Creeping conservatism: the guaranteed minimum income

What’s supposedly progressive Dylan Matthews at the supposedly progressive Vox doing pushing an idea favored by Hayek, Milton Friedman, and Richard Nixon?

Of course, the devil is in the details. It matters a lot how minimal the income really is, how fast it phases out, and (crucially) how much of the rest of the income-maintenance and social-services structure it replaces. It’s an idea with the defects of its virtues: Insofar as it displaces direct services, it saves overhead expense and avoids subjecting recipients to bureaucratic meddling in their lives. That’s good or bad depending on how great the expense is, how much fraud results, and how much meddling turns out to be useful. It gives recipients maximum flexibility in how and when to spend their money, which is good or bad depending on the recipients’ capacities for foresight and self-command. At the level of political economy, the question is whether the superior performance of the system would give redistributive policies a political edge sufficient to compensate for the loss of support from provider interests.

For those – including progressives – who think the virtues obviously trump the defects, here’s the thought-experiment: Would you replace public education with unrestricted cash payments to families with school-aged children?

But if you think, as I do, that most of what’s wrong with poor people is that they don’t have enough money, and that many of what look from the outside like behavioral pathologies are actually the predictable consequences of scarcity and insecurity, and despair, as I do, of the prospects for changing the distribution of market incomes enough to manage rising inequality, then the guaranteed-income idea looks very, very attractive. The problem then is to get as large a base and as gentle a phase-down as possible, and – this is the hard part – to discern what specific services need to be delivered alongside the cash. Seems pretty clear to me that housing, home heating, and food mostly shouldn’t get specific subsidies or direct provision, while education and health care should. But there’s lots of crucial detail to be worked out: even with a relatively generous income guarantee, I suspect there would be a need for direct housing provision to people who otherwise would be homeless victims of severe mental illness or substance use disorder. (Day care is an interesting liminal case; so is disability insurance, which could be replaced by a cash income not conditional on disability – likely to lead to substantially improved health outcomes – plus direct services or subsidies to help people deal with the consequences of disability other than difficulty in earning a living.)

The other key progressive goal should be keeping the income-support system national, to protect the poor people of, e.g., Mississippi from the hostility of state governments doing the bidding of bigoted majorities and exploitative employers whose business model is based on employees with no alternative to poorly-paid work but starvation or theft. That would have the side-effect of reducing one perverse impact of the current system, which ties poor people to high-cost-of-living areas where the social safety net tends to be less frayed. A family barely scraping by in Section 8 housing in the Bronx could live rather comfortably in Arkansas if it could cash out the value of that housing subsidy as part of a national income guarantee.

I have no idea whether Matthews is right that a guaranteed income is poised to become a mainstream political issue. But it’s a nice possibility to think about.

Does socialism cause dishonesty?

Here’s an interesting natural experiment.

For external, historical reasons, workers in one half of a culturally and linguistically unified but politically divided country had the right to organize unions to defend their interests against employers, while in the other half of that country workers’ organizations were state-controlled in the interests of management, and genuine union activity was punished by firing if not worse.  After that country was reunified, randomly chosen people from the union half and the non-union half were subjected to a standard psychological test measuring the propensity to cheat.  Those who had grown up under conditions were ordinary people could defend themselves openly from oppression by their bosses turned out to be more honest than their peers from the non-union part of the country.

Conclusion: Unionization makes people behave well, while union-busting makes them behave badly.

Of course, it’s not an entirely clean experiment. The non-union side (East Germany) was under foreign control, with a secret-police network that recruited as much as one-third of the population as informants. So possibly dishonesty is caused by living in a world of fear and distrust, rather than by the absence of workers’ rights alone.

Worse than that, the non-union half was systematically looted by the occupying power, while the union half was treated much better by its conquerors and became rich. So maybe it’s scarcity, rather than or in addition to denial of workers’ rights, that makes people dishonest.

Still and all, the result is what it is: a strong labor movement is associated with improved morality.

Only somehow that’s not the conclusion the authors of the study (including Dan Ariely, a perominent behavioral economist and the author of a good semi-popular book on the subject, Predictably Irrational) decided to draw. Instead, they focused on the fact that West Germany had, alongside wealth, the rule of law, personal freedom, and a strong trade-union movement, a primarily market-based economy, while East Germany was under the Soviet system – what Orwell accurately labeled “oligarchic collectivism” – with arbitrary government, no rule of law, and no respect for human rights; residents could be and were shot for trying to emigrate, and many tried to leave just the same.

Using a definition favored only by Bolsheviki and fans of plutocracy, Ariely et al. elect to call the East German tyranny “socialism,” and pretend that their study shows that living under “socialism” worsens the morals of a population.

Having reached an extreme conclusion from a single poorly-defined case study, Ariely and his colleagues then stop, without trying to test their conclusion out of sample. Sweden, for example, has great personal liberty, honest government, and the rule of law, but much more state ownership of enterprise, more tightly regulated markets, and a far more redistributive tax-and-transfer system than Germany.  Swedes are also (if we restrict our attention to mostly-Lutheran Northern Germany) culturally similar to Germans.

Would Ariely and his co-authors be willing to bet that Swedes are less honest than Germans (or Norwegians, living under a regime closer to German mixed capitalism than to Swedish social democracy)?  If so, I’m happy to take the other end of the bet.

The same applies if we were to compare Israelis raised in explicitly socialist kibbutzim to other Israelis, or  Englishpeople raised before the Thatcher era with those raised after, or Canadians with Americans. (After all, the same people who use the word “socialist” to describe Stalinist tyranny also use it to describe national health insurance.)

Of course in all of those cases one could name other factors that might influence the outcomes. But that’s precisely the point: the same is true of the German case. Yet Ariely and his co-authors seem to think they’ve proven something, and the Economist and Alex Tabarrok (who certainly knows better) at Marginal Revolution and Mark J. Perry at AEI (who may not know better) swallow it whole, without raising a single methodological red flag. “When it comes to ethics, a capitalist upbringing appears to trump a socialist one,” trumpets the Economist, hoping that its readers will vote to help the rich get richer and the poor get poorer while “reforming” union power out of the labor markets.

To call this a “mistake” would, it seems to me, be far too generous. A blunder that extreme only happens when the people making it want to fool themselves and others. It’s an example of what Dan Kahan calls “motivated cognition.”

Do the thought experiment for yourself.   Imagine that the results had come out the other way: say, showing that Chileans became less honest while Pinochet’s minions were gouging out their opponents’ eyeballs and Milton Friedman was gushing about the “miracle of Chile”? How do you think the paper would read, and what do you think the Economist, Marginal Revolution, and AEI would have had to say about its methods? 

I know that some of my libertarian friends consider my views of their movement uncharitable, but honest to God, the combination of high IQ and good formal economics training with great willingness to believe and repeat obvious nonsense that characterizes that group is really hard to take.  Of course con-cons and professional lefties also believe some truly stupid sh*t,  but neither group is as good as the glibertarians at pretending to be Serious Social Scientists.

Here’s a Pro Tip: If you never reach and publish a conclusion that doesn’t support  your prejudices, no one has any reason to take any of your results seriously.

Anti-intellectualism in libertarian policy?

Though most people aren’t aware of it, Friedrich Hayek in a 1949 article (“The Intellectuals and Socialism” [JSTOR: academic paywall; ungated version from the Mises Institute, with a crucial omission described below]) wondered aloud whether the existence of independent intellectuals, who could make a living due to copyright, was on balance a good thing. In the text (p. 420 of the law review version, 374 of the Mises Institute’s reprint) he wrote:

In the sense in which we are using the term, the intellectuals are in fact a fairly new phenomenon of history. Though nobody will regret that education has ceased to be a privilege of the propertied classes, the fact that the propertied classes are no longer the best educated and the fact that the large number of people who owe their position solely to the their general education do not possess that experience of the working of the economic system which the administration of property gives, are important for understanding the role of the intellectual. Professor Schumpeter, who has devoted an illuminating chapter of his Capitalism, Socialism, and Democracy to some aspects of our problem, has not unfairly stressed that it is the absence of direct responsibility for practical affairs and the consequent absence of first hand knowledge of them which distinguishes the typical intellectual from other people who also wield the power of the spoken and written word. It would lead too far, however, to examine here further the development of this class and the curious claim which has recently been advanced by one of its theorists that it was the only one whose views were not decidedly influenced by its own economic interests. One of the important points that would have to be examined in such a discussion would be how far the growth of this class has been artificially stimulated by the law of copyright (bold emphases added).

The law-review version contains at this point—though the reprint omits—the following rather striking footnote:

It would be interesting to discover how far a seriously critical view of the benefits to society of the law of copyright or the expression of doubts about the public interest in the existence of a class which makes its living from the writing of books would have a chance of being publicly stated in a society in which the channels of expression are so largely controlled by people who have a vested interest in the existing situation (bold emphasis added).

Hayek, often praised by his enemies for his consistency, was consistent here as well. Given his deep and abiding hatred of generalist intellectuals, who make their living by their pens and fix the general tenor of society’s ideas, Hayek mused about cutting the knot: abolishing intellectuals by abolishing the law that alone lets them support themselves. His whole purpose was to bring about what might seem the reductio result: that the only writers would be professionals—mostly academics—who drew a salary to convey their expertise; people with independent incomes who wrote on the side; and writers as servants, employed by wealthy patrons and willing to toe their line. Hayek lamented that an honest policy debate on this was impossible because those pesky intellectuals, knowing their living was at stake, wouldn’t allow it.

Well, it turns out we didn’t need an honest policy debate in order to approach Hayek’s preferred outcome.

Continue Reading…

This insubstantial pageant

British lefty pundit George Monbiot, in a gloomy tirade against the cult of economic growth:

Ignore if you must climate change, biodiversity collapse, the depletion of water, soil, minerals, oil; even if all these issues were miraculously to vanish, the mathematics of compound growth make continuity impossible ….

The trajectory of compound growth shows that the scouring of the planet has only just begun. As the volume of the global economy expands, everywhere that contains something concentrated, unusual, precious will be sought out and exploited, its resources extracted and dispersed, the world’s diverse and differentiated marvels reduced to the same grey stubble.

Some people try to solve the impossible equation with the myth of dematerialisation: the claim that as processes become more efficient and gadgets are miniaturised, we use, in aggregate, fewer materials. There is no sign that this is happening.

Monbiot’s argument is wrong. I dug out a nice oddball paper on dematerialization by Austrian scholar Julia K. Steinberger et al, Development and Dematerialization: An International Study, in online peer-reviewed journal PLoS ONE. Snark if you like, but read it first. They used standardised material flow data still produced by national statistics agencies (perhaps in response to Leontief’s input-output analysis). The three basic categories – fossil fuels, biomass, and minerals – are aggregated by weight into “domestic material consumption”, DMC. It’s a measure of the mass of material resources we consume. Not very helpful for helium and yttrium, but these are of marginal importance.

The chart over the jump shows the trends for a good number of rich and developing countries. Continue Reading…

When you spend less per person on pharma, you can have lower corporate taxes. It’s all about trade-offs.

Although I don’t study pharma prices, I could not resist the irony I saw reading the WSJ today while I tried not to choke on my oatmeal.  Evidently Pfizer Inc. wants to acquire AstraZeneca at least partly to take advantage of lower corporate tax rates and move much of its operations to the United Kingdom.  Of course, business considerations such are more likely to be driving this, but as they walk out the door, why not aim this  Cassandra-like warning that other countries are more competitive, and we should lower corporate tax rates?

Not so fast! Two things to keep in mind: If the US regulated drug prices the way that other countries do, including the UK,  maybe the US government could also afford to lower its corporate tax rate.  According to the OECD, total expenditure on pharmaceuticals and other medical non-durables, (adjusted for cost of living with US$ purchasing power parity) is $995 per person. How about the UK? A paltry $374 per person! The OECD average is $497. Even Switzerland, long known to be more like the US in many ways in healthcare, spends $530 per person, probably because you can’t have US pricing when you are surrounded by countries that don’t. And with this magnitude of difference, I’m guessing this is unlikely to be the mix/intensity or quantity of drugs used. It’s probably mostly price.

Essentially,  quite apart from the pharma price effect on health insurance premiums for those of us with private insurance, we probably give back whatever we take in corporate taxes by paying higher prices for drugs via Medicare Part D. The  industry strenuously avoided price regulation or studies of cost-effectiveness under the Medicare Modernization Act while expanding their market.  The Affordable Care Act did extract some discounts, but nothing like those of other countries. Just one more example of how health care prices are a drag on the economy, and an example of rent-seeking and capture gone rampant. 

A second aspect is how much governments actually collect vs. what they charge, in effect, the sticker vs. the real price. Again, tax policy is not my area, but I did study comparative politics and American political development in grad school. In the UK tax rates might be lower, (apart from  higher sales tax and income tax than the US),  because  I’m guessing that the UK tax code offers companies a lot less flexibility for corporate loopholes:  the membrane between tax lobbyists and officials in the Westminster system of government is usually a lot less porous.  Maybe other countries simply collect a higher proportion of taxes levied.

PS—By the way, I still blog here!  Keith wrote to me and said he was sending out a search party sometime ago. I’m on what they would lovingly call at the NYT “book leave” from the blog,  to write about another critical health care issue, the Relative Value Update Committee (RUC) and physician fees. So, for now, I’m popping my head in very sporadically.

Thomas Piketty’s other book

Americans think the French don’t work hard. Thomas Piketty’s Capital in the XXIst Century has 970 pages in the French edition before me. That’s with merely a table of contents. Following the annoying and backward French habit, there’s no index. The scholarly apparatus – bibliography, data tables, and more – is shifted to a website. You can download the lot in a zip file of a mere 13 MB.

scales-of-justice

It matters that Piketty has written a doorstopper not an article. The book is very accessible to the general reader with stamina; in fact it’s too leisurely and repetitive for my taste, more appropriate to the series of lectures on which it is no doubt based. But it is massively learned. My heart warms to a writer who takes Jane Austen and Honoré de Balzac as serious and acute witnesses to the economic life of their times. His interest in social history is not that of a dilettante like me. He has done primary research in the Paris city archives on the inheritance patterns of the bourgeoisie of the Belle Epoque. His research style owes a lot, explicitly, to the Annales school of historians like Febvre, Braudel and Bloch, who were not afraid of the challenge of understanding entire complex societies over long sweeps of time.

Freshwater economists will not be able to challenge this historical depth simply by fanning their vapours with elegant DGSE models. Jane Austen is outside their professional frame of reference. Piketty has restored economic history to its rightful place as the test of large-scale theory, as Milton Friedman accepted. Graduate students in economics are I hope heading for the history departments to learn about the methods. With luck, Piketty may shift the paradigm of economic science in a good direction, with more humility and a willingness to use all the evidence.

Beyond simple praise – read the book! – there are three ways to criticise a magnum opus like this. Niggles: e.g, in his long time-series charts, he often shifts the horizontal scale half-way without flagging it. This sort of thing would be useful in quantity, but requires real work. Frontal attack: the theory is wrong because. Piketty is out of my league and anyway it looks pretty convincing to me. Finally, there’s complaining that the author should have written a different book. That’s my line. It has the additional advantage that I don’t need first to finish the one he wrote.

The book he didn’t write is about innovation. Continue Reading…

Soft Signs of Economic Revival in the Developed World

2013 was a painful year for developed economies, particularly those in the Eurozone. Finland, Greece, Holland, Ireland, Italy, Portugal, Slovenia and Spain all saw their GDP shrink. France and Germany just barely avoided the same fate. But the latest International Monetary Fund projections for 2014 economic growth are better news for those ailing economies, as well as for the non-Eurozone G7 nations. The chart below ranks these countries from greatest projected 2014 growth (The United Kingdom) to worst (a tie between Finland and Slovenia). Although none of them has a red-hot economy, neither is any of them projected to contract.

IMF Growth Projections for 2014

The biggest projected turnaround from 2013 is long-suffering Greece, whose economy shriveled by a ghastly 3.9% in 2013. The Greeks must also feel relieved that investors seem willing to lend them money again. However, the end of economic contraction does not necessarily mean an end to misery for most people in an economy. Ryan Cooper glumly points out that Greek unemployment is at 27%! That grim statistic underscores how far Greece remains from a healthier economy like the U.K.’s, where respectable economic growth is being projected concurrent with a 5-year low in unemployment.

Still, as a whole, the developed world seems poised to move ahead economically in 2014. That’s encouraging news for the millions of its people who spent 2013 hanging on by their fingernails.

p.s. In case you are wondering why I use “Holland” instead of “The Netherlands”, it’s because Holland is an ancient Dutch word that translates roughly as “Name for our country that fits on a PowerPoint slide”.

Quantitative Easing Explained

As developed economies show more signs of life, many observers wonder whether it is time to end quantitative easing. The discussion would be much more informative if more people actually knew what QE is. This is the best short explanation I have seen.

Moral hazard

One of the nice things about living in a civilized society is being able share the risk of catastrophe across populations larger than your family and close friends.  We have all sorts of machinery for this, private and public, from welfare to fire insurance to fire departments, arrangements that protect each of us, for example, from either needing savings accounts large enough to pay for a whole new house (or a triple bypass heart operation) with cash, or being on the street, or dead, if chance rolls us snake eyes or boxcars.

Republicans are much exercised over the incentives to laziness and fecklessness these programs breed in poor people; as Oscar Wilde’s Lady Bracknell observed, if the lower classes don’t set us a good moral example, what’s the use of them?  Continue Reading…

Compared-to-what? analysis: Greg Mankiw edition

Is there anything more pathetically and transparently shoddy and dishonest than Greg Mankiw’s pretense at economics?

Why, yes there is: Greg Mankiw’s pretense at philosophy.

Isaac Chotiner reads Mankiw, so you don’t have to.

Extra bonus fallacy: Now that millions of people have Obamacare coverage, Mankiw’s “first-do-no-harm” approach would argue against repeal. Ditto social security privatization and reneging on public pensions.

What’s disgusting is that Mankiw can’t be, in real life, nearly stupid enough to believe the crap he publishes. If it’s not mere partisan hackery, it must be pure motivated cognition.