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MMT streetfighting

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

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

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

The opportunity cost of firm payouts

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

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

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

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

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

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

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

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

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

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

Update History:

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

Continuous elections

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

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

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

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

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

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

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

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

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

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

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

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

Update History:

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


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

I. Could a SWF fund a UBI?

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

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

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

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

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

II. On the political effects of a SWF+UBD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

III. On the macroeconomic implications of a SWF+UBD

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

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

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

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

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

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


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

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

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

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

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

Update History:

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


We use the word “authority” to mean lots of things — police and state actors are “the authorities”, an expert may be “an authority on the matter, etc. But I want to suggest that it is very useful to think of authority as a characteristic of information in a social context. In particular, information is “authoritative” when some community of people to coordinate upon it and behave as if it were true, regardless of whether or not the information is in fact true, or even of whether the individuals doing the behaving personally believe it to be true. If information is authoritative, members of the community behave as if the information is true even despite strong, often opposing interests in the question. When we claim that someone “is an authority”, we are claiming that the information they produce will (or should) alter behavior within some human community. Authority subsists in the relationship between information and behavior in a social context.

Let’s take an example. A judge, in the context of a trial, is an authority. Suppose a judge pronounces a defendant guilty, despite her protestations of innocence. Both parties have produced information. But it is the information produced by the judge that guides the behavior of the vast preponderance of the community. Suppose the bailiff, who was present for the trial, privately came to a different conclusion than the judge, and believes that the defendant is in fact innocent. The bailiff will nevertheless behave as if she were guilty, taking her back into custody rather than setting her free.

More often than not, there is not so much cognitive dissonance. Most of us, most of the time, take a huge variety of conjectural “social facts” as given, condition our behavior as if they were true, and to the degree that we even give them a second thought, we believe them to be true. I log into my bank’s website, and check the balance of my account. Most of the time, I take the number presented as an authoritative representation of how much money I have “there”. I would prefer, quite strongly, that the number be millions larger, and my deposit balance at a bank is nothing more or less than what the bank acknowledges that it owes to me, so it is in a small way extraordinary that the bank and I are so willing to agree, despite diametrically opposed economic interests on the matter. But the miracle of authority is that it quells many disputes so thoroughly that parties don’t even imagine that there is any ambiguity or question to argue about. Authoritative information presents itself as factual, even when it (like a bank balance) has no external, empirical referent and is purely a social construction.

As surely as we depend upon the laws of physics to suspend us in our fifth floor apartments, we depend upon authority to give structure to our social and economic lives. Our very identities — our names, our credentials, the entity to whom our properties belong — exist as “social fact” by virtue of authority. The production of authority is the production of the social reality upon which we all coordinate. We talk sometimes about “defying authority”, by which we mean resisting some particularly crude and visible attempts to render information authoritative. But for the most part, to fail to coordinate on the “same facts” our community has settled upon comes off not as courageous but as insane. As Ijeoma Oluo writes:

A lot of things in our society are social constructs — money, for example — but the impact they have on our lives, and the rules by which they operate, are very real. I cannot undo the evils of capitalism simply by pretending to be a millionaire.

It’s hard to defy the authority of your bank account, even though the value that ends up there is the result of myriad social and institutional contingencies and is in a certain sense quite arbitrary. Of course we can, and under some circumstances we do, claim our bank balances are wrong. But whatever we believe the “true” figure should be is irrelevant as a practical matter unless and until an authoritative source (in this case, the bank itself) produces it. As individuals, we can dissent, but what makes information authoritative is how a larger community treats it, which often renders our own private judgements immaterial.

If authority is defined by information that a human community behaves “as if” is true, one might conjecture some relationship between processes that produce authoritative information and practices that might be colorably argued to be truth-generating. In most societies, a judge pronounces guilt, rightly or wrongly, after some kind of trial in which evidence is gathered and presented and the facts of the case are argued. In some societies, we might imagine the truth-generating power of legal procedure to be pretty good. In other societies not-so-much and we might mumble dismissively about “show trials”. As an anthropological matter, it’s clear that having some sort of narrative that connects the information we coordinate upon as “true” to processes that might mean they actually are true is helpful to the production of authority. Let’s call this “soft power”. On the other hand, if there are people with economic resources they can withhold to starve you, or with the physical capacity to harm and imprison you, they can, um, persuade the collective you to behave as if the information they produce is true. Let’s call this “hard power”. In nearly all societies, authority is generated by a combination of hard and soft power. We have a dispute. Is this house your house or my house? I can show you the deed to the property, evidence of a transfer of funds for its purchase, all of those things. But perhaps you can do the same. Our economic interests are opposed, and our standards of evidence are unlikely to be neutral. If we bring our dispute to the attention of the broader community, is it hard power or soft power that wins the day? Who knows? In most societies hard power is usually deployed under a fig leaf of soft power (the police evict me or they evict you following a trial with evidence and all of that). But sometimes this fig-leaf is so thin as to be meaningless. Even under procedures we consider decent, the ultimate “truth of the matter” will very often remain uncertain and contestable after all of the formalities have been deployed. A verdict will nevertheless be pronounced, and we will collectively behave as if the unknowable truth is known. Sure, that’s true in part because we believe hard power might eventually be deployed against those who defy the decision. But then, if the procedures were truly decent, you can argue that it is those who manage the institutions of soft power that determine the direction of the gun. And in practice, it’s rare for any overt hint of the exercise of hard power to be required to persuade most of use to behave as if some set of social facts is true.

It is a mistake — an easy, common, and foolish mistake — to imagine that hard power tells the whole story, that “how many divisions does he have?” is the beginning and end of the question of authority. The exercise of hard power is expensive. Even from the perspective of a “rational bandit” (ht Elaine Ou) whose ultimate source of legitimacy is the barrel of the gun, producing information about the world that causes people to behave in the ways you would like them to behave is cheaper and more efficient than frog-marching everybody everywhere all of the time. You’ll have more firepower available to defend your domain and plunder new lands if you can point your guns outward and your subjects still do what you want, then if you have to be pointing your guns inward at everyone. The law of the jungle selects for “voluntary compliance”. Further, relying upon the exercise of hard power butts up against the same informational limits that give rise to the economic calculation problem. No leader or ruling junta can even figure out what even they want the millions of people they rule to be doing all the time, let alone stand behind them with a gun and make them do it. [1] It’s much better if you can shape social reality so that people behave in roughly the way you’d like them to behave without your even having to tell them specifically what to do all the time, let alone point your scarce guns at them.

Communities want authoritative information on which they can coordinate. All sorts of valuable forms of collaboration are practical only when we are not bickering over every contingent and contestable social fact. Even flawed authority is better than no authority, and authority has network effects (the more people act as if some set of information is true, the more costly it is for others not to also act as if it were true). Nevertheless people dislike the cognitive dissonance associated with acting “as if” certain facts are true when they privately believe them to be false. We denote authority “Orwellian” when it is clumsy, when under threat of hard power or overwhelming convention it becomes in our interest to behave as if things we think false are true. Much more powerful (and so potentially dangerous) is authority that is not Orwellian at all, whose “soft power” is sufficiently persuasive that we privately believe nearly all of the social facts that we collectively coordinate upon. [2]

Authority, like most coordination problems, is relatively easy at small scale. We can choose a wise woman to judge and declare. However, the benefits of coordination grow nonlinearly with scale (“agglomeration effects”). Economic and military power accrue to polities that are able to produce authoritative information that coordinates behavior over large geographies and populations with minimal exercise of costly hard power. Modern, developed countries devote a significant fraction of their energies to the production of authority. Much of the work of the legal and accounting professions in the private sector, and of courts and the regulatory state in the public sector, is devoted to the production of authority. Finance, which concerns itself with contentious questions of who owns what and how scarce resources should be invested, is necessarily intertwined with the machinery of authority. The court system, the training and professional standards that apply to law and accountancy, the bureaucratic procedures that surround the operation of the regulatory state, all embody complicated sets of compromises between interests (which try to shape the social facts we coordinate upon for their own benefit) and the broader necessity of maintaining “credibility” and “legitimacy” so that recourse to hard power in shaping social behavior is rare. The production of “soft power” authority is the sine qua non of the modern state, and a source of competitive advantage for those who do it well.

The production of authority is a socio-technological problem, albeit a far-from-neutral technological problem (but technologies are never neutral). Although “soft power” authority is cheaper than resorting frequently to hard power to manage behavior, the systems by which we currently manage the production of authoritative information remain extraordinarily expensive — lawyers and judges and regulators and bankers don’t come cheap! Contemporary practices are also discriminatory. Most of the work of producing authority is done by a particular professional class, which is often socially and geographically segregated from the rest of the polity. Enfranchisement in the production of authority is skewed towards those within that class or capable of accessing (and paying) members of that class. This is problematic on technical grounds (those whose interests and perspectives are not included in the production of authority are more likely to privately dissent, diminishing the effectiveness of authority at coordinating behavior and increasing the degree to which hard power may be required), and on ethical grounds (the facts upon which we coordinate social behavior largely determine social outcomes, the determination of those facts is never neutral and always to a very large degree arbitrary).

The entropy of an individual human body is extraordinary large. It is a miracle, the degree to which even people we lock up as batshit crazy control and manage that entropy to yield elaborately functional behavior. The entropy of a human community or society is many of orders of magnitude larger, the space of potential social behavior is incomprehensibly vast and multidimensional. The behavior of so many bodies must be improbably constrained and synchronized to yield functional societies, which requires elaborate social coordination. Authority is an invisible drummer that helps to organize this dance. We construct authority. How we construct it is among the most important social, ethical, and technological problems we face.

[1] As with questions surrounding socialism and economic calculation, there is an case to be made that emerging information technology will render practical more pervasive and direct forms of state compulsion. So, um, exciting.

[2] When we are in it we are in it, but while we are thinking about authority from a distance, let’s remind ourselves that the absence of cognitive dissonance does not imply the presence of truth from some larger perspective. History is full of communities that produced authority effectively (in the sense that the “facts” that conditioned social behavior were widely privately believed), but which we now look back upon as having been egregiously in error, scientifically or morally. We might be “wrong” too. But authority is not about truth or falsehood in the eyes of God. It is about coordinating human behavior.

Sandwichman Sunday

Sandwichman offers a précis of the putative economic basis of Stephen Miller views on immigration.

Back when Miller was a Congressional staffer in a world where certain norms applied, his restrictionist position took care, according to Sandwichman, to “discretely avoid[] any overt expression of racism or white supremacism.” Instead, Miller framed his position in terms that from someone else’s mouth might be described as left-populist: There aren’t enough good jobs to go ’round, immigrants compete with natives for those jobs and put downward pressure, and so exacerbate “principal economic dilemma of our time…the very large number of people who either are not working at all, or not earning a wage great enough to be financially independent.” (Miller’s words, via Sandwichman) Miller presents liberal immigration as an “agenda pushed by the world’s most powerful interest groups and businesses that clearly results in fewer jobs and lower wages for Americans.” I am an admirer of Bernie Sanders, and decidedly not an admirer of Stephen Miller, but in their positions circa 2015, it’s hard not to see some common ground.

Sandwichman segues to the usual rebuttal of this view by liberal economists, handing the mic to Simon Johnson and Walter Ewing to point out that immigrants are a source of employment demand as well as employment supply, so that even in a very static analysis it is unclear whether the net effect of immigration is to put downward or upwards pressure on wages and employment. As Sandwichman concludes of broad conjectures of wage suppression or economic stimulus, “they are both right and they are both wrong.” You cannot make a reasonable guess about the employment effects of immigration, or conduct a meaningful empirical analysis, without a lot of context about the immigrants who would likely arrive and the structure of the economy that would receive them. There is no immigration policy that is not also economic policy, and like economic policy in general, it can be tilted towards this interest or that.

(“It depends” is supposed to be an economists’ cliché — Harry Truman famously cried “Give me a one-handed economist!” — but ambidexterity is unfortunately antiquated. The authority in which the profession has garbed itself has created a lucrative market for the kind of people willing to make helpful pronouncements, so the custom now is to fill in the gaps left by missing context with impressive thickets of theory and quantitative analysis and appeals to the literature, all of which support whatever the professional subculture to which the analyst belongs is paid to support.)

In musing about this now stereotyped argument between immigration-employment optimists (new demand means more economic activity!) and pessimists (new workers means fewer or lower-paying jobs for current workers!), a cutesy irony occurred to me. In the static, ceteris paribus world in which this argument plays out, each worker is basically an aliquot of labor supply bundled with an aliquot of labor demand, and the question is which is bigger. So, if you want employment stimulus, your ideal immigrant should carry a duffle bag of labor demand but just a dainty purse of labor supply. Who might that look like? Well, a so-called “scrounger” or “welfare tourist” would do the trick nicely. As long as we permit only the most demanding people with a strict aversion to hard work to immigrate, and provide state support if necessary to accommodate those preferences, Stephen Miller should welcome the newcomers. I guess it is not a novel observation that immigrants can’t both be welfare layabouts and putting everybody out of work at the same time. So if disemployment is your main concern, pick welfare layabouts.

In less stereotyped real life, of course, this is all stupid. Ceteris paribus does not hold, and states have the capacity to generate labor demand at will simply by borrowing or creating money ex nihilo and distributing purchasing power to people likely to use it to buy labor-intensive goods. For reasons beyond any effect on employment, we prefer to discourage rather than encourage the practice of living on state support without doing anything useful (although us UBI-ists and JG-ists would like to broaden the range of activities considered “useful” beyond paid market work). If we want a lot of immigration without disemployment or (nominal) wage suppression, we can have it, or we could have it, if we had the political capacity to run the economy hot, that is, to distribute new purchasing power in order to engender labor demand, and accept the risk of inflation that would come with that. We can always put everybody to work, but the question of how productively — of whether our “hot” economy would leave almost all of us better in real terms or amount to a redistribution (or worse) from existing creditors and workers with safe jobs to immigrants and the marginally employed — is a hard question well beyond the kind of facile quantitative reasoning that surrounds this debate. Thinking seriously about this stuff would be thinking about the institutional details of production, how we might engender collaborations that create services we genuinely value from the underutilized talents of citizens and newcomers alike, and prevent frictions and conflicts that might undermine those collaborations. But the morally fraught politics of immigration, and the economic debates that surround it, are mostly orthogonal to these questions. The things we do that are bejeweled with the accoutrements of being smart are mostly stupid.

Sandwichman links to an earlier piece of his, on debates in the 1920s and 1930s surrounding the campaign for an eight-hour workday. He quotes economist Dorothy Douglas, describing the theories of 19th Century labor advocate Ira Steward:

Douglas condensed the two main aspects of Steward’s theory and their interconnection:

One, the stimulating effect of leisure and leisure-time consumption upon the standard of living and hence the wage demands of the lowest classes of labor… and the other, the stimulating effect of this more expensive labor upon the technique of production itself — the effect of “driving” labor saving machinery. Finally, uniting the two, is a plea, now familiar to our ears of mass demand as alone making mass production possible.

It strikes me as remarkable how current these ideas are, and should be. Generous social policy does not stand in opposition to productive work. On the contrary, if well arranged, it is the basis for productive work. To the manager of a firm, cheap labor is a source of productive advantage, but that’s a perspective that fails to compose. Economies that offer cheap labor must import external demand. A good economy is composed of workers with time and money to consume, and of firms with strong incentives to innovate, to use dear labor ever more efficiently.

Update History:

  • 25-June-2018, 4:10 p.m. EEST: “…is a harder hard question well beyond the kind…”
  • 25-June-2018, 5:55 p.m. EEST: “Miller presents liberal immigration as an ‘agenda pushed by the world’s…”

Exiting the Iran deal is a blow to financial transparency and US control

Over the past decade, the United States has succeeded at exercising an extraordinary degree of “extraterritorial” control over the Western financial system. The apotheosis of this exercise was perhaps the nearly $9 billon penalty levied against BNP Paribas in 2014. Other non-US banks caught in the extraterritorial US net include HSBC, which paid $1.9 billion in 2012 for violating sanctions against Iran and laundering money in Mexico (for which it is in trouble again), Commerzbank, and many others.

The United States’ remarkable success at exercising control over overseas banks was never a foregone conclusion. Before there was the #resistance, there was La Resistance. Many European bankers and public officials never believed it right that transactions which might be perfectly legal under their own domestic law, and which in no obvious way involve any US entity, should be blocked by whim of the American government. Re l’affaire BNP, American Banker noted:

French government officials have repeatedly mentioned that BNP’s alleged actions don’t violate European law, even though it’s irrelevant to the debate at hand. The Justice Department doesn’t care if BNP’s actions violate European law; by operating in the U.S. (through Bank of the West and First Hawaiian Bank), BNP has agreed to follow U.S. law. And U.S. officials view sanctions violations seriously. (The violations do not have to occur in the U.S. for American authorities to act.)

More recently, Europeans have chafed as the US government has chipped away at Swiss banks’ vaunted secrecy and the prerogatives of other European tax havens, while allowing places like Delaware and Nevada to pick up the business that American authorities are dismantling overseas.

Nevertheless, thus far, the Europeans have played along, and the West’s dominance of global finance has meant that the US effectively controls conduits which are the lifeblood of non-Western powers like Russia and China as well. Russia, itself bitterly subject to American sanctions, hopes to escape the noose by deploying a blockchain-based parallel infrastructure for international transactions. Whether such an enterprise will prove laughable and quixotic, or whether it might pierce meaningful holes in the US-dominated conventional system, depends a great deal on how policymakers, bankers, and entrepreneurs around the world react to it.

Prior to, well, yesterday, the US could claim a moral high ground. Its extraterritorial financial control might be objectionable, yes, but absent some coordinating mechanism like that, there would always be a competitive race among politicians and bankers to allow themselves to be persuaded that Mexican drug lords are just legitimate businessmen from a hardscrabble country and why should the Iranians be prevented from getting nukes when the world winks at the Israelis? The US may not be the ideal global financial policeman, but like every other kind of global policeman that it is, it may be better than no policeman at all.

However, now, specifically with respect to its enforcement of financial sanctions on an apparently compliant Iran, it is the United States that seems, even among its Western partners, to be the rogue state in need of policing. However begrudging European acquiescence to extraterritorial US sanctions may have been two days ago, it is more begrudging today.

More than that, the remaining counterparties of the Iran nuclear deal — China, France, Russia, the UK, and the EU — all want the deal to continue. They will be at pains to persuade Iran that it continues to enjoy significant sanctions relief relative to what it would face if it abandoned the deal. Which puts those countries between a rock and the hard-place of extraterritorial enforcement by the US of reimposed prohibitions. At a policy level, the remaining signatories now have an active interest in enabling, even encouraging, evasion of US financial controls, an interest that is morally and politically defensible. All of a sudden La Resistance among sullen French bankers isn’t just about the juicy fees foregone, but a heroic struggle to #resist Donald Trump, to prevent the renuclearization of Iran. And policymakers might agree.

That might mean taking some of the pressure off of European and vacation isle tax havens, reversing the recent, American-enforced trend towards transparency. It might mean partnering with China and Russia to participate in the parallel, alternative financial arrangements that those countries seek to develop. It plainly puts at risk the hard won, absolutely extraordinary, hegemony that American regulators have over global finance.

All of this might seem contrary to American interests. But then on questions of financial transparency and control, not all Americans actually have the same interests. And for those among the US #resistance who see Vladimir Putin beneath every strand of orange hair, what Donald Trump has just done makes the possibility of a new Russian SWIFT considerably less laughable.

Update History:

  • 10-May-2018, 9:05 p.m. PDT: “European bankers and public pubic officials” (thanks commenter Typo)


I like this piece by Kate Aronoff looking back on WPA “boondoggles” in the context of a suddenly much discussed job guarantee. A lot of people deserve congratulations for the suddenly much-discussedness of job guarantee proposals. People like William Darity, Darrick Hamilton, and Mark Paul, Pavlina Tcherneva, Randy Wray, and others have worked doggedly through years of winter to keep this (by no means new) idea alive while no major political faction in the United States was willing to give it the time of day. Now, all of a sudden, Democratic Party(ish) bigwigs including Kristen Gillibrand, Cory Booker, and Bernie Sanders are racing onto the bandwagon. Persistence pays (although perhaps not quite a living wage).

Let’s get this part out of the way. I’m for it, if it’s well implemented. What about a UBI? I’m for that too, if it’s well implemented. Do we need both? Well, they do complement each other: Pairing a job guarantee with a UBI would mitigate the risk that the “guarantee” would transmogrify under political pressure into a punitive workfare program. Pairing a UBI with a job guarantee would mitigate the risk that we neglect the broader project of integrating one another into a vibrant society, that we let a check in the mail substitute for human engagement. If we could get both a UBI and a JG, that’d be great. (Of course, if we did get both, we’d want the numbers to be different than either as a standalone.)

However, I am not so worried about an embarrassment of riches. We’ll be fortunate to get one, either one, implemented well enough not to subvert its purpose. I see no reason not to advocate both. People make this stupid argument about how we have to choose where we want to “expend our political capital”. There are times, in the context of some specific negotiation, where it might be reasonable to imagine “political capital” as a thing akin to hoarded gold, a commodity that must be spent either here or there. But most of the time this quasi-material analogy is worse than dumb. Political capacity is much more like muscle than gold, the more you use it the more you have. Advocating for UBI and advocating for a job guarantee are complementary activities. Both push against the present, barbaric consensus, under which human sacrifice to a drunken god of business cycles and market forces is defended by the fearfully fortunate as a price that must be paid. The way we squander our political capacity is not by arguing for UBI when we should be arguing for JG or vice versa. It’s when we argue with one another about which we should argue for, when we could be taking these ideas to a broader public. Whether we get either, both, or we just terrify our complacent Mandarines into using more conventional tools to run a hotter, fairer economy, persuading the public is how we will make progress.

I have nothing more to say on the normative “should we? shouldn’t we?” question. Unfortunately, in my view, much of the take-making on the subject of a job guarantee has been driven first and foremost by authors’ self-positioning as advocate or critic. But away from all that heat, the details and implications of what is proposed are fascinating. Suppose we did this thing? What would happen? What would our country look like with a Federally funded but locally administered program to exploit the talents and capacities of all those who otherwise would not be employed for a decent wage? In between the certainties of Labor Paradise or Stalinist Hellhole are more modest possibilities and pitfalls that are worth thinking through.

One of the things that I think is a mistake in the current job guarantee debate is a focus on productivity too narrowly defined. Where will be the work for all these people? Will it just be make-work? Isn’t a job something where a need is identified in advance, and then a human is hired to fill it, rather than something determined by the existence and capabilities of the human?

I think this frame is very limited and limiting. In the hallowed private market, it is not uniformly the case that a need is identified and then the cog — um, I mean, the body — is hired to fill it. Successful firms define roles to make the most of unusually talented people they are fortunate to have. An increasing share of private work cannot be easily codified and Taylorized, but involves ongoing improvisation, collaboration, and negotiation between individuals and employers to achieve business goals. A job guarantee that had an unlimited number of slots on a mid-20th Century assembly line producing valuable, salable widgets might be easy to defend as “productive”, but would be wasteful of worker talents and poor preparation for participation in the modern economy. In actual, current practice, managers with very imperfect information hire teams of people they hope will have a mix of skills to accomplish various purposes, and then do a great deal of work trying to understand and cajole the humans they find they have to make useful things happen. The luckiest managers, those who hire at high salaries for prestigious firms, do much of their work by selection. From a large pool of applicants, they can choose the very few who are not only disciplined and capable of performing the work, but who are also able to convincingly demonstrate they are disciplined and capable during a hiring process. The vast majority of managers at the vast majority of firms, however, cannot be so choosy. Managers try to select those with the highest probability of being disciplined and capable, or perhaps more accurately, those for whom they will not be blamed if a hire turns out to be difficult and unprepared. Once the hiring is done, management is the art of building true from crooked timber. The world is not made of stylized firms with slots and then workers to fill them, but with humans who improvise, including managers who cajole, threaten, and guide in the thrall of incentives that define what counts as “productivity” or “success”.

But for a job guarantee program, what should count as productivity or success? It can’t (and shouldn’t) be a “market test”. The state and nonprofits are not in the business of making goods to sell. One version of a job guarantee would focus on production within and for the employee: Is she flourishing in her role, is she learning and demonstrating skills and habits that will increase her ability to gain more remunerative private sector employment? These are all good things, but I don’t think it would be a good idea to define the success of a JG job primarily in these terms. If the job itself is for the benefit of the worker, and she is getting paid for it as well, there will be a hazard that the broader public will not perceive JG “workers” as actual workers, but as beneficiaries of taxpayer largesse twice over. For the program to survive, and for it to confer the “dignitarian” benefits thought to come with paid work, a job guarantee job must be socially coded as a job, as fair pay for value — social, rather than market, value, but still value — and not as a “handout”. Importantly, the public should very directly perceive the value provided by JG workers. The job guarantee program should yield visible, popular amenities. During economic booms that draw people out of the job guarantee program and into private-sector employment, the public should notice and lament the loss of those amenities.

In much of the conversation about a job guarantee, advocates understandably work hard to argue that employment on the proposed terms can provide “real” value, and so emphasize activities whose importance and moral worth is difficult to deny — eldercare and childcare, protecting the environment, services for vulnerable and underserved communities. But I think there is a kind of paradoxical danger in focusing too exclusively on the things that are easiest to defend as valuable. It is like how we eviscerate education by shedding arts programs and focusing on STEM and demanding ever more testing. Tradeoffs that from a narrow, goal-directed perspective make perfect sense end up undermining the broader ecology under which a meaningful education is possible, ultimately subverting even the particular goals the “hard choices” were meant to support. In a job guarantee context, I don’t think we will get to keep the valuable but largely hidden eldercare if there are not also things whose social worth will be more contestable by naysayers and scolds but also visible and enjoyable to a broad base of voters and taxpayers. Wherever the job guarantee is, there should be festivals and block parties. There should be children’s theater in the park. There should be visible beautification, beyond just the cleaning of litter — trees planted, community gardens established and tended, decaying park benches replaced with custom carpentry. Perhaps ironically, job guarantee workers could help remedy the toll our society’s increasing fetishization of formal labor has taken on civil society. With extra human energy, neighborhood association meetings could be more frequent, more festive, and publicized more invitingly than the often drab affairs that they often are, dominated by interested insiders and people unusually motivated by resentments. With a well-subscribed job guarantee, cities could provide help with organization, catering, and clean-up to anyone interested in organizing open-to-the-public meetings and events.

Should a locally administered, Federally funded job guarantee program come to exist, a litmus test for its success will be the reaction of localities. Usually, localities compete with one another to shed the unemployed, to encourage them to move elsewhere. San Francisco will happily — and so compassionately! — buy a bus ticket for any homeless person to, um, help them get “home”. In this tradition, many localities’ initial response will be to sabotage rather than embrace a job guarantee, to make the work punitive in hopes that labor-market losers look elsewhere rather than stick around and trouble the citizens. The job guarantee will succeed only if officials who reverse that impulse, who welcome job guarantee workers (and the Federal money they bring), are rewarded at the voting booth for doing so. And that will only happen if voters in municipal elections, whose behavior is notoriously not driven by altruistic or progressive impulses, perceive tangible benefits that outweigh the hassles and scandals and declamations of “boondoggle!” that will inevitably arise. We will know that a job guarantee has succeeded when the conventional incentives have flipped, when localities compete to attract job guarantee workers rather than to try to shift the burden of this otherwise marginally employed population elsewhere.

Update History:

  • 3-May-2018, 8:50 p.m. PDT: “under which human sacrifice to a drunken god of business cycles and market forces is defended by the fearfully fortunate as a price that must be paid by the fearfully fortunate.”; “and declamations of ‘boondoggle!’ that will also inevitably arise”; “that we let a check in the mail substitute”; “look like with a Federally funded and guaranteed, but largely locally administered, program”; “performing he the work”

Ceci n’est pas un post

interfluidity is migrating to hellish modernity, a new server, https rather than http links.

So exciting, I know.

I’m sorry to pollute your feed with this, a test post.

Segregation is a normal good

There’s a view that, since much of American inequality can be explained by the dynamics of housing wealth (as famously argued by Matthew Rognlie), then we could remedy inequality, or at least prevent its increase, if we took a battering ram to the gated city by eliminating height limits and exclusionary zoning and other restrictions that make it difficult for developers to add housing supply as prices increase in desirable cities and neighborhoods. I think this view is mistaken. It gets causality backwards.

It is not hard to find explanations for the increase in inequality in the US. There has been an evisceration of labor unions; selective globalization that puts the working class but not the professional class in competition with labor in developing countries; skill-biased technical change and automation that substitutes labor for capital or threatens to. All of these reduce the power of labor to bargain for their share of the economic pie. Market power increasingly concentrates income and wealth, via Facebook or Google with their unassailable platforms, via Pharma and Hollywood thanks to the expansion of narrowly conceived patents and copyrights into amorphous “intellectual property”. Deregulation of finance and various forms of “financial innovation” made it possible for skilled financiers to lay claim to gains while offloading risks, creating a class of people who won big until they didn’t but never lost very much. The professional class, thanks to the general bailout of creditors when things came apart, hitched a ride on the coattails of the gamesters of finance and came through the great financial crisis largely unscathed, while the middle and working class lost their homes and marriages and self-esteem to a margin call on housing, which has since recovered in other people’s hands.

You can certainly add having bought the right properties in the right cities in the 1970s and 1980s to the list of drivers of inequality, but I don’t think it is a big piece of the puzzle. Instead, I think it is more accurate to point out that one of the first and most valuable amenities people purchase when they become wealthier is wealthier neighbors. Wealthy people self-segregate, and the places to which they self-segregate become valuable, because the way you get a place limited to wealthy people is by bidding up the price of being in that place. The community, or the city, is gated for a reason.

Now this sounds like a story of dastardly rich people. It is not. It is a story of humans, and how humans naturally and understandably behave in the society that we have built. To be successful in our society, to be a good person, is to be a successful capitalist. One should accumulate educational and financial resources, steward them responsibly, and invest them in labor and capital markets or business entrepreneurship to yield decent returns. Failing to do this is waste. Consideration of the welfare of others is mostly delegated to the state, or else to arms-length charities to which one budgets as one sees fit. The misfortune of your neighbor, or of your cousin, is not your misfortune directly. One could never be a successful microcapitalist, and therefore a good person, if one took it upon oneself to indemnify the mishaps and misfortunes of ones neighborhood and extended family. To do too much of that is a kind of squandering, a kind of waste. If it puts the welfare of your own family at risk, especially if it reduces your child’s quality of life or education, it segues from failure to sin.

This ethos is very difficult to maintain, for human beings most of whom do strive to be good, do try to be virtuous, if we live directly among misfortune. We strive to find ways of reconciling being good and doing well, and to consider ourselves good we want to feel and be viewed as generous within our own, directly experienced communities. But we cannot simultaneously be successful microcapitalists and generous people according to the norms of less fortunate communities. Because while in theory, under mixed-economy capitalism, the state provides the less fortunate with the insurance they require to live decent lives in a topsy-turvy economy, in practice, in the United States, it does a pathetically inadequate job of it. In poorer communities, people manage their risks by pooling them directly, helping a neighbor with a rent check to prevent an eviction, or else letting her crash at their place for a while. Poorer people insure one another by forming lasting human relationships under which they make directly available, or directly draw upon, one another’s real and financial resources. Wealthier people “self-insure”, but of course that is an oxymoron. What insurance means is to create claims upon others’ resources that we can draw upon if we suffer misfortune. The “self-insurance” of the wealthy replaces the interpersonal claims of informal insurance with financial claims exercised via arms-length markets. Wealthier people save money they can draw upon in times of trouble. They purchase formal insurance contracts. Most of us try very hard not to trouble our neighbors with our misfortunes, but wealthier people are much more likely to succeed. Which makes wealthier people desirable neighbors, especially for wealthier people upon whose disproportionate resources the misfortunes of poorer people might make strong emotional and moral claims.

The wealthy huff a lot about efficiency, but what fundamentally distinguishes the insurance behavior of the wealthy and the poor is that the poor insure one another with much greater capital efficiency than the rich. The wealthy prefund their insurance individually, each household accumulating cushions of financial savings and contingent assets, the majority of which are rarely drawn upon. The poor never hold much in the way of assets they do not require, but draw upon the resources of their community and family on an as-needed basis. Wealthy communities hold financial assets multiples in value of what members of the community will ever actually use, but each household within a wealthy community may genuinely have no resources to spare, in the sense of having endowed themselves sufficiently to buffer their family’s customary lifestyle against potential shocks. At a social level, the capital inefficiency of financial “self-insurance” need not be a problem. Financial resources aren’t inherently scarce like real resources, and one can imagine a policy regime in which some sort of financial claim was made so broadly available that all households could “self-insure” in this way without increasing any burden on real resources. But in the world as it is, wisely or not, only the wealthy can afford the luxury of dormant, underutilized financial claims. The not-so-wealthy must find ways of managing their risks without the intermediation of money and markets. They call upon on another for help, and when disputes arise, as they often do with respect to need-based claims, rather than hire a lawyer to fight the insurer as a wealthy household might, neighbors and families must argue it out, in discussions that may become painful and personal and destructive of valuable relationships. Like most efficiencies, capital-efficient mutual insurance has costs invisible to the outputs-over-inputs computation. As we become wealthier, we trade less intensive use of the financial claims at our disposal for the peace of not having to field or make claims upon our neighbors.

This would all be true even if it were not the case — but of course it is the case — that various sorts of crime and discomfiting behavior correlate geographically with poverty. That correlation is itself, I think, a function of reconciling inequality with a liberal society, an effect much more than a cause of that inequality. You can agree with that or not, but the correlation still stands, and people want to move to nice neighborhoods, where “nice” is defined by the behavior of your neighbors, and wealthier people are more likely to be “nice” in the sense of troubling you less than poorer people.

Segregation is a normal good, for individuals and families. As people become wealthier, they want to insulate themselves from the chaos of other people’s lives. In a relatively equal society, there is no community of people more or less capable of substituting formal, maket-intermediated forms of mutual insurance for interpersonal and relationship-based mutual insurance. As a society that celebrates personal accumulation and self-reliance becomes unequal, then unless the state itself provides sufficient formal insurance, those capable of “self-insurance” will migrate away from those who survive by sometimes tugging on their neighbors heart strings and purse strings. Some will move explicitly into gated communities. For the more liberal and cosmopolitan among the wealthy, the quiet gate of high market prices — which they themselves must work and sacrifice to pay! — is more spiritually congenial. Individually we take prices as just a fact of nature, so the control prices exercise seems natural and legitimate, even if, from some idealistic perspective, lamentable.

In the US, segregation is overdetermined. If by the path-dependence of horrible history, we find that wealth and race become correlated, this tendency of the wealthy to segregate themselves from the poor would be sufficient to engender racial segregation. Add, gently, a modest preference for same-race neighbors or, less gently, outright racial animus, and it’s unsurprising that in the US we see the sharpest segregation across racial lines that are also economic lines. And of course, while segregation may be an outcome of yesterday’s economic tournaments, it also shapes the outcomes of tomorrow’s tournaments. The children of parents who could afford to withdraw themselves to gated communities with great schools are much more likely to be able to do so themselves, as they inherit both social capital and much of the financial capital their parents held as insurance. Race and racism very obviously shape and harden segregation in America. But we would and will have it in some shape or form regardless, as long as we are so unequal in our capacities to insure ourselves by impersonal means, and liberal enough to accommodate the preference of the wealthy to withdraw from the very personal claims of the less well insured. And just as race shapes segregation, segregation shapes race. Segregated communities don’t remain just groups of different individuals for very long. Across the lines, the different communities give one another names, turn anecdote and experience into stereotypes, attribute differences in circumstance to differences of character, behave in ways that presume and reinforce group differences. Over a generational time horizon, the phrase “racial segregation” is a tautology.

Update History:

  • 27-Jan-2018, 10:20 p.m. PST: “…Matthew Rognlie), that then we could remedy inequality, or at least prevent its increase, if…”