for example, starring disaffected Iraqi sunnis. Justly excluded from political life, their careers destroyed, their interests dismissed in the new dispensation, they did not, as they ought to have, hide in squalor and devote themselves to mortifications. Instead they fought from without. Who could possibly have forseen it?

In Afghanistan, apparently, the Taliban early on sought a negotiated peace with the government we installed, requesting amnesty for prior leaders and participation in the new government. But the Taliban were terrorists, and we don’t negotiate with terrorists. Our Afghan partners sagely agreed to the peace, but Donald Rumsfeld — who, we must concede, was no stranger to John Wayne films — forced them to walk it back. The Taliban and their supporters were exiled from participation in government, chased by an army of nineteen-year-olds on a desperate mission to crush the terrorists, at risk of being SWAT-ed anytime by cynical local rivals who figured out that ours were arms they could direct. Eventually they regrouped and today they have turned our narrative framework right back on us.

In real life, bad guys don’t get crushed and disappear. After the “Mission Accomplished” banner is stowed in some dusty closet, all (nearly all) of the complicated humans, not good, not evil, will still be around, and they’ve all got to figure out some satisfactory manner by which to coexist peacefully. Or else they will not coexist peacefully.

It is worth contrasting Iraq and Afghanistan with the experience of Ireland. Sinn Féin, you may recall, was “the political wing of the IRA”, a terrorist organization. But an influential diaspora in the United States didn’t see it that way, and pointed out there was terror on the other side too. In American consciousness, providentially, it was not so clear who the good guys were and who should not be negotiated with but needed to be crushed. So, unusually, we refrained from fucking things up, and even helped encourage the parties negotiate a political settlement in which all sides, even the ones associated with terrorism (as I said, all sides) would be represented and included. When, unusually, we are unable to impose our Hollywood formula narrative on events, we do, occasionally, refrain from actively ruining things. We might even manage to play a modest constructive role.

Our Hollywood imaginations are not restricted to foreign affairs. The formula we applied so successfully in Iraq and Afghanistan we are working hard to apply at home. Both of the two political communities into which our electoral system divides us find it convenient to label the other as “fascists”, “authoritarians”. More in sorrow than in anger, perhaps, our side, the ones who are still sane, who carry the torch for our way of life, our values, Our Democracy, can no longer afford to appease these extremists. They must be extirpated, crushed, discredited. The Earth must be salted beneath their corpses.

Do we all see how dumb this is? We, the good guys (whichever flavor of good guy you belong to), believe in life, liberty, and the pusuit of happiness. They, those other people, are putting all of that at risk. So we will what? Kill, subjugate, imprison, “reeducate”, nearly half the country? Merely disenfranchise them and use a militarized state to crush the politics by other means governance without consent is sure to engender? Our Hollywood intuitions are pathetically stupid. The aftermath of victory is not a happy ending. It is hell on earth.

So stop rewarding at the box office of media grift and political contribution all these brave truth tellers who will fight against this latest outrage, who will not betray you, who will not yield. Of course, it’s no good either rewarding at the box office the “centrist” insiders and establishment smarter-than-thous who will always betray you, who have for decades and demand normfully you be mature enough to allow it to continue. Whether it’s #Resistance versus MAGA, or PMC elites vs outsiders, this framework of Defeating The Bad Guys is a mirage. Our intuitions are drawn nowhere but there, it is the only way our atrophied minds now understand our human affairs. Blame Hollywood.

The art of living well is modus vivendi. It is a practice of continual negotiation, stitching, construction. There is progress, but there is never final victory, no happy endings. You support your values not primarily by working political institutions to ensure your side wins, but by expanding communities that celebrate metavalues like pluralism and tolerance and integration, under which we all keep the blessing of one another’s company without surrendering our differences, however profound.

So many of us focus on political tactics — data-soaked electoralism, wonk insider activism, take-to-the-streets militancy — that can stand in tension with the work of expanding our political community. That doesn’t mean those tactics are bad or unimportant. The consequences of this moment’s legislative and electoral outcomes can be serious, and every decision is necessarily a battlefield. But over the long term, the shape of the social terrain will determine whether civilized outcomes are even possible. Tactical opportunities should be devoted to creating material and institutional conditions that reinforce the work of expanding community, rather than taking wins against implacable bad guys. At home and abroad, magnanimity and inclusion are the only bases for a realist nondystopian politics.

Update History:

  • 5-Sep-2021, 5:30 p.m. PDT: “wonk insider activism, take-to-the-streets militarism militancy
  • 11-Sep-2021, 12:25 p.m. PDT: “coursening coarsening” Thanks commenter Tom!

We’re already paying for it

In social democratic quarters of American political debate, it’s common to argue that we need to impose broad-based taxes. The social democracies of Europe not only tax a greater fraction of their GDPs than the United States, but they also rely more on taxes that hit middle-class and even poor households, like a value-added tax (VAT). If you promise, as both Joe Biden and Hillary Clinton did, not to raise taxes on anyone earning less than some high-ish income threshold, you won’t be able to finance really transformative programs like Medicare For All. You can think of that in conventional terms: You can’t tax enough dollars only from the top few percent of the population to cover the cost of generous benefits for everyone. Less conventionally and more accurately, you can point out that you’d have to tax the rich much more than the cost of benefits in order to make room for the increase in demand egalitarian benefits would provoke, because the top few percent weren’t spending their marginal dollars anyway (so taxing them away doesn’t change what they spend), but benefits distributed to the non-rich will quickly be spent, either by the state as benefits provider, or by recipients of cash benefits. You can’t “finance” — in the sense of neutralizing the pressure on real resources, and then inflation and interest rates — broad based benefits without broad based taxes.

That argument is true enough. But if we’re thinking in these terms, we should think a little bit about our definition of “taxes”. To the degree our goal in taxation is to make room for noninflationary expenditure by the state, what we are really after is what old-school Keynesians called leakages. One person’s spending is another person’s income, funds move in one direction, goods and services in the other, forming the famous “circular flow” of economics. A fixed aliquot of purchasing power might turn an economy forever, with stable prices, if all income was promptly spent. But in reality there are injections and leakages. Holding constant the productive capacity of the economy, if the state spends, that adds new money chasing the same goods and services, generating inflation. To counter that injection, the state can tax, which becomes a leakage of purchasing power, stabilizing prices.

However, another source of leakage is financial saving. If a person holds cash rather than spending it into another’s income, that will be disinflationary, or even deflationary, like a tax. (Depending on our definitions this “saving” might constitute “investment” in accounting terms, but it will not contribute to demand for either capital or consumer goods in the economy.) This effect underlies the main technique we use to fine-tune inflation. When the state wants to restrain prices, it intervenes to ensures that interest rates are high for financial savers, or equivalently that opportunity costs are high for spenders, which persuades actors in the economy to save more and spend less, calming the bid for real goods and services.

If we want to finance a large benefits program but offset the pressure it puts on prices and therefore the risk of inflation, one way we can do that is to not tax at all, but raise interest rates. It’s pretty clear that this can work in the short-term, but it’s a conceptually messy business, since high interest rates are usually bundled with injections of cash (from interest payments on government debt), which might contribute to pressure on prices over a longer term. Plus, there are financial complications, as real estate and longer-term financial assets reprice with interest rates, in ways that may be distributionally unjust when rates go down and destabilizing financially should rates go up too fast.

However, holding interest rates constant, there is another regularity we should understand about financial saving: People with big incomes do lots, lots more of it than people with small incomes. If you give Jeff Bezos an additional million dollars, that results in approximately zero new direct spending on consumption or capital goods by Jeff. Instead, he’ll devote the income to purchases of financial assets like stocks and bonds. The relationship between financial asset purchases and real expenditures by issuers or sellers of those assets is weak. Jeff’s stock buys may contribute to asset price appreciation, but they don’t much inspire investments that companies otherwise wouldn’t have made. Income to Jeff is a leakage, in an old-school Keynesian sense.

What we want from taxes, if what we are interested is financing programs without putting pressure on prices, is leakage. But the money that we pay to Jeff Bezos can deliver leakage pretty much as well as money taken by the tax man. In terms of financing programs, money we pay to Jeff is a near-perfect substitute for money we pay to the state. We can finance a social democratic benefits state from broad-based formal taxation, or we can just as well finance it via broad-based rent extraction by plutocrats. Call that the American VAT.

On the face of it, the United States collects taxes equal to just under a quarter of its GDP, while social democracies like Denmark or Norway collect taxes that amount to 40% to 50% of GDP. But how much do Americans pay once the plutocracy tax is taken into account? A recent study by Carter C. Price and Kathryn A. Edwards suggests that between 1975 and 2018, the share of taxable income paid to the top 1% grew by 13 percentage points, from 8% to 22%. Treating that additional income as our plutocracy tax, and naively summing it with the overt tax share of GDP, we get a total tax share of 38%, within spitting distance of Norway.

As a quantitative exercise, this is squishy and a bit bullshit. [*] The point here is not to claim, as a function of data and evidence to which you must defer, that there surely is demand leakage due to income inequality in the United States that creates fiscal space comparable to what the Nordics’ extensive tax systems engender more overtly. I don’t think we have the means to measure that, and would take with boulders of salt any work that claimed to. I make the weaker claim that a social-democracy sized demand leakage is within the plausible range of what contemporary inequality has wrought. We can be confident there is a great deal of slack. Tolerating interest rate rises towards a “normal” 4%-ish, we might be able to fund a full social democratic benefit state in the US without imposing a penny of new middle-class taxes. We don’t need to risk a VAT (which might in practice finance replacement of the progressive income tax, rather than new benefits). We can let weathervane politicians like Joe Biden and Hillary Clinton make their sweet promises without taking them as fatal blows to social democracy. When they ask us how we mean to pay for our programs, we can say we’ve already paid Jeff Bezos, thanks. If you want the money, you can take it from him.


There are a lot of things to hate about this political economy. Having plutocrats, rather than the state, effectively collect much of the tax base creates dormant antidemocratic quasigovernments. All those funds that the rich usually bank can, after all, be mobilized, in ways the real government, accountable however imperfectly to the broad public, would never approve. Proposals like those by Elizabeth Warren and Bernie Sanders for a high-net-worth wealth tax become essential, even though they play little role in “financing expenditure” in the sense of ensuring immediate fiscal space for government action. Over the long term, such taxes reduce the risk that ventures of the ambitious wealthy emerge at so large a scale they override the priorities of the public and force fiscal retrenchment.

Moreover, it’s not so great to have benefits dependent in some sense on continual rent extraction and upward income redistribution. I’d much rather we build a more equal society in which universal benefits are financed from overt, broad-based taxes that we are solidaristically proud to pay. But it may be that you can’t get there from here without some detours. The US mass public really is bearing the burden of a huge plutocracy tax. The dollars we are not paid by monopsony employers, the medical bills we face despite expensive “insurance” (or the care we eschew to avoid those bills), these are burdens on the American public as concrete and real as any new tax would be. A more conventional approach means layering, at least for some period, a social-democratic tax system on top of plutocratic rents an exhausted, precarious public is already supporting. It arguably makes sense to let plutocracy alone finance the benefits at first, then build out the tax side in sync with, and as a means of, tackling plutocracy, when the public understands the good things the taxes help them keep.

Whatever its role in creating fiscal space for social democracy, plutocracy ultimately has to go. In basic economic terms, it is too inefficient compared to straight-up taxation. We worry with income taxes about deadweight costs due to a supposed dampening of incentives to produce. Plutocracy provokes direct incentives to restrain production, because the rents upon which it relies are extracted at bottlenecks, where high prices can be demanded of customers or low prices can be imposed upon suppliers. Insufficient housing production supports real estate assets writ large. Consolidation of hospitals into chains, patent monopolies, and too few doctors all keep medicine lucrative by restricting supply. From chicken farmers to call centers, consolidated buyers impose low prices and terrible conditions on suppliers and workers, “earning” rents that textbooks say should be competed away by new entrants offering better terms.

Efficiency demands either robust competition or public options in order to vouchsafe price-elastic supply of goods and services throughout the economy. But in order to get there from here, we need a muscular, popular state. Plutocracy sews the seeds of its own destruction by creating fiscal space to build one through the very rents that it extracts. Let’s water the fields. ■


Update: Matt Bruenig points out that Norway is a bad comparator for the tax burden of a social democratic welfare state, because Norway’s government collects a great deal of nontax revenue from state-owned enterprises and sovereign wealth funds. This doesn’t much affect the point that its existing “plutocracy tax” could put the US pretty close to contemporary social democracies: Rather than “spitting distance of Norway” (2019 tax/gdp of 39.9%), I might have described 38% as not far from Finland (2019 tax/gdp 42.2%), and more than Iceland (36.1%). It also underscores the core point: there’s nothing special about taxes. To the degree Norway’s state-owned enterprises earn profits from Norway’s public that are then reinvested via social wealth funds in global portfolio assets, that is disinflationary in exactly the same way that private profits almost reinvested in global portfolio assets would be, creating space for (inflationary) social-democratic benefits provision. State ownership of those assets is decidedly better, from a social-democratic perspective, because it avoids both the political and fiscal risks that attend the private sector’s capacity to mobilize dormant wealth in ways that might threaten public goals going forward. But so long as it is not so mobilized (and not thought likely by financial market participants to be so mobilized), the profits extracted create fiscal space, regardless of who holds the resulting paper. The Norwegian state also earns profits from hydrocarbon sales to foreigners, which is disinflationary compared to letting hydrocarbon revenues become private sector domestic income to not only the wealthiest people (the cause of “Dutch Disease”), and by making it easier for Norway to support the exchange rate of its Krone and so restrain import prices.


[*] Taxable income is much lower than GDP; implicitly I’m assuming that the top one percent’s claims on production-not-taxed-as-personal-income grows at the same rate as their share of taxable income. This probably renders the our measure a sizable underestimate of the leakage, as we know that the rich accumulate compounding wealth whose taxation they avoid by not “realizing” the income through sales. On the other hand, I’m assuming all of the additional 1% share is a leakage of demand. Currently, the threshold for membership in the top 1% of incomes is about $530K. At that level, additional income mostly is demand leakage — households with that income are usually plowing marginal dollars into financial portfolio wealth — but less perfect a leakage than a payment to Jeff Bezos. Some fraction of the broad 1% will level-up their amenities rather than bank a financial surplus. More significantly, what I’m scoring as “plutocracy tax” income begins at the one percent’s 1975 share, not at the 2018 share where they end up, which in would have been around 217K in contemporary money, a level at which a marginal dollar in high cost, high income cities might well be significantly spent. On yet the other hand, there is tremendous income inequality within the top 1%, and to the degree the increase has gone disproportionately to the Bezoses, Gateses, Buffets, Dimons, Sacklers, Kochses, and Musks of the world, treating the 1% share as pure leakage will be closer to correct. Incomes have been rigged upwards across the board, households at the 90% do more financial saving than households at the 70% percentile, so using the only change in top 1% share will underestimate the drag. Even in 1975, income inequality in the Nordic social democracies was lower than in the United States, so relative to those comparators arguably Americans were paying a plutocracy tax even then, making it more likely we can afford to match Nordic benefits. But income inequality has risen a bit in Nordic social democracies since then, so maybe their contemporary tax share also hides a meaningful plutocracy tax, diminishing the US’ putative tax-free-fiscal-slack advantage.

Update History:

  • 22-Aug-2021, 4:55 p.m. PDT: Added bold update re: Matt Bruenig’s Norway critique. Also change link to source of 2019 tax revenues to direct OECD source.

Central bank digital payments

I broadly favor central-bank digital currencies, or CBDCs. Inspired by cryptographic “monies” like Bitcoin and stablecoins like USDC, governments should offer digital assets which are per se fiat money, rendering unnecessary fragile and corruptible mechanisms to redeem digital assets for cash. The main case against CBDC, argued for example by Stephen Cecchetti and Kim Schoenholtz, is from my perspective a feature rather than a bug. Disintermediation of commercial banks is desirable. Disintermediation would provoke replacement of retail deposits in bank capital structures with central bank lending facilities, breaking the deceptive political economy under which commercial banks are notionally private despite nearly all of their risk being borne by deposit-insuring, bail-out providing states. It is long past time we straightforwardly acknowledge that contemporary commercial banks are conduits through which public investment is delegated to (ideally) decentralized actors whose incentives are (ideally) commercial and apolitical, but which are ultimately agents of the state. If you are a banker and you think you are John Galt, you are just lying to yourself, as well as the rest of us. Jamie Dimon is just a poorly supervised public servant who’s fibbed his way into exemption from the General Services pay scale. For a discussion of some of the conceptual and implementation issues surrounding CBDCs, see Rohan Grey. (I use CBDC to mean open access, federally provided digital money, not to express a preference about whether the Federal Reserve should be the agency that manages it.)

More urgently than CBDC, however, I think we need a federally operated digital payments platform in the mold of Amazon Pay, Apple Pay, or Google Pay. A payments platform is distinct from the media by which payments are ultimately made, which might be a credit card, a debit card, a bank account, a stablecoin, or CBDC. A payments platform wraps payment media beneath a persistent customer identity, and adds related information like billing and frequent shipping addresses. Payments platforms are increasingly the digital reification of business-to-customer relationships. If you have an Amazon account, if you have set up Apple pay, you and those platforms have a persistent, resilient, nearly zero-friction means of consummating transactions on-line, and increasingly at physical points-of-sale. This gives Apple, Amazon, and Google a tremendous advantage over other businesses, because who wants to go through the trouble of entering credit card information and addresses, expiration dates and security codes, usually on a finicky mobile screen, just to make some dumb little purchase? Even with apps and businesses for which you do go to the trouble of entering all that crap yet again, even if you check “save for payment information for future use” on those apps, the shelf life of your relationship is short. A credit card expires or gets compromised or is lost, and the relationship is broken. You have to start over and may well never bother. Your Amazon or Apple Pay identities are persistent. They are often backed by multiple payment media, and when an underlying payment medium breaks, you do bother to repair it, because you can amortize the burden of data entry over the many businesses you’ll use the platform to pay. Your identity belongs to Apple and Amazon and Google, and is rented to other businesses, under terms the platform providers set. Businesses have little choice but to accept those terms. To conveniently pay from an iPhone, customers must rely on Apple Pay. When purchasing from small businesses on the Amazon marketplace, customers must use Amazon Pay. The platforms enjoy clear network effects: each payment system becomes more valuable to both customers and businesses the more customers and businesses are on them. The value of those networks is extracted in markups (charged opaquely to businesses, not visible to payers) by within-ecosystem monopolists, at the expense of transactors.

It’s easy to argue that these platforms should be broken up or regulated on antitrust grounds. Epic Games has filed antitrust lawsuits against both Apple and Google for the cuts those platforms take and their heavy-handed exclusion of other, cheaper payment channels. But sometimes when we think about antitrust we spend too much energy on the anti — on what in the status quo we want to undo or dismantle — and too little on what we’d like to create. Even when we win, often the result of clipping some bad practice is to create a power vacuum that some new not-so-great practice rushes to fill. Rather than just attack the problem, often it is best to construct a solution.

Businesses would prefer to independently own their customer relationships, but because the network value of payments platforms is real, it will be increasingly difficult for them to do so. There will be some large-scale intermediary that manages, and so potentially gates, those relationships. What we can do is ensure that there exists a fair payments platform, a platform that can’t discriminate against businesses without due process (as private payments providers assuredly do), which imposes no toll on transactions beyond the cost of managing and running the platform, and is conveniently available from all the digital ecosystems.

The simplest and least heavy-handed way to do this would be for the government to provide a public payments platform, which would set fees just sufficient to break even on operating costs. The Pays of Amazon, Google, and Apple could continue to exist. Those firms can surely innovate faster than the Federal government will. But the price premiums those innovations command will be limited by the option of using the public service, which, like the strange antagonist from It Follows, or like a textbook of market capitalism, will eventually catch up and compete down fees.

What we want is not just antitrust. We want free enterprise, a business ecosystem in which people can use their own minds, interests, and experience to explore wants in their communities not currently met, and then even from a very small scale, develop commercial solutions without incumbents extracting tolls or using advantages of bigness to eat their lunches. Network effects in payments are an economy of scale that should not be left to private providers.

Let’s just put FedPay on our smart phones and call it a day.


Update: Adam Levitin was prescient about this stuff in 2016. (ht @squarelyrooted)

Update History:

  • 11-Aug-2021, 6:05 p.m. EDT: Added bold update referencing Adam Levitin paper.
  • 14-Aug-2021, 1:05 p.m. EDT: Fix Rohan Grey’s name (which isn’t “Gray”). Sorry Rohan!

Economies of scale

There are economies of scale in businesses. Some of them are technical. States should not try to insist that Mom and Pop should be able to bootstrap competitors to GM out of savings from their second job. But technical economies of scale peter out at scales much smaller than megafirms. Tesla, which (in physical, rather than casino-financial terms) is not so big, can compete with GM. Technical economies of scale require the scale of a factory, producing in quantities that fully amortize fixed capital costs, but not more than that.

Beyond technical economies of scale, there are economies of scale due to network effects. These are real economies, but as John Hussman describes them, network effects should be classified as “uninvented public goods”. Firms should be rewarded for discovering them — and indeed they have been and are rewarded, quite handsomely — but networks should not remain monopoly franchises of private entities indefinitely. They are “natural monopolies”, which competition will not regulate in the public interest. They should fall, whether through outright ownership or as “regulated utilities”, into management by the state. [1]

Besides technical economies of scale and network effects, there are less savory “economies of scale”. There is traditional monopoly or market power by which firms can extract rents from workers, suppliers, and consumers. Market power is a correlate of scale that looks great from any firm’s perspective, but its “efficiencies” are just transfers from other stakeholders, and are destructive in aggregate. There are resource and coalitional “economies of scale”, the way very large firms can engage in predatory pricing, or coordinate the activities of lawyers and lobbyists and media, and eventually politicians and regulators, in a firm’s interest. Again, these are not true “economies” at all. They may benefit incumbent firms, but are of negative social value.

Finally there are economies of scale in the insurance of stakeholders, which is a genuine efficiency and of tremendous social value. A large firm can provide generous sick leave or parental leave, because the absent employee is one of a large stable among whom the extra burden can be shared, and over which the financial cost can be amortized. For a small firm, even temporary loss of a skilled worker can paralyze the business. And a small firm’s finances may be too weak to pay the leave. “Mom and Pop” firms are notoriously shitty at providing flexibility and insurance benefits not because Mom and Pop are bad people, but because a big insurance pool functions better than a tiny one. This is a real economy of scale. However, much of this advantage of bigness would disappear if the social insurance function were sensibly provided by the state instead of our relying upon individual businesses to offer “benefits”. (The state cannot relieve businesses of the risk that a critical employee may need to step back, but this risk fades even at small-to-medium scales beyond “Mom and Pop”.)

When we think about “antitrust”, we should always ask ourselves from what apparent advantages of scale actually derive. If it’s just traditional market power, traditional antitrust remedies like breaking firms apart or forbidding mergers may be sufficient. Traditional antitrust can also help prevent and limit resource economies of scale, by limiting conglomeration or forbidding predatory pricing. If the scale advantage is due to network effects, forbidding scale will be socially costly, so the answer will involve some means of exerting public control over the network, whether by regulating or nationalizing private platforms, or by creating public alternatives that engender similar or even stronger network value. Addressing coalitional “economies of scale” encompasses the broad challenge of good government, of reigning in corruption, which probably does require truncating private scale. Addressing the economy of scale in insurance provision is the core work of social democracy. If you believe in free enterprise but oppose a social democratic welfare state, you have a serious contradiction in your worldview to examine.


[1] Yes, states are corrupt, in that they often improperly serve particular private interests. But the only reason we don’t understand firms to be even more corrupt is that serving particular private interests is each firm’s overt function and purpose. It’s not that monopolists behave better, from a social perspective, than states, it’s that their misbehavior gets coded as legitimate competence. “That makes me smart,” boasts Donald Trump about avoiding taxes.

Update History:

  • 1-Aug-2021, 2:45 p.m. EDT: “sick leave or parental leave”

Beyond crypto I: Gray technologies

Increasingly I think that “crypto” — meaning blockchains like Bitcoin and Ethereum, their imitators and would-be successors — is a transitional technology. I don’t think that blockchains of this style, whether “proof of work” or “proof of stake”, are going to endure and dominate in the way that their proponents imagine and hope. At the same time, I think crypto detractors are and have always been wrong to imagine there’s no there there, “anything you can do with a blockchain you can do better with a regular database”. This kind of critique has always missed the point. Blockchains are social institutions, a means of constituting authority around data that would otherwise be widely contested, given powerful and opposed economic interests in the contents. Permissionless, inexpensive, authoritative computation does indeed make possible a tremendous range of new applications and institutions that we are only just beginning to explore. But once we collectively acknowledge that, we’ll find that there are ways of arranging it that are more straightforward and powerful than Satoshi-style open blockchains, and that in practice are as reliable and effective.

In the end, I think crypto will be one of many examples of what I’ll call a “gray technology”. A gray technology starts out, often self-consciously, as a revolution and an underdog, an antagonist to an existing industry and regulatory regime. Via some combination of stealth, pretension of technological ungovernability, and aggressive self-righteousness, early proponents launch projects that demonstrate the value of practices that the existing regulatory regime would discourage or forbid. However, the result is not overthrow or irrelevance of the regulatory state, but a process of conflict and negotiation between the upstarts, incumbents organized around the status quo regime, and regulators. Eventually a new equilibrium emerges that either embraces some of the once discouraged practices, or enables alternative means of producing the newly demonstrated value without the troublesome practices.

There have been lots and lots of examples of this. Firms like Uber and AirBnB got their start by very plainly and aggressively flouting (or by encouraging others to flout) prior taxi and hotel regimes. These firms did not then secede into cyberspace or render themselves untouchable in Cook Island trusts. They skirted laws they loudly argued were bad (remember when Uber would go on about “Big Taxi”), they proved that in skirting such laws they could enable interactions that consumers and providers really valued, they used those constituencies as sources of political bargaining power by which they negotiated (and continue to negotiate) new regulatory regimes within which their once oppositional practices become blessed. Napster began as a self-righteous, self-consciously oppositional project to make all the world’s music conveniently and inexpensively available to all. It clearly demonstrated value. But, alas, in this case, the effect was not to normalize regulation around once transgressive practices, but to spur the incumbent industry to provide alternative means of offering much of that value under the existing regulatory regime, which powerful interests valued very strongly. Uber “won” and Napster “lost”, but in both cases gray technology served a similar role, demonstrating value propositions incompatible with an existing set of industry and regulatory arrangements, then spurring a reorganization of those arrangements to enable much of the demonstrated value under a new, administratively blessed regime. We begin with a status quo thesis, upstarts emerge as antithesis, until finally we settle into a new synthesis.

Although it is easy to mock, “DeFi” has demonstrated real value. Automated market makers and the near perfect arbitrage finance of “flash loans” represent real technical innovations within the plumbing of finance. Permissionless stablecoins enable experimentation with institutional forms that involve funds flows more complicated than simple payments, experimentation that previously was restricted to firms capable of partnering with conservative and often predatory banks. (Suppose a small startup wanted to build the platform for writers I proposed a few months ago, with variable refunds to subscribers. You can’t use off-the-shelf credit card payments for that.) DAOs (“decentralized autonomous organizations”) represent really interesting experiments in democracy and civil society that currently regulate billions of dollars of funds through various grant providers, token exchanges, and collateralized lending protociols. All of this has emerged under a very gray technological environment, whose main economic driver has been simple speculation (or, if you prefer, gambling) in very unstable coins like BTC, ETH, and thousands of their peers.

But owing precisely to that success, DeFi and stablecoins are now far too big and prominent for regulators to meet only with benign neglect. The DAO that governs Uniswap has already allocated about $19 million dollars for a “DeFi Education Fund”, which will function as a lobbying organization on behalf of an industry with identifiable interests, despite “decentralization”.

More fundamentally, regulation is not just a threat to DeFi, it is also the key missing element if the fascinating tools and practices of the industry are to ever finance real-world goods, services, and businesses. The NFT that now represents a kind of postmodern nonclaim on a digital collectible could as easily represent an ownership claim on a home. If that were to happen, then with the help of valuation or appraisal “oracles“, home mortgages could be financed in the same way that people’s speculalative crypto positions currently are, via automated collateralized lending platforms like Aave, Compound, or dYdX. Whether that would be dystopian or socially valuable competition for (dumb, corrupt, predatory) financial incumbents would, well, depend very much on how these practices come to be regulated. But it is only with regulation, and the concomitant ability to have “on-chain” outcomes enforced “off-chain” by the legal system, that DeFi can escape its current predicament as a sophisticated panoply of financial techniques financing nothing but an incorporeal casino.

Tech types often think of regulation as a mere inhibition or friction, a thing that gets in the way of innovation. That’s foolish. Regulation is an integral part of applied technology. Airplanes would fly in libertopia, but civil aviation, the technology that keeps a city of humans in the air 24 hours a day and lets us travel anywhere, could not exist if regulations had not evolved along with fuselage materials. Modern monetary systems, in which the obligations of thousands of banks all trade at par and settle obligations with customers of any other bank, represent an extraordinary technological achievement crafted primarily from the stuff of regulation. DeFi needs regulation not defensively, so entrepreneurs can do what they want without going to jail, but constructively, so entrepreneurs can do things that, without regulation, they simply could not do.

But Satoshi-style open blockchains were designed to resist an adversarial regulatory state whose assistance would be dispensed with and whose edicts, um, defied. If that requirement is relaxed, there are simpler and more powerful ways of structuring the kind of permissionless, authoritative computing that contemporary blockchain platforms offer. Most emerging applications do not seek to permanently resist regulation by a hostile state. Rather, like other gray technologies, they seek eventual accommodation with the regulatory and legal system. As applications find that accommodation, I suspect they will migrate from complex, expensive open blockchains to an ecosystem that begins as permissioned “sidechains” (see Polygon, xDAI, Ronin, etc.) but evolves into more convenient and capacious platforms for robust, permissionless, high-integrity computing. These will be run by communities of identified operators that accept regulatory obligations to compute correctly, to behave as common carriers, and to respond to legal orders. Crypto will neither “win” like Uber, nor lose to incumbents like Napster, but transform into an industry that preserves the new playing field that upstarts have created, in a way that addresses the concerns and recruits the capabilities of regulators.

Microcities

Michael Eliason has a great piece (hosted at David Roberts’ substack) describing the kind of experiments with the urban built environment that are common in parts of Europe but unheard of the in United States. Eliason writes:

It should be noted that these developments are largely the result of urban planning competitions. This is in stark contrast to the US, where we incorporate little to no urban planning and essentially let the market drive development, with no forethought to livability, open space, schools, walkability, and so forth.

Citizen participation is also a major component of these projects. Unlike in the US, this participation isn’t a wasteful exercise whereby local homeowners get to block new homes and preserve the status quo. Rather, these processes allow residents to have a say in what their new district can look like, where things should be located, and what kinds of open space or car-free areas it will have. It is true democratic planning, facilitated by spatial planning policies that are both top-down and bottom-up. We should probably take note.

Eliason describes the development of whole districts, while in the United States we are caught in trench warfare over piecemeal infill, waging a conflict that has foolishly polarized into “YIMBYs vs NIMBYs”. It’s great that progress has been made towards legalizing ADUs and polyplexes among the single-family homes. Not everything has been futility. But ultimately activism framed in terms of righteous conflict against greedy homeowners is a political mistake. The characterization is not accurate, and even if it were, car and parking dependent homeowners in the contemporary United States are too large and well enfranchised an interest to be simply defeated. They have to be coopted. Their support, or at least acquiescence, has to be won somehow.

Otherwise, the pace of any progress will remain dangerously detached from the urgency of the problems that derive from insufficient housing. With abundant housing in quality communities, we would have much less homelessness, despair, madness, and crime. Even if the politics were better, creating infill housing quickly is hard, physically and in terms of social equities. Infill is retrofit, limiting the scope of “forethought to livability, open space, schools, walkability, and so forth”. To address housing scarcity deliberately and at scale, the unit of work should not be individual buildings, but neighborhoods, districts, quarters, “new towns“.

But in the United States, don’t new towns just become Levittown or Columbia, Maryland — car-centric, shopping-mall centered, suburban sprawl? By default, yes they do. If you let the market do its thing, the national homebuilders will build out tracts of cul-de-sacs and detached homes in their sleep, hardly even noticing what they’ve done. The “market” is a local optimizer, a risk-averse creature of habit. Even under the best of circumstances the market would build too little, given the asymmetry of social costs of housing scarcity versus overabundance. We want more experimentation than the market would provide, and as Eliason points out, we want planning during which future residents exercise a meaningful franchise. The United States used to be a site of utopian experiments. It ought to be again. We’ll need activist government, some form of social housing, in order to make that happen. But what form should that take?

“Social housing” codes left, and trading NIMBY/YIMBY gridlock for left-right culture-war gridlock sounds unhelpful. Would it be possible to design some form of social housing that would accommodate concerns of the cultural right while providing bulk, credibly non-dystopian housing in the form of walkable, transit-connected, mixed-use development? Yes, I think so.

The basic idea would be this: What if the government committed to financing “microcities”. These would be high density exurban developments, subject to constraints including a minimum population size and, importantly, a requirement that the entire city be built within walking distance of a central transit station. There would be just a single glorified bus stop, for an area roughly one and a half square miles, housing between thirty and eighty thousand people.

In the United States, microcities would be located where the good lord intended us to live: along interstate highways. However, there would be almost no automative access within the microcity (with exceptions for commercial deliveries and disabled service). The microcity itself would be pedestrianized. Frequent express bus service would connect each microcity to traditional cities nearby, key employers, and to other microcities. An interface to private automobiles would sit only at the edge (or perhaps beneath) the microcity. Residents who wish to own cars could, but at a walk away. However, given the sociable convenience of pedestrian commerce and the existence of online discount stores, residents would not need private cars for everyday living. For nearish outings, transit and ridesharing would suffice. For infrequent longer trips, car rental could replace car ownership.

If the microcities are designed well, parking would be used less by residents than by neighboring exurbanites, for whom new microcities would be an amenity. It is already the case that developers build “main streets” or “town centers” with restaurants, retail, and entertainment in America’s exurbs. What if instead of faking it, we built what actually are main streets, designed to support fine-grained street-level urbanism, with a residential clientele large enough to support that? Microcities transform exurbs into near suburbs of new, thoughtfully designed urban centers, without upsetting the character of the exurbs themselves or threatening existing residents.

Microcities complement, rather than seeking to alter, displace, or shame, the approach to comfortable living that has predominated in the United States since the muscle car and the GI bill. They also compete with that approach, not by damning segregated suburbanites and forcing them to change, but by offering as options ways of living that are more appealing and at least as affordable, but also more integrated and sustainable. Microcities don’t ask anyone to eat their vegetables. They don’t demand existing neighborhoods acquiesce to changes to which residents don’t consent in the name of a greater good. Microcities are things that we can just build, at will, a bit more thoughtfully, a bit more carefully, but as ultimately as readily as another tract of cul-de-sacs. We should build them like we built shopping malls in the 1980s.

Microcities also compete with “superstar cities”, whose price and exclusiveness have soared for lack of elastically supplied alternate suppliers of employer-proximal urban amenity. San Francisco’s homeowners — which is to say, San Francisco’s political class — won’t consent to disruptive change in the name of undercutting their own home values. They’ll resist risking the stability of neighborhoods they love in order to make room outsiders clamoring to live there. [*] What might drive greater tolerance of development in superstar cities is not higher home values (current values are way more than high enough to entice developers, absent regulatory barriers), but the threat of lower home values, if living there came to seem not so special any more. A San Francisco whose high home values depended on quality rather than scarcity of urban amenities would build more rather than less. That San Francisco’s Pacific beachfront is developed with nothing more appealing than a four-lane highway is a reflection of the same forces Lily Tomlin mocked about the phone company in 1976. “We don’t care, we don’t have to.”

But would microcities work? I mean, in the United States, “social housing” is a nice name for “public housing” whose other name is “the projects” whose other name is hell. Traditional public housing in the US had two characteristics. One is it was extremely dense, as an economic efficiency. The other is it was reserved almost entirely for the poor. That was and would still be a toxic combination. However much or little it is the fault of the poor themselves, social pathology often correlates with poverty in liberal, unequal societies. Urban density can be a force magnifier. It can turn what might otherwise have been nice neighborhoods into vibrant, creative centers, or what might otherwise have been stagnant neighborhoods into sites of crime and violence. Microcities should be mixed income housing, and include attractive upscale options as well as inexpensive apartments. In order for microcities to do any good for anyone, they must first and foremost succeed as urban communities that deliver desirable housing at scale and so reduce pressure on home prices throughout their region. Building de novo cities is a capital-intensive risky business, which is why the private sector on its own won’t deliver them. A wise public sector will use the tools at its disposal to rig outcomes, to skew the landscape towards Red Vienna, away from Cabrini-Green.

But the state’s reputation for wisdom is pretty spotty. It’s one thing to talk about artful urban planning, top-down design of prerequisites for what, in its details, must succeed or fail via chaotic bottom-up processes. It’s hard to imagine the self-dealing to-and-fro of state and Federal legislative processes actually delivering smart urbanism.

However, among things government can do are set goals, define constraints, and write checks. Microcities should be a Federal initiative, balancing funds availability across the states as necessary to win political support. It should then rely upon local formations of people who commit to become long-term residents to manage the process through milestones from conception through construction. The model would be urban cohousing or baugruppen, but at a larger scale. Each microcity would begin as a nonprofit development company whose employees include professionals with competences relevant to city building, whose compensation would consist of cash salaries augmented with free, perpetual tenancy or outright ownership (depending on the economic model adopted) of an apartment in the finished city, conditioned on completing a multiyear residency. Besides employed professionals, the development company would also convene a larger group of future residents willing to pay a bond and participate in the planning process, who would also earn discounted ownership or rent conditional on residency for a period of years. Planning processes should favor diversity, experimentation, innovation. Construction quality in the United States is abysmal, compared to the state-of-the-art in Europe and Asia. As Eliason suggests, microcity founders should solicit competitive visions from urban architects and dreamers globally. They should import best practices, and push boundaries of passive, carbon-absorbing, sustainable habitation. Each microcity should be an aspiration, a dream made imperfectly real, a cathedral to the possible improbable, a sketch of that shining city on the hill that we’ve lost in recent times to some tsunami of cynicism.

What about the NIMBYs? Every plot of earth has some stakeholder who demands it stays exactly the way it is, whether due to fear of parking competition or real concern for the local ecosystem. But the square miles adjacent to our interstates are not unspoiled wilderness, NIMBY concerns decay with each mile and highway interchange, and the county-level balance between “homevoters” and the “growth machine” when the scale of growth proposed goes from several million dollars to several billion dollars. Microcity entrepreneurs would have to find sites whose local and state governments would welcome them and help. I don’t think that will be so hard.

But if you build it, would they come? Who would live in these new microcities? The founders, the people who participated in the city’s design and committed to live there, would. But they would be only a fraction of the city’s desired population. Leaving things to the market, potential residents might fear failure, vacancy and blight, and that fear could become self-fulfilling.

So, don’t leave things to the market. In addition to founders, once the city is built the state should offer heavily subsidized ownership or tenure in the new city until a critical degree of occupancy is achieved. This might take the form of Singapore-style housing assistance for younger people on the cusp of household formation, or regional lotteries to encourage a more representative and age-diverse population for the new city. The subsidies should be sufficiently generous that, in combination with the amenities of the appealingly designed new cities and proximity by transit to important elsewheres, many people find the offer difficult to refuse.

Would microcities be affordable? Yes, despite the sticker shock of billions of Federal expenditure, which, after subsidies, would be only partially or very slowly recouped from sales or rents of residences and commercial space. Microcities look very expensive as standalone initiatives. But consider the social costs of housing scarcity, from delayed household formation to mass homelessness, crime, overdose, and incarceration. The financial costs associated with failing to address these problems, for government at every level, are not small. Now compare the cost of adding housing for 30,000 people as a microcity versus the cost of doing so via infill housing in prosperous urban cores, taking into account the resources that will inevitably be lost to permitting squabbles and lawsuits, and the need for expensive retrofits of existing infrastructure. Greenfield development is a cheaper, faster, surer way of adding housing to metro areas than building new housing where market actors would on their own strive to place it.

To be sure, this lower overall price tag would hit the public purse, while the higher price tag of grinding infill through the opposition of neighborhoods falls upon developers and the residents that they battle. In a narrow way, the state saves money by letting private parties engage in their war of attrition. But the state’s interest should be in accomplishing the task at the lowest real resource cost, not in avoiding visible expenditures on public balance sheets. And the state’s interest very definitely lies in actually accomplishing the task of housing humans in a (much better than) functional built environment, quickly and surely.

Microcities are also arguably better urbanism for the age of the automobile than traditional contiguous cities. A great city is a collection of great neighborhoods, and neighborhood greatness emerges at pedestrian scale. But one cannot pedestrianize a whole metropolis. Everything about automotive convenience, from expressways to parking, is destructive of urban quality of life. The typical American city includes a few lovely “microcities” isolated in a sea of ugly car-centered quasicity, bound by a mix of expressways and commercial “arteries” cluttered with parking lots and strip malls.

With microcities, we reimagine the contemporary city as an archipelago of almost arcologies in an exurban sea, with point-to-point transit connections between. Like The City & The City, the urban core and traditional exurb coexist in the same space, with well-defined interfaces between. Mixed-use pedestrian density and leafy, car-centered suburbs each have their appeal, but the neither/nor compromise that now constitutes much of the American cityscape satisfies no one.

Macro-level pathologies — economic precarity, housing scarcity regionally and nationally, pervasive availability of opiates and methamphetamine, pervasive availability of firearms — push local government towards negative-sum, tacitly brutal, competition to establish and sustain themselves as islands of segregation from the prevailing dystopia. Small communities usually fail but sometimes succeed. Large cities cannot simply insulate themselves from macro-level pathology. Citizens demand “solutions” to problems that a municipality simply cannot solve on its own. The predictable result is within-city segregation (sustained by authoritarian policing) that renders life materially tolerable for the affluent and well enfranchised, combined with a performative politics whose function is to render the affluent and well enfranchised tolerable to themselves. Housing issues in this kind of city are existential, as the affluent threaten to displace (“gentrify”) communities tacitly ghettoized, or ghettoized communities threaten to break the segregation and strip the affluent of their insulation. Urban politics becomes neurotic in the strict psychoanalytic sense. The id knows what it needs, the superego insists this is wrong, politicians’ role as ego is to repress and paper over the conflict.

Microcities would face the same macro pathologies as other cities, but a Federally coordinated, actually effective, initiative to make housing abundant nationwide is our only hope of remedying those pathologies. By virtue of compact geographies, within-city segregation would be off the table for microcities, demanding an actually functional politics, rather than the mere performance of virtue, to protect the material interests of even affluent residents. Microcities would enfranchise citizens into manageable units for which the trade-offs faced by municipal government might be less cacophonous and more tractable than those plaguing larger cities.

Individually, each microcity might be utopian, but in aggregate networked microcities constitute a pragmatic counter to contemporary dystopia, a solution tailored to augment and improve rather than rage against the existing built environment, with the constraints, political as well as physical, that our past choices do impose.


[*] The current best hope for more dynamism in San Francisco’s built environment are the human catastrophes of homelessness, drug abuse, and crime. Finally the city faces problems that code to incumbent homeowners as, well, problems. But if incumbent homeowners can “resolve” those problems by replacing Chesa Boudin with Robocop, they’ll very cheerfully revert to rainbow-flag-inclusive eco-NIMBYism.

Name the solution

There is this notion, proclaimed on all sides of the political spectrum, that if you want to solve a problem, the first step is to name it, center it, because only then can you properly address it. It sounds very rational, very modern. To address a problem, list it on the clipboard. Then we can get together and devise the 19-step plan that will remedy it.

This is often counterproductive for social problems, where the names that we demand be given have connotations that are far from neutral.

From 9/11 through the Obama era, Republican constituencies were scolding us we had to publicly name and call out “radical Islamic terrorism” as a problem, the enemy. Beginning in 2016, Democratic-aligned constituencies demanded that we center and call out “racism” and “white supremacy”. That continues, with a litany that includes “patriarchy” and “transphobia”, wrapped in a bowtie under the unobjectionably objectionable name “hate”. Now Republican-aligned constituencies demand that we publicly call out illiberal “wokism” and activist/academic movements like “critical race theory”.

I’ll try to put this gently, so as not to commit the same error I am criticizing. This approach to politics is unhelpful. The things partisans demand we call out can in fact be bad. All terrorisms, defined as violence or threat of violence against innocents to compel political change, are bad. Nearly all of us agree that racism, white supremacy, and “hate” are horrible. Even the “wokest” people will cop to existence of excesses in social justice activism, though they may argue that cynical overstatement of those excesses is a bigger problem than the excesses themselves.

We are asked to name, and then to publicly call out, problems not because there is some insight gained in the naming. What, we didn’t realize that racism was appalling before contemporary anti-racisms put it front and center? Was the Obama administration unaware of the existence of Islamic terrorism while it was drone assassinating weddings in the Middle East?

We are asked to name and denounce because some coalitions are better immunized, while other coalitions are put on the defensive, when public debate is structured around certain names. The Democratic Party’s coalition includes religious minorities, including Muslims, who are not terrorists but whose social networks and religious traditions are more proximate to groups that prosecuted atrocities in the name of Islam than the white Christians who overwhelmingly define the Republican Party. When we are naming white supremacy, the shoe is on the other foot. The point of this politics is to polarize in a way that gives one coalition the high ground, and sows division in the other while portraying them as apologists for evil.

There may be some electoral value to this, in the sense of persuading a sliver of swing voters or drawing habitual nonvoters into your great moral struggle. The polarization it provokes “usefully” helps stabilize partisan gerrymanders. It is emotionally delicious, as we grunt in our tribes, to hold up mirrors through which we are awesome and they are not. While naming problems and demanding denunciations may move some people to vote your way, it may entrench others and undermine your purported cause. A virtue weaponized ceases to be a virtue at all, and those who might be tarnished by association often perceive demands to denounce even things that they concede are bad as attacks. Because defiance of unjust coercion is itself a virtue, insistent calls to denounce may instead rally sympathy or support. When Republicans call out “critical race theory”, does that render progressives more or less supportive of social justice activism, whatever its excesses?

However things actually shake out at election time, whether demanding denunciations helps or hurts either party, the tactic reliably delivers revenue to media and political institutions. You can’t fundraise off quietly persuading a reasonable but mistaken public. When there are monsters to battle, partisans shower champions with cash.

If you are actually interested in constructive social change, this is a terrible politics. Durable change does not in fact come from crushing a near-equally-matched social enemy. It comes from cooptation until the rump social enemy is small, and can then be cleanly defeated. Gay marriage is no longer controversial in the United States, because the broad public was pretty quietly won over before the Supreme Court delivered a final victory. If the political parties had remained actively polarized around the issue, if nonsupporters strongly identified as objectors, there would have been no victory. An (unlikely) Supreme Court win would have become a new Roe vs Wade, a battle cry rather than a final outcome. The campaign for gay marriage was waged in favor of a solution, rather than as a fight against homophobia, which might have polarized the public into factions more or less implicated by the charge. It was a campaign for something that like most things, most people had never taken a strong position on, and could be content to accommodate what seemed kind without ever having to admit defeat or prior error.

You can’t coopt people while you are calling them out. You can’t achieve durable victories — win the peace rather than a continuing war — without bringing people into what becomes a broad consensus. When it’s the 99% against the 1%, you can crush the opposition. When it’s the 52% against the 48%, you can’t. If you try you get civil war, hot or cold. Both sides in every civil war are sure they have God and justice on their side while they destroy first the prerequisites of civilized life, then lives directly. At home as abroad, the real struggle is always for hearts and minds. The rest is just carnage.

Naming problems and demanding denunciations hardens the battle lines, digs trenches. Making everybody confess the people’s enemy is not a rational path to positive change. On the contrary, what reason demands is a politics that welcomes and improves the imperfect but well-intentioned creatures that we nearly all of us are, a politics that is generous with redemption rather than fierce with judgment of our fellows. By all means, hold policymakers (and pundits!) to account. But never publics. That’s a fool’s errand. Offer solutions and be grateful towards people who sign on, rather than name problems and condemn people for insufficient zeal in demanding their extirpation.

Update History:

  • 9-Jun-2021, 1:15 p.m. EDT: “sews sows division” (Thanks Steve Roth!)

Taxes vs subsidies, flows net and gross

A straightforward objection to the style of policy I proposed as “market dirigisme” in the previous post is that it’s too expensive for the central government to pay to subsidize all the behavior it wants from the public. As Peter Dorman writes in the comments

With so many objectives to pursue, if policy mainly took the form of bribery — excuse me, incentives — the state would be overwhelmed. It’s necessary to have negative incentives, taxes, as well as positive ones, feebate systems for instance.

The taxation-based complement of my market dirigisme is just Pigouvian taxation. Instead of purchasing from the citizenry the behavior the central government desires, the central government can penalize citizens who fail to behave as the central government prefers. That seems “cheaper”, but also meaner and more contentious. People generally don’t mind being offered an opportunity — “Hey! I’ll pay you if you do this thing. You don’t have to, but if it’s worth the money to you you can!” People object vociferously to, and organize politically against, state coercion that takes the form of “You should do this thing, and if you don’t we will punish and fine you.”

So it’s usually politically wise, I think, to prefer the former. Subsidize the behavior you want.

Revenue-motivated taxation should be broad-based and imposed gently on things mostly coded as good (like income). Pigouvian taxes, to be politically sustainable I think, require a strong consensus among the influence-weighted citizenry that the thing to be taxed is “bad”, that people, at an individual level, deserve to be punished or at least to compensate society for the behavior. Matt Yglesias has been talking up alcohol taxes, and that’s probably fine as a Pigouvian tax, because most of us have been persuaded at some level that drinking is a vice and even if we ourselves enjoy it responsibly, it’s fair that we should make some compensation to society for indulging. Gas taxes or carbon taxes are not fine. It is not a vice, at an individual level, for a person to drive to the grocery store or commute to work, even if they live far away. It’s not a vice for a person to live in an exurban or rural place where ordinary life requires long drives. On the contrary, many of us consider rural living an outright virtue. Yes, these choices have social costs, “externalities” in the language of Pigouish economists. But unless those social costs have been pervasively internalized as sin by the broad public (no, your own politically engaged friend group isn’t enough), Pigouvian taxation is “partial equilibrium“. A polity won’t allow large, enfranchised publics to be selectively penalized for behavior they think is fine. Michael Bloomberg can get a soda tax passed maybe in snobby elitist towns whose enfranchised publics look down paternalistically on frequent pop drinkers. But that’s pushing the limits. I’m all for a (refunded!) carbon tax, higher gas taxes, etc. I, um, voted for the proposed soda tax in San Francisco. But, realistically, it’s not a smart approach. You’re not going to save the planet by punishing large, influential blocks of citizens for behavior intrinsic to what they see as legitimate ways of living.

So, what about the expense? Are subsidies to encourage desirable changes by the citizenry affordable? Yes, absolutely. There are two broad points to make here. First, the real cost of such subsidies is lower than it appears. As always, we should be wary of a dollar-for-dollar accounting frame when considering the costs of public policy. Public expenditures are not alike in their effect on price stability, distribution, and other social desiderata. Secondly, to the degree that we are forced to ration net outlays, balancing conditional subsidies with broad-based taxes can be made equivalent to Pigouvian taxes fiscally, while retaining the benefits of relying on subsidy politically.

Subsides of citizen behavior are cheaper than they look for a bunch of reasons. Very narrowly, subsidies are not expenses at all, they are only transfers. They do not directly recruit or put pressure on real resources. To the degree the state is conditioning subsidies in order to “purchase” something from the public, that isn’t quite right, but usually the behavior that will be purchased displaces minimal alternative uses of real resources, or even increases the availability of such resources, making them negative expenditures in a sense.

Let’s unpack that. If the state hires people to build dense housing, that imposes a direct real-resource cost. People who otherwise would do different work are diverted to building these homes. Brick and timber and steel that otherwise would go elsewhere go here. In a broad sense, we can argue that the dense housing net-frees resources, because the people who move in might otherwise have lived in resource-costly exurbs. But that’s a complicated, very contestable, calculation. However, if the state subsidizes people who live in densifying neighborhoods, and the voters in some communities encourage construction they otherwise would have forbidden, very little of the recruitment of real resources should be attributed to the state. The people the state pays with its subsidy are not hired away from their old jobs or withdrawn from the labor market. The choices about which real resources will be recruited and deployed to the now popular densification will remain with the local governments, communities, and developers, displacing their own alternative uses. Mostly what will have happened is we’ll have (i) gotten the policy outcome we might have wanted but failed to achieve if we tried to induce local governments to change their laws despite the resistance of their citizenry; and (ii) made a very-broad based, rather than targeted, transfer to citizens of that community.

In distributional terms, broad based-transfers are often scored as “expensive” relative to counterfactual programs targeting the needy (although when the cost of attrition is taken into account, they shouldn’t be). But relative to ordinary expenditures, broad-based transfers are desirably progressive. When the government hires a contractor to do something, some of the funds may go to modest wage workers, but lots also go to well-paid professionals or flow through as capital income to business owners. None go to people who are neither investors or workers. Business revenue from government expenditures is distributed like market income generally. To the degree a more egalitarian distribution is desirable, broad-based subsidies are “cheaper” than ordinary expenditure in the sense that they incur less of the social cost that comes with making the rich richer.

Finally, on a per capita basis, broad-based subsidies intended to alter citizen preferences with respect to local governance can be cheap even in accounting terms. Most voters are not rich, a little bit of money can make a big difference relative to the costs and benefits they perceive from local policy and the convenience costs of voting. Often when you want to get something done, you have to purchase things from rich people who control access to scarce resources or capabilities, for whom it takes a lot of money to move the needle. But when the state wants to purchase changes in behavior or political preference from the citizenry, most people are very far from rich, and small amounts of money can go a long way. (The current vaccine lotteries are a great example. The per-person cost of the lotteries is pretty tiny, yet they have seem to be effective.)

However inexpensive subsidies are in the senses I’ve described, in some contexts and for some purposes, fiscal limits in an accounting sense will sometimes bind, politically or institutionally. These cases should be infrequent. Well-arranged governments don’t face purely financial constraints on socially valuable investments, just like firms in a well-arranged financial system can always issue securities to fund high NPV investments. But sometimes, pathologically, firms are subject to hard capital rationing, and sometimes governments may have to tax in order to subsidize. In these cases, you use the ordinary tax system to ensure you have the revenue you will need to purchase changes of behavior from the public, just like any other public expenditure. We have property taxes, income taxes, sales taxes. If we want to pay citizens of neighborhoods that tolerate densification and our expenditures are revenue constrained, we can raise those other taxes. The tax increases should not take the form of matched “pay-fors”. That’s a very bad style of public policy. But financially constrained governments should use the tax system to ensure the revenue they require for public purposes, including purchasing behavior from the general public.

A certain kind of wonk will object and say that this is really dumb. Why tax everybody and pay some people a subsidy when you could more “efficiently” impose the same net financial flows by levying a tax on the people who don’t do what you want?

This is a point I’ve made before and I suspect I will make again. There is social meaning, and political effect, in gross financial flows. An income-tax-financed UBI is not the same thing as a negative income tax even when the net financial effect of the two would be the same. Besides the stuff wonks will deign to recognize (like that paying first and taxing back later ensures more certain and prompt payment to those who will ultimately be entitled), different program forms create different social facts. A UBI informs the public in the straightforward language of cash that we are all together receiving a benefit, for which we are paying according to our means. A negative income tax shouts that the poor get a benefit for being poor that the rich must pay for. How the public understands a policy is part of the policy, inseparable from its effects on behavior, its political sustainability, and its ultimate effectiveness. Gross flows condition the meaning of a policy to the public, in addition to net outcomes.

Sure, increasing general taxes in part to pay for conditional subsidies to the public can be equivalent in net terms to just imposing a conditional tax. But imposing a conditional tax has the social meaning that the payer is being punished or asked to compensate for doing wrong, and is politically unsupportable when influential publics think the taxed behavior is legitimate or virtuous. Offering a subsidy communicates no such judgment. I don’t feel judged by the state for not driving a Tesla, even though had I purchased one, I’d probably have been eligible for some government cash. An offer of a subsidy is a market bid, an opportunity. You can take it or leave it, but the option is no injury. The general schedules of taxes on property, income, and sales are… schedules of taxes that apply broadly to everyone and carry no judgment about the lifestyles or choices of segments of the public. Combining those two elements, a general tax schedule and a lucrative offer, yields an entirely different social animal than a tax targeted and conditioned on behavior, even when from a high level you could argue the net financial flows would be similar.