No! Wait! Sorry! Wrong future for socialism! This is John Roemer’s A Future for Socialism, a book on how to build a kinder, gentler socialist economy. In my review of Red Plenty, I complained about the book’s lack of gritty economic planning details, and Gilbert commented:

The least unimpressive modern detail-level explanation of how socialism could work is [A Future For Socialism]. I might regret recommending this book, because Scott is the kind of person to fall for it.

With a recommendation like that, how could I not?

A Future For Socialism makes – and I believe proves – a bold thesis. It argues that a socialist economy is entirely compatible with prosperity, innovation, and consumer satisfaction – just as long as by “socialism”, you mean “capitalism”.

The book makes proposals, but you’re not exactly hearing the Internationale playing in the background as you read them. Prices are obviously the best form of allocating goods, so a socialist economy should keep them. Central planning could never work, so a socialist economy doesn’t need it. Bosses and managers seem to be doing a good job keeping their firms profitable, so they can all keep their jobs under socialism. Everyone has different skills, so clearly in a truly socialist system they deserve different wages, in fact whatever wage the market will bear.

So where’s the socialism? Well, socialism is a system where the people own the means of production. Right now corporations control the means of production, and you own corporations by holding stock in them. So if everybody owns stock in all corporations, then if you squint that’s kind of socialist.

Roemer proposes the following: first, you nationalize large industries – or, if you’re a post-Communist country (Roemer was writing in 1992) you start with your large industries already nationalized. Then you split them into stocks. Then you give everyone an equal amount of these stocks. When the corporations make money, they pay them out in the form of stock dividends, which go to the people/stockholders. So every year I get a check in the mail representing my one-three-hundred-millionth-part share of all the profits made by all the corporations in the United States.

Question: won’t poor people immediately sell their shares to rich people, resulting in the rich people becoming wealthy means-of-production-owning capitalists again? (compare question 4.1 here). Answer: yes, obviously. So Roemer proposes a law that stocks cannot be sold for money, only coupons and other stocks. Every citizen is given an equal number of coupons at birth, trades them for stocks later on, and then trades those stocks for other stocks. This allows smart citizens to invest wisely, and allows a sort of “stock market” that sends the correct signals (this business’s stock price is decreasing so maybe they’re doing something wrong) but doesn’t allow stock accumulation by wealthy capitalists.

In this system, businesses would raise funds not by selling stock but by seeking loans from banks. Apparently this is already how it works in Japan, where companies are arranged into “business groups” called keiretsu with each having a bank in charge of lending them money. Roemer hopes his model would work even better than the keiretsu, because the flow of stock coupons would give the banks market-driven information that help them make funding decisions.

So when I read about this I got really excited, because it sounded like a Basic Income Guarantee without the awkward questions about how to fund it. If everyone owns an equal number of shares in a diverse portfolio of the nation’s companies, then corporate profits go to everyone in the form of a check in the mail. Sounds like a good way to help the poor.

Unfortunately, Roemer calculates in the back of the book how much money he expects people to get from such a scheme. Using equations I can’t exactly follow, he finds that every citizen would get about $500, which is about 5% of the 1992 poverty rate. Using slightly different assumptions weighted in his favor, he is able to increase this to $1000 per person. It looks like we will not be solving poverty today.

On the other hand, I recently learned that corporate profits have been rising dramatically lately. If you do a calculation much simpler than Roemer’s – in fact, pure division of the $2 trillion in national profits by the 300 million Americans who could receive them – you get about $6,000 per person. That’s still not enough to reach the poverty line, but it’s something, especially if you’re willing to tax the wealthy’s share to funnel it to the poor.

(on the other hand, maybe fewer than all corporations will be nationalized? I dunno here.)

But Roemer doesn’t even mention this except as an aside, and doesn’t think it’s the most interesting thing about his system. What he’s really interested in is finding a way to control what by analogy to public goods he calls “public bads”. These are all the things that coordination problems form around, like pollution and global warming and selling weapons to dictatorial regimes and so on.

He makes the following fascinating claim: poor decision-making in the current system is driven by an imbalance of costs and benefits caused by the concentration of capital. For example, suppose that using lots of fossil fuel will produce $1 trillion in good economic activity, but also $10 trillion in costs due to climate change. The Koch brothers own lots of capital (in the form of stock, ownership rights of companies, et cetera) so much of that $1 trillion in economic benefits takes the form of increased corporate profits that go directly into their pockets. However, they only suffer the same share of global warming anyone else in the US suffers – presumably 1/300 millionth of the national cost. Therefore, since they get disproportionately large benefits but only proportionate costs, they have strong incentive to try to push fossil fuels. They are rich and powerful and usually get what they want, so probably fossil fuels will continue to be used.

But imagine that we socialized stock. Now everyone in the US gets 1/300 millionth of the national profits from good economic activity, and 1/300 millionth of the national costs of global warming. Since we already said the costs are greater than the benefits, every individual wants to fight global warming. People’s incentives finally match reality.

This is a really pretty idea, but it doesn’t seem quite right to me. By my understanding, very little lobbying is done by rich capitalists personally – and I think the Koch brothers are an exception because they genuinely hold conservative principles, not because they expect the calculus to come out in their favor. See Does Class Warfare Have A Free Rider Problem? Instead, lobbying is done by businesses directly, driven by the leadership of the businesses. Exxon Mobil hires oil lobbyists, Google hires intellectual property lobbyists, Monsanto hires agriculture lobbyists.

Would enraged Monsanto stockholder/citizens launch a corporate revolt demanding the company stop hiring lobbyists to work against the American people? I don’t think so. Corporate revolts are really really hard even nowadays when most stocks are held by a few attention-paying competent rich people. Give them to millions of not-attention-paying mostly-incompetent hoi polloi, and you think they’re going to be able to coordinate something? Besides, since stocks are tradeable, it might be only a few percent of the population who own Monsanto stock in particular; everyone else traded it away for more Google and Exxon Mobil stock. Those few percent of the population would get more money from Monsanto dividends than they would lose in the inevitable revolt of the Mutant Corn People, so their incentives would still be screwed.

So the Basic Income angle isn’t really enough to be exciting, and I don’t find the public goods/game theory angle too convincing either.

There’s also a big set of questions the book leaves unanswered – how do companies get nationalized? How are new companies formed? What happens to them?

Roemer does agree that it would be hard to nationalize all companies in a large advanced nation like the United States. In particular, taking rich people’s stock away from them without compensation would be naked theft, and the government probably couldn’t afford the compensation necessary. So he suggests that something like this be tried first in the post-communist countries or some other nation that already has nationalized industries and wants to know what to do with them.

Fine. That leaves the other big question. Suppose that the US somehow nationalizes all its industries in 1992, and a few years later Page and Brin want to start Google. What happens? Does the government say “Oh, no, sorry, we already have companies, we don’t need more of them”? Are they allowed to start it small, but the government immediately seizes it once it gets past a certain size? Are they just not allowed to sell it for stock and turn it into a corporation? Or if all of those things are okay and they can build Google as normal, what happens once most of the economy is made of these new post-1992 corporations and everything is capitalist again?

Overall there’s nothing terrible about the system in A Future For Socialism. It sure beats Stalin and even Castro. It just seems like a lot of work for not necessarily very much gain.

The last chapter is the only one in which Roemer permits himself to wax rhapsodic into the optimism I normally associate with the socialist cause. He says that he hopes market socialism is just the beginning, that this system of universal stock ownership will cause people to stop promoting public bads and care about the general welfare of the country, and this will take the form of more investment in education to train the next generation of workers, and once everyone has access to good education everyone will be just about equal and able to earn just about equal wages in the free market and then all this social class nonsense will disappear. Man, people who wrote politics before we fully understood how genetics worked were so cute!

But despite my panning the economic proposals, I learned a lot from this book and am grateful to have read it.

First, I was impressed by the assumptions. Roemer starts by explaining that yes, he knows why capitalism is a good thing, it’s reasons X Y and Z, and he’s not going to challenge or ignore that. When I hear someone making a controversial claim I disagree with, my immediate instinct is to assume that person is ignorant. Roemer proves he isn’t in precisely the right way. Before you advocate socialism, you prove that you’re not just totally ignorant of capitalism; that simplifies the process of sorting out the people you can learn from from the people you can’t.

He also makes it clear that he’s not out to change human nature. He hopes human nature will eventually change (see above about education) but he also recognizes that has to track changes in society, not be the cause of them. He writes:

[These proposals should take people as they actually are today, not as they might be after an egalitarian economic policy or cultural revolution has “remade” them. We must assume, as social scientists, that people are, in the short term at least, what they are: what can be changed – and slowly at that – are the institutions through which they interact.

Well put. Roemer establishes himself early on as someone who shares some of my basic assumptions (and can express them better than I can), which means even disagreement will be productive disagreement.

But second, and more important, this book is the first time I really had to think about joint-stock corporations. Like, I know what stock is in a “you buy it and then you get very excited or upset when it goes up or down” way, but I hadn’t thought of it as an important philosophical and political idea before, and Roemer really hammers home that it is.

The book identifies three big principal-agent problems in Soviet and other communist economic systems. First, managers employ workers to make their product, but workers want to slack off or line their own pockets. Second, central planners employ managers to run plants, but managers want to slack off or line their own pockets. Third, The People employ central planners to run the economy, but central planners want to slack off or line their own pockets. The Soviets solved these problems poorly. The central planners had no responsibility to anyone except other Party bureaucrats; the central planners could only punish managers who failed to meet their cooked-up metrics, leading to Goodhart’s Law gone berserk. And managers sometimes couldn’t promote workers in a meaningful way or fire them in a meaningful way, so workers had little incentive to do a good job.

The standard capitalist narrative is that principal-agent problems are very hard and maybe impossible on such a big scale, but this is okay, because in capitalism the people making the decisions are the ones profiting off them.

Roemer points out that’s nonsense. Most real-world capitalism isn’t the plucky entrepreneur founding a startup, it’s the giant corporation, in which a bunch of investors (who profit off of good decisions) hire a manager or CEO type person (who is supposed to make good decisions). Insofar as CEOs keep companies profitable – and it seems they do – the principal-agent problem is solved. If we want the company to be run by Stalin instead of by investors, all we need to do is use current corporate governance structure, but give Stalin the stock, and the company will be just as profitable as ever (as long as Stalin doesn’t try to interfere).

Roemer credits for this the hostile takeover method, where if a stock’s price falls too low, that means some other group can buy out all the stock and fire the manager. It’s a good point, but I can’t help wondering if another part of it is immediate, hard-to-deny feedback: that is, the existence of the stock price at all. First of all, the CEO can’t remain too deluded about her decisions; there has been many a politician who sends a country to its grave all the while hearing from a bunch of toadies that she’s making things better, but stock prices are hard to fudge. Second of all, the investors and the Board of Directors and so on have a mechanism by which they can agree upon whether the company is doing well or not, short-circuiting some of the politics that might cause them to split into factions for or against the current leadership (this is not to say there are no corporate politics, just that they are more resolvable than other kinds of politics).

The principal-agent problem is at the center of a lot of different things, so it’s really interesting to think of something as humble and unassuming as the joint-stock corporation as having in some sense solved it. I’m not sure what the wider implications of this are, but the idea of futarchy is looking better and better.

So in summary, this book’s ideas on stock distribution seem potentially okay but probably not worth nationalizing all industries over, but the real gem is the lucid explanation of the importance of corporate governance.

I decided to read Red Plenty because my biggest gripe after reading Singer’s book on Marx was that Marx refused to plan how communism would actually work, instead preferring to leave the entire matter for the World-Spirit to sort out. But almost everything that interests me about Communism falls under the category of “how communism would actually work”. Red Plenty, a semi-fictionalized account of the history of socialist economic planning, seemed like a natural follow-up.

But I’d had it on my List Of Things To Read for even longer than that, ever after stumbling across a quote from it on some blog or other:

Marx had drawn a nightmare picture of what happened to human life under capitalism, when everything was produced only in order to be exchanged; when true qualities and uses dropped away, and the human power of making and doing itself became only an object to be traded.

Then the makers and the things made turned alike into commodities, and the motion of society turned into a kind of zombie dance, a grim cavorting whirl in which objects and people blurred together till the objects were half alive and the people were half dead. Stock-market prices acted back upon the world as if they were independent powers, requiring factories to be opened or closed, real human beings to work or rest, hurry or dawdle; and they, having given the transfusion that made the stock prices come alive, felt their flesh go cold and impersonal on them, mere mechanisms for chunking out the man-hours. Living money and dying humans, metal as tender as skin and skin as hard as metal, taking hands, and dancing round, and round, and round, with no way ever of stopping; the quickened and the deadened, whirling on.

And what would be the alternative? The consciously arranged alternative? A dance of another nature. A dance to the music of use, where every step fulfilled some real need, did some tangible good, and no matter how fast the dancers spun, they moved easily, because they moved to a human measure, intelligible to all, chosen by all.

Needless to say, this is Relevant To My Interests, which include among them poetic allegories for coordination problems. And I was not disappointed.

II.

The book begins:

Strange as it may seem, the gray, oppressive USSR was founded on a fairy tale. It was built on the twentieth-century magic called “the planned economy,” which was going to gush forth an abundance of good things that the lands of capitalism could never match. And just for a little while, in the heady years of the late 1950s, the magic seemed to be working. Red Plenty is about that moment in history, and how it came, and how it went away; about the brief era when, under the rash leadership of Khrushchev, the Soviet Union looked forward to a future of rich communists and envious capitalists, when Moscow would out-glitter Manhattan and every Lada would be better engineered than a Porsche. It’s about the scientists who did their genuinely brilliant best to make the dream come true, to give the tyranny its happy ending.

And this was the first interesting thing I learned.

There’s a very settled modern explanation of the conflict between capitalism and communism. Capitalism is good at growing the economy and making countries rich. Communism is good at caring for the poor and promoting equality. So your choice between capitalism and communism is a trade-off between those two things.

But for at least the first fifty years of the Cold War, the Soviets would not have come close to granting you that these are the premises on which the battle must be fought. They were officially quite certain that any day now Communism was going to prove itself better at economic growth, better at making people rich quickly, than capitalism. Even unofficially, most of their leaders and economists were pretty certain of it. And for a little while, even their capitalist enemies secretly worried they were right.

The arguments are easy to understand. Under capitalism, plutocrats use the profits of industry to buy giant yachts for themselves. Under communism, the profits can be reinvested back into the industry to build more factories or to make production more efficient, increasing growth rate.

Under capitalism, everyone is competing with each other, and much of your budget is spent on zero-sum games like advertising and marketing and sales to give you a leg up over your competition. Under communism, there is no need to play these zero-sum games and that part of the budget can be reinvested to grow the industry more quickly.

Under capitalism, everyone is working against everyone else. If Ford discovers a clever new car-manufacturing technique, their first impulse is to patent it so GM can’t use it, and GM’s first impulse is to hire thousands of lawyers to try to thwart that attempt. Under communism, everyone is working together, so if one car-manufacturing collective discovers a new technique they send their blueprints to all the other car-manufacturing collectives in order to help them out. So in capitalism, each companies will possess a few individual advances, but under communism every collective will have every advance, and so be more productive.

These arguments make a lot of sense to me, and they definitely made sense to the Communists of the first half of the 20th century. As a result, they were confident of overtaking capitalism. They realized that they’d started with a handicap – czarist Russia had been dirt poor and almost without an industrial base – and that they’d faced a further handicap in having the Nazis burn half their country during World War II – but they figured as soon as they overcame these handicaps their natural advantages would let them leap ahead of the West in only a couple of decades. The great Russian advances of the 50s – Sputnik, Gagarin, etc – were seen as evidence that this was already starting to come true in certain fields.

And then it all went wrong.

III.

Grant that communism really does have the above advantages over capitalism. What advantage does capitalism have?

The classic answer is that during communism no one wants to work hard. They do as little as they can get away with, then slack off because they don’t reap the rewards of their own labor.

Red Plenty doesn’t really have theses. In fact, it’s not really a non-fiction work at all. It’s a dramatized series of episodes in the lives of Russian workers, politicians, and academics, intended to come together to paint a picture of how the Soviet economy worked.

But if I can impose a thesis upon the text, I don’t think it agreed with this. In certain cases, Russians were very well-incentivized by things like “We will kill you unless you meet the production target”. Later, when the state became less murder-happy, the threat of death faded to threats of demotions, ruined careers, and transfer to backwater provinces. And there were equal incentives, in the form of promotion or transfer to a desirable location such as Moscow, for overperformance. There were even monetary bonuses, although money bought a lot less than it did in capitalist countries and was universally considered inferior to status in terms of purchasing power. Yes, there were Goodhart’s Law type issues going on – if you’re being judged per product, better produce ten million defective products than 9,999,999 excellent products – but that wasn’t the crux of the problem.

Red Plenty presented the problem with the Soviet economy primarily as one of allocation. You could have a perfectly good factory that could be producing lots of useful things if only you had one extra eensy-weensy part, but unless the higher-ups had allocated you that part, you were out of luck. If that part happened to break, getting a new one would depend on how much clout you (and your superiors) pulled versus how much clout other people who wanted parts (and their superiors) held.

The book illustrated this reality with a series of stories (I’m not sure how many of these were true, versus useful dramatizations). In one, a pig farmer in Siberia needed wood in order to build sties for his pigs so they wouldn’t freeze – if they froze, he would fail to meet his production target and his career would be ruined. The government, which mostly dealt with pig farming in more temperate areas, hadn’t accounted for this and so hadn’t allocated him any wood, and he didn’t have enough clout with officials to request some. A factory nearby had extra wood they weren’t using and were going to burn because it was too much trouble to figure out how to get it back to the government for re-allocation. The farmer bought the wood from the factory in an under-the-table deal. He was caught, which usually wouldn’t have been a problem because everybody did this sort of thing and it was kind of the “smoking marijuana while white” of Soviet offenses. But at that particular moment the Party higher-ups in the area wanted to make an example of someone in order to look like they were on top of their game to their higher-ups. The pig farmer was sentenced to years of hard labor.

A tire factory had been assigned a tire-making machine that could make 100,000 tires a year, but the government had gotten confused and assigned them a production quota of 150,000 tires a year. The factory leaders were stuck, because if they tried to correct the government they would look like they were challenging their superiors and get in trouble, but if they failed to meet the impossible quota, they would all get demoted and their careers would come to an end. They learned that the tire-making-machine-making company had recently invented a new model that really could make 150,000 tires a year. In the spirit of Chen Sheng, they decided that since the penalty for missing their quota was something terrible and the penalty for sabotage was also something terrible, they might as well take their chances and destroy their own machinery in the hopes the government sent them the new improved machine as a replacement. To their delight, the government believed their story about an “accident” and allotted them a new tire-making machine. However, the tire-making-machine-making company had decided to cancel production of their new model. You see, the new model, although more powerful, weighed less than the old machine, and the government was measuring their production by kilogram of machine. So it was easier for them to just continue making the old less powerful machine. The tire factory was allocated another machine that could only make 100,000 tires a year and was back in the same quandary they’d started with.

It’s easy to see how all of these problems could have been solved (or would never have come up) in a capitalist economy, with its use of prices set by supply and demand as an allocation mechanism. And it’s easy to see how thoroughly the Soviet economy was sabotaging itself by avoiding such prices.

IV.

The “hero” of Red Plenty – although most of the vignettes didn’t involve him directly – was Leonid Kantorovich, a Soviet mathematician who thought he could solve the problem. He invented the technique of linear programming, a method of solving optimization problems perfectly suited to allocating resources throughout an economy. He immediately realized its potential and wrote a nice letter to Stalin politely suggesting his current method of doing economics was wrong and he could do better – this during a time when everyone else in Russia was desperately trying to avoid having Stalin notice them because he tended to kill anyone he noticed. Luckily the letter was intercepted by a kindly mid-level official, who kept it away from Stalin and warehoused Kantorovich in a university somewhere.

During the “Khruschev thaw”, Kantorovich started getting some more politically adept followers, the higher-ups started taking note, and there was a real movement to get his ideas implemented. A few industries were run on Kantorovichian principles as a test case and seemed to do pretty well. There was an inevitable backlash. Opponents accused the linear programmers of being capitalists-in-disguise, which wasn’t helped by their use of something called “shadow prices”. But the combination of their own political adeptness and some high-level support from Khruschev – who alone of all the Soviet leaders seemed to really believe in his own cause and be a pretty okay guy – put them within arm’s reach of getting their plans implemented.

But when elements of linear programming were adopted, they were adopted piecemeal and toothless. The book places the blame on Alexei Kosygen, who implemented a bunch of economic reforms that failed, in a chapter that makes it clear exactly how constrained the Soviet leadership really was. You hear about Stalin, you imagine these guys having total power, but in reality they walked a narrow line, and all these “shadow prices” required more political capital than they were willing to mobilize, even when they thought Kantorovich might have a point.

V.

In the end, I was left with two contradictory impressions from the book.

First, amazement that the Soviet economy got as far as it did, given how incredibly screwed up it was. You hear about how many stupid things were going on at every level, and you think: This was the country that built Sputnik and Mir? This was the country that almost buried us beneath the tide of history? It is a credit to the Russian people that they were able to build so much as a screwdriver in such conditions, let alone a space station.

But second, a sense of what could have been. What if Stalin hadn’t murdered most of the competent people? What if entire fields of science hadn’t been banned for silly reasons? What if Kantorovich had been able to make the Soviet leadership base its economic planning around linear programming? How might history have turned out differently?

One of the book’s most frequently-hammered-in points was that there was was a brief moment, back during the 1950s, when everything seemed to be going right for Russia. Its year-on-year GDP growth (as estimated by impartial outside observers) was somewhere between 7 to 10%. Starvation was going down. Luxuries were going up. Kantorovich was fixing entire industries with his linear programming methods. Then Khruschev made a serious of crazy loose cannon decisions, he was ousted by Brezhnev, Kantorovich was pushed aside and ignored, the “Khruschev thaw” was reversed and tightened up again, and everything stagnated for the next twenty years.

If Khruschev had stuck around, if Kantorovich had succeeded, might the common knowledge that Communism is terrible at producing material prosperity look a little different?

The book very briefly mentioned a competing theory of resource allocation promoted by Victor Glushkov, a cyberneticist in Ukraine. He thought he could use computers – then a very new technology – to calculate optimal allocation for everyone. He failed to navigate the political seas as adroitly as Kantorovich’s faction, and the killing blow was a paper that pointed out that for him to do everything really correctly would take a hundred million years of computing time.

That was in 1960. If computing power doubles every two years, we’ve undergone about 25 doubling times since then, suggesting that we ought to be able to perform Glushkov’s calculations in three years – or three days, if we give him a lab of three hundred sixty five computers to work with. There could have been this entire field of centralized economic planning. Maybe it would have continued to underperform prices. Or maybe after decades of trial and error across the entire Soviet Union, it could have caught up. We’ll never know. Glushkov and Kantorovich were marginalized and left to play around with toy problems until their deaths in the 80s, and as far as I know their ideas were never developed further in the context of a national planned economy.

VI.

One of the ways people like insulting smart people, or rational people, or scientists, is by telling them they’re the type of people who are attracted to Communism. “Oh, you think you can control and understand everything, just like the Communists did.”

And I had always thought this was a pretty awful insult. The people I know who most identify as rationalists, or scientifically/technically minded, are also most likely to be libertarian. So there, case dismissed, everybody go home.

This book was the first time that I, as a person who considers himself rationally/technically minded, realized that I was super attracted to Communism.

Here were people who had a clear view of the problems of human civilization – all the greed, all the waste, all the zero-sum games. Who had the entire population united around a vision of a better future, whose backers could direct the entire state to better serve the goal. All they needed was to solve the engineering challenges, to solve the equations, and there they were, at the golden future. And they were smart enough to be worthy of the problem – Glushkov invented cybernetics, Kantorovich won a Nobel Prize in Economics.

And in the end, they never got the chance. There’s an interpretation of Communism as a refutation of social science, here were these people who probably knew some social science, but did it help them run a state, no it didn’t. But from the little I learned about Soviet history from this book, this seems diametrically wrong. The Soviets had practically no social science. They hated social science. You would think they would at least have some good Marxists, but apparently Stalin killed all of them just in case they might come up with versions of Marxism he didn’t like, and in terms of a vibrant scholarly field it never recovered. Economics was tainted with its association with capitalism from the very beginning, and when it happened at all it was done by non-professionals. Kantorovich was a mathematician by training; Glushkov a computer scientist.

Soviet Communism isn’t what happens when you let nerds run a country, it’s what happens when you kill all the nerds who are experts in country-running, bring in nerds from unrelated fields to replace them, then make nice noises at those nerds in principle while completely ignoring them in practice. Also, you ban all Jews from positions of importance, because fuck you.

Baggy two-piece suits are not the obvious costume for philosopher kings: but that, in theory, was what the apparatchiks who rule the Soviet Union in the 1960s were supposed to be. Lenin’s state made the same bet that Plato had twenty-five centuries earlier, when he proposed that enlightened intelligence gives absolute powers would serve the public good better than the grubby politicking of republics.

On paper, the USSR was a republic, a grand multi-ethnic federation of republics indeed and its constitutions (there were several) guaranteed its citizens all manner of civil rights. But in truth the Soviet system was utterly unsympathetic to the idea of rights, if you meant by them any suggestion that the two hundred million men, women and children who inhabited the Soviet Union should be autonomously fixing on two hundred million separate directions in which to pursue happiness. This was a society with just one programme for happiness, which had been declared to be scientific and therefore was as factual as gravity.

But the Soviet experiment had run into exactly the difficulty that Plato’s admirers encountered, back in the fifth century BC, when they attempted to mould philosophical monarchies for Syracuse and Macedonia. The recipe called for rule by heavily-armed virtue—or in the Leninist case, not exactly virtue, but a sort of intentionally post-ethical counterpart to it, self-righteously brutal. Wisdom was to be set where it could be ruthless. Once such a system existed, though, the qualities required to rise in it had much more to do with ruthlessness than wisdom. Lenin’s core of Bolsheviks, and the socialists like Trotsky who joined them, were many of them highly educated people, literate in multiple European languages, learned in the scholastic traditions of Marxism; and they preserved these attributes even as they murdered and lied and tortured and terrorized. They were social scientists who thought principle required them to behave like gangsters. But their successors – the vydvizhentsy who refilled the CEntral Committee in the thirties – were not the most selfless people in Soviet society, or the most principled, or the most scrupulous. They were the most ambitious, the most domineering, the most manipulative, the most greedy, the most sycophantic: people whose adherence to Bolshevik ideas was inseparable from the power that came with them. Gradually their loyalty to the ideas became more and more instrumental, more and more a matter of what the ideas would let them grip in their two hands…

Stalin had been a gangster who really believed he was a social scientist. Khruschev was a gangster who hoped he was a social scientist. But the moment was drawing irresistibly closer when the idealism would rot away by one more degree, and the Soviet Union would be governed by gangsters who were only pretending to be social scientists.

And in the end it all failed miserably:

The Soviet economy did not move on from coal and steel and cement to plastics and microelectronics and software design, except in a very few military applications. It continued to compete with what capitalism had been doing in the 1930s, not with what it was doing now. It continued to suck resources and human labour in vast quantities into a heavy-industrial sector which had once been intended to exist as a springboard for something else, but which by now had become its own justification. Soviet industry in its last decades existed because it existed, an empire of inertia expanding ever more slowly, yet attaining the wretched distinction of absorbing more of the total effort of the economy that hosted it than heavy industry has ever done anywhere else in human history, before or since. Every year it produced goods that less and less corresponded to human needs, and whatever it once started producing, it tended to go on producing ad infinitum, since it possessed no effective stop signals except ruthless commands from above, and the people at the top no longer did ruthless, in the economic sphere. The control system for industry grew more and more erratic, the information flowing back to the planners grew more and more corrupt. And the activity of industry , all that human time and machine time it used up, added less and less value to the raw materials it sucked in. Maybe no value. Maybe less than none. One economist has argued that, by the end, it was actively destroying value; it had become a system for spoiling perfectly good materials by turning them into objects no one wanted.

I don’t know if this paragraph was intentionally written to contrast with the paragraph at the top, the one about the zombie dance of capitalism. But it is certainly instructive to make such a contrast. The Soviets had originally been inspired by this fear of economics going out of control, abandoning the human beings whose lives it was supposed to improve. In capitalist countries, people existed for the sake of the economy, but under Soviet communism, the economy was going to exist only for the sake of the people.

(accidental Russian reversal: the best kind of Russian reversal!)

And instead, they ended up taking “people existing for the sake of the economy” to entirely new and tragic extremes, people being sent to the gulags or killed because they didn’t meet the targets for some product nobody wanted that was listed on a Five-Year Plan. Spoiling good raw materials for the sake of being able to tell Party bosses and the world “Look at us! We are doing Industry!” Moloch had done some weird judo move on the Soviets’ attempt to destroy him, and he had ended up stronger than ever.

The book’s greatest flaw is that it never did get into the details of the math – or even more than a few-sentence summary of the math – and so I was left confused as to whether anything else had been possible, whether Kantorovich and Glushkov really could have saved the vision of prosperity if they’d been allowed to do so. Nevertheless, the Soviets earned my sympathy and respect in a way Marx so far has not, merely by acknowledging that the problem existed and through the existence of a few good people who tried their best to solve it.

Is there a decline in American skyscrapers possibly indicating a decline in American civilization?

I realize that some people may live in happy little bubbles where this question does not in fact always seem to come up sooner or later. But I tend to hear it a lot. It seems to be a favorite of former SSC commenter James Donald. From here:

The twin towers were big buildings, and buildings of that size cannot be built under progressive regimes. As the trabant was a fraud, created to disguise the fact that the Soviet Union could not build consumer cars, the One World Trade Center is a fraud, created to disguise the fact that the US can no longer build buildings as large as it used to be able to build.

He has more in the same vein here, here, and at his blog. But it’s not just Jim. From Countercurrents:

It’s not a coincidence that the tallest buildings in America were built during the 1970s. What we didn’t realize at the time was that we would never again have it so good. The 1970s represented a “tipping point,” to use the popular vernacular, for the American Dream.

Vox Day writes:

I suspect that human capability reached its peak or plateau around 1965-75 – at the time of the Apollo moon landings – and has been declining ever since. This may sound bizarre or just plain false, but the argument is simple. That landing of men on the moon and bringing them back alive was the supreme achievement of human capability, the most difficult problem ever solved by humans. 40 years ago we could do it – repeatedly – but since then we have *not* been to the moon, and I suggest the real reason we have not been to the moon since 1972 is that we cannot any longer do it. Humans have lost the capability.

He doesn’t bring up skyscrapers, but a commenter does.

Or, to totally remove any subtlety, here’s The Decline Of The West As Measured By The Rise Of New Skyscrapers.

The typical response to this sort of thing is to bring up the studies showing that increased skyscraper construction is in fact correlated with not with progress, but with economic decline. The Skyscraper Index is a whimsical attempt to use skyscraper construction to predict economic downturns. And that if the world’s largest skyscrapers are currently in Dubai and Saudi Arabia, maybe skyscrapers are less a sign of national glory and more a sign of having more oil than sense.

But it looks like Jim isn’t a fan of that argument. So let’s take a different tack:

America’s capacity to build skyscrapers isn’t decreased at all, in any way, whatsoever.

(says the guy with the secret guilty skyscraper obsession)

Here is a graph of the height in feet of the tallest skyscraper in America, by year.

In the mid-1700s, the tallest building in the US was Christ Church in Philadelphia at 196 feet. There’s some underwhelming progress until about 1900, when a thirty-year spurt takes us from 391 feet to over a thousand. This spurt ends with the Empire State Building (1,250 feet) in 1931. There is then a forty year dry spell ending with the construction of the WTC and Sears Tower in rapid succession, then another forty year dry spell ending with the construction of One World Trade Center last year.

After the 1900 – 1930 spurt (which corresponded to the first widespread use of steel and elevators) growth is extremely linear.

Jim argues this is unfair because One World Trade Center, the recent data point beating the old Sears Tower and WTC, has an unusually large spire inflating its height. This is true.

If we ignore spires and concentrate on roof height, the old WTC was 1368 feet and the new WTC is also 1368 feet (coincidence?), showing little progress. Luckily for our argument, the Nordstrom Tower currently under construction in New York has a roof height of 1,479 feet, a good one hundred feet higher than the WTC and enough to restore linearity.

[Note: I feel bad arguing against Jim after banning him from commenting. I’ll unblock him from this post’s comment section for purposes of fairness.]

A different measurement might be concentrating on quantity rather than quality of skyscrapers. This graph shows the number of supertall (> 1000 ft high) skyscrapers in the US over time:

Two built in the 1930s (Empire State and Chrysler Buildings), none from 1931 to 1969 (our dry spell), a gradual trickle from 1969 to 2007 or so, and a sudden recent explosion. Thus the excitement about New York’s recent supertall boom. The current spurt includes the previously mentioned One World Trade Center, the Nordstrom Tower (which will be one foot lower than 1WTC at 1,775 feet), 432 Park Avenue (“only” 1,398 feet, but higher than 1WTC without its spire). There are more supertall buildings scheduled for construction in the Hudson Yards redevelopment project in New York than existed in the entire United States in 1973.

This isn’t even counting the really ambitious projects, like the plan to build a 2,000 foot tower on the site of the old Chicago post office. Which might sound overly ambitious, except that Chicago just finished a 1,389 foot Trump Tower.

It is true that China is now building more skyscrapers than the US. So there is an argument for relative decline. But the argument for absolute decline is much less strong. But of note, China also has four times the population density of the US, probably much more when you take into account the small portion of its territory where people actually live. That’s a pretty strong incentive to build higher.

Finally, one more graph – this one a little more complicated.

This is the cost per foot of building a skyscraper over time.

My methodology was to take the tallest skyscraper built during each decade, convert its cost into 2013 dollars, and divide it by the number of feet high in the skyscraper.

I did not follow this methodology exactly, because the tallest skyscraper of the 2010s is One World Trade Center, which cost about three times more per foot than any other skyscraper on the list. According to the Wall Street Journal:

One World Trade Center’s construction is vastly more expensive than a traditional office tower, in large part due to security costs associated with building the tallest building in North America on a site that has been the target of two separate terrorist attacks (the site was also bombed in 1993). Once known as the Freedom Tower, the 1,776-foot skyscraper sits atop a heavily reinforced, windowless podium. It also has a thick core of concrete and steel around its elevator shafts. By comparison, other-high profile buildings around the world have been far less expensive. The Port Authority long ago gave up hope that One World Trade would be a profitable investment in the short- or mid-term.

So 1WTC was a crazy outlier because they had to make it terrorist-proof. Rather than have it completely throw off the graph, I replaced it with the next tallest 2010s building I had cost information on, which I think was Four World Trade Center.

I was worried that this was unfairly penalizing newer skyscrapers because the 1000th foot probably costs more to build than the first and newer skyscrapers are taller. But I reran the analysis using the building from every decade closest to 1,000 feet (many were within 10 ft of the target) and got very very similar results (not shown).

The important lesson to take from this graph is that if you’re building a skyscraper, you should definitely hire whoever built Bank of America Plaza, the extreme outlier in 1990 that throws off the otherwise smooth curve with a sudden precipitious dip. They somehow built a very pretty building for one-third of the cost of everyone else in history, so kudos to them.

(but if it falls over the next time there’s a strong breeze, and the investigation finds it was actually made out of Styrofoam, don’t say I didn’t warn you)

The other important lesson is that skyscraper costs have changed little if at all since the age of the Empire State Building. This is important because one of the other decline arguments I get all the time is that building anything is so bureaucratized and expensive and bogged down by building codes and environmental compliance checks that nobody will do it. A friend recently told me – I can’t find the original quote so I can’t make sure I’ve got it right – that Estonia is considering building a tunnel all the way across the Baltic Sea for the same price it costs New York City to build four blocks worth of subway, presumably because NYC is so bureaucratized. I don’t know if that’s true with regard to subways, but if so skyscrapers seem to have escaped the worst of it.

One more point. The most notable thing I turned up researching this post was the extent of the 1930 to 1960s skyscraper dry spell. Ten buildings taller than 700 feet were built in 1933 or before – and zero from 1933 to 1960. Skyscraping didn’t really recover to its 1930 heights (no pun intended) until 1973 or so.

Anyone wanting to talk about a collapse of civilization from 1940 to 1970 would have had a lot of evidence from skyscraper decline. But that was exactly the period when most people today think technological progress was at its height!

I conclude that skyscrapers are not a very a good indicator of anything.

Ozy:

A man goes up to a stockbroker and says, “You guys are so stupid. You invest in more than one stock. But there’s only one stock that is going to pay off the most. Why don’t you just put all your money in the stock that is going to earn the most money, instead of putting it in a bunch of stocks?”

With my usual quick and timely response, I would like to point out the fallacy within this article on effective altruism. The author offers up several things that would, in an effective altruist world, not exist:

If we all followed such a ridiculous approach, what would happen to:

1. Domestic efforts to serve those in need?
2. Advanced research funding for many diseases?
3. Research on and efforts in creative and innovative new approaches to helping others that no one has ever tried before?
4. More local and smaller charitable endeavors?
5. Funding for the arts, and important cultural endeavors such as the preservation of historically important structures and archives?

6. Volunteerism for the general public, since most “worthy” efforts are overseas and require a professional degree to have what Friedman calls “deep expertise in niche areas”?
7. Careers in the nonprofit sector?”

The answer to several of those is pretty obvious: people should work in the nonprofit sector if that’s their comparative advantage, who gives a @#$! about volunteerism or local charitable endeavors, arts funding comes out of people’s entertainment budgets they way it should, and resources are scarce and each donation to someone relatively well-off in the developed world trades off against resources from someone less well off. So far, so well-trammeled.

However, I think his points two and three are actually really interesting points. A lot of people seem to think of effective altruism as like the man who wants to invest in the best possible stock. However, in reality, just as a person who wants to maximize their returns invests in more than one stock, a society where everyone is an effective altruist would probably have a variety of different charities (although perhaps a narrower segment of charities), just as they do now.

To be clear, there are certain charities that are not effective at all and would probably not exist in a hypothetical effective altruist society. Make a Wish Foundation would probably not survive the conversion to a hypothetical effective altruist society (except, presumably, out of one’s entertainment budget). Nevertheless, the nonexistence of obviously ineffective charities doesn’t mean that we as a society would decide to have fewer charities, any more than not buying lottery tickets means that you are only allowed to invest in one stock.

(Note that I am using stocks as an analogy. Stocks and charity donations are unlike each other in a lot of ways. It isn’t a perfect metaphor. Also, I literally know nothing about stock investing.)

One of the reasons that people invest in more than one stock is uncertainty. Probably some stocks will go up and some stocks will go down. However, I, as an investor, don’t know which stocks will pay off more than other stocks. Therefore, I want to hedge my bets. Knowing that the market will go up in general, I choose to invest in a variety of different stocks, so that no matter what happens I keep some of my money.

A similar uncertainty applies to charities. For instance, it’s possible that Give Directly is run by crooks who steal all the donations. (As far as I know, Give Directly is an excellent organization and never steals anyone’s money.) If everyone has given to Give Directly, we’re screwed. If we have several different charities giving cash to people in the developing world, then it matters less that one of them is run by crooks. Similarly, we may be uncertain about whether malaria relief or schistosomiasis relief is the best bang for one’s charity buck. Given that it is impossible to eliminate all uncertainty, it’s best to direct some money towards both, so that in case malaria relief turns out to be a bust we haven’t wasted all our charitable budget.

In stocks, return is a function of risk. If there’s a chance of a large payoff, there’s an even larger chance of going bust and losing everything. If there’s not very much risk, you get payoffs that are barely larger than inflation. Therefore, you want a balanced investment strategy: have some high-risk investments that might make you rich, and some low-risk investments that have a less awesome payoff.

This also applies to charity donation, which is where we get to Berger and Penna’s concerns. Something like malaria relief is low-risk and relatively low-return. If you distribute malaria nets, it is pretty certain that people are going to have lower rates of malaria. However, there’s not much chance of getting a payoff higher than “people have lower rates of malaria, maybe no malaria at all,” which will save probably millions of lives. Compare this to, say, agronomy or disease research. With agronomy, there is a high chance that you will pour in millions of dollars and get nothing. Most agronomic research gets us, say, wheat that’s a little better at resisting weeds, or better understanding of the ideal growing conditions of the chickpea. However, there’s the slim chance that you’ll have another Green Revolution and save literally billions of lives. As effective altruists, we want to invest in both high-risk high-return and low-risk low-return charities.

Another important example of a high-risk low-return charity is a new charity, which I think is important enough that I’m going to talk about it separately. What happens if someone has a brilliant new idea about how to help people in the developing world? There’s potentially a high payoff if they can beat the current most effective charity; but new ideas for effective charities are probably not going to pay off, if for no other reason than ‘most new ideas are terrible.’ It is really important that we invest in new ideas.

What happens to a low-risk high-return charitable investment? Well, it is clearly the most effective place to donate and becomes our new baseline, and the same trilemma survives. Other charities are either comparable, and thus either higher return but higher risk or lower return but lower risk, or incontrovertibly better and the new baseline.

Please note that I’m not saying the individual should donate multiple places. Probably any individual only has time to investigate one family of charities and – for that matter – gets the most warm fuzzies from only one charity. I think that most people should probably only donate to one charity, because they can be certain they’re donating to the most effective charity they can. But what that charity is is different for different people. And, no, a hypothetical effective altruist society won’t totally lack scientific research.

Scott:

I think I disagree with this. That is, I’m sure I disagree with what I think it says, and I think it says what I think it says. I think it confuses two important issues involving marginal utility – call them disaster aversion and low-hanging fruit – and that once we separate them out we can see that diversifying isn’t necessary in quite the way Ozy thinks.

Disaster aversion is why we try to diversify our investments in the stock market. Although there’s a bit of money maximization going on – more money would always be nice – there’s also an incentive to pass the bar of “able to retire comfortably” and a big incentive to avoid going totally broke. This incentive works differently in charity.

Suppose you offer me a 66% chance of dectupling my current salary, and a 33% chance of reducing my current salary to zero (further suppose I have no savings and there is no safety net). Although from a money-maximizing point of view this is a good deal, in reality I’m unlikely to take it. It would be cool to be ten times richer, but the 33% chance of going totally broke and starving to death isn’t worth it.

Now suppose there is a fatal tropical disease that infects 100,000 people each year. Right now the medical system is able to save 10,000 of those 100,000; 90,000 get no care and die. You offer me a 66% chance of dectupling the effectiveness of the medical system, with a 33% chance of reducing the effectiveness of the system to zero. In this case, it seems clear that the best chance is to take the offer – the expected value is saving 56,000 lives, 46,000 more than at present.

The stock market example and the tropical disease example are different because while your first dollar matters much more to you then your 100,000th dollar, the first life saved doesn’t matter any more than the 100,000th. We can come up with strained exceptions – for example, if the disease kills so many people that civilization collapses, it might be important to save enough people to carry on society – but this is not often a concern in real-life charitable giving.

By low-hanging fruit, I mean that some charities are important up to a certain point, after which they become superseded by other charities. For example, suppose there is a charity researching a cure for Disease A, and another one researching a cure for Disease B. It may be that one of the two diseases is very simple, and even a few thousand dollars worth of research would be enough to discover an excellent cure. If we invest all our money in Disease A simply because it seems to be the better candidate, the one billionth dollar invested in Disease A will be less valuable than the first dollar invested in Disease B, since that first dollar might go to hire a mediocre biologist who immediately spots that the disease is so simple even a mediocre biologist could cure it.

This is also true with more active charities. For example, the first bed net goes to the person who needs bed nets more than anyone else in the entire world. The hundred millionth bed net goes to somebody who maaaaaybe can find some use for a bed net somewhere. It’s very plausible that buying the first bed net is the most effective thing you can do with your dollar, but buying the hundred millionth bed net is less effective than lots of other things.

In this case, at any one time there is only one best charity to donate to, but this charity changes very quickly. In a completely charity-naive world, Disease A might be the best charity, but after Disease A has received one million dollars it might switch to Disease B until it gets one million dollars, and then back to Disease A for a while, and then over to bed nets, and so on.

We can turn this into a complicated game theory problem where everyone donates simultaneously without knowledge of the other people’s donations, and in this case I think the solution might be seek universalizability and donate to charities in exactly the proportion you hope everyone else donates – which would indeed be a certain amount to Disease A, a certain amount to Disease B, and a certain amount to bed nets, in the hope of picking all the low-hanging fruit before you subsidize the less efficient high-hanging-fruit-picking.

But in reality it’s not a complicated game theory problem. You can go on the Internet and find more or less what the budget of every charity is. That means that for you, at this point in time, there is only one most efficient charity. Unless you are Bill Gates, it is unlikely that the money you donate will be so much that it pushes your charity out of the low-hanging fruit category and makes another one more effective, so at the time you are donating there is one best charity and you should give your entire donation to it.

Granted, people are not able to directly perceive utility and will probably err on exactly what this charity is. But I think the pattern of errors will be closer to the ideal if everyone is trying to donate to the charity they consider highest marginal value at this particular time rather than if everyone is trying to diversify.

The reasons for diversifying in the stock market are based on individual investors’ desire not to go broke and don’t really apply here.

A commenter asked in yesterday’s discussion on The Two-Income Trap: why did the entry of women into the workforce produce so little effect on GDP? Here’s the graph of US women’s workforce participation:

And here’s the graph of US GDP.

In about 50 years – 1935 to 1985 – we went from 20% of women in the workforce to 60% of women in the workforce. Assuming a bit under 100% of men in the workforce, that’s an increase of almost 50% over the expected trend if number of women in the workforce had stayed constant.

I’ve already admitted I find the fixedness of the GDP trend bizarre. But how on Earth do you unexpectedly raise the number of people in the workforce by 50% and still stick to exactly the same GDP trend? It would be like the US annexed Mexico one day but the GDP didn’t change a bit. Are we imagining here that if women hadn’t entered the workforce, GDP would have suddenly deviated downward from the trend, and totally by coincidence women rushed in to save the day? And then when we ran out of interested women to add to the work force, again by coincidence the GDP stabilized back to its trend line?

Possible solutions:

1. The GDP data is totally false. I am suspicious of that GDP data anyway. Maybe some joker in the Bureau of Labor Statistics just graphed out an exponential function and reported that as our GDP to see if anyone would notice.

2. The GDP data is low resolution. So low-resolution that even a change of 50% is invisible if stretched over a long enough time period.

3. Women contributed through unpaid labor in the home, and their paid labor substituted for that but didn’t add to it. But as far as I know GDP only counts paid-for goods. Not only should women’s labor in the home not have counted, but GDP should overcount the benefits of putting women to work because paid daycare and so on appear as valuable new services.

4. Somehow in total contradiction to usual economic theory, all gains made by women came out of the pockets of men, leaving the same growth as would have happened anyway.

This last one segues into a question asked by another commenter – did women entering the workforce drive down male wages?

This seems a lot like the question “do immigrants entering the workforce drive down native-born wages?” to which economists tend to answer “no” with more or fewer caveats. But the economists’ explanation for the immigrant effect is that in addition to producing, immigrants also consume, increasing demand.

Women were presumably already consuming. Back when they were housewives, they still needed houses, food, clothes, entertainment, et cetera. Their entrance into the workforce may create slightly more demand – for business clothes and office supplies, for example – but nothing like the demand created by immigrants entering the country.

If women increase the labor supply by 50% but don’t change the demand for labor, that seems like it should make wages go way down. Even if women are primarily in different jobs than men, men’s wages should still go down via a substitution effect (that is, even if women all become elementary school teachers, then a man who was planning to be an elementary school teacher before might become a fireman instead, raising the labor supply for firemen and pushing down fireman wages).

But the only study I can find to investigate this says it didn’t happen. And male wages don’t seem to have dropped dramatically starting 1950 or so. They do seem to have stagnated dramatically starting 1970 or so, but I feel like the income inequality explanation for that is on pretty solid ground. Unless you want to argue that the reason for income inequality is that between both sexes there’s now such a large reserve army of labor that the capitalists can get away with paying the workers very little. But I feel like economists would have told us if this were going on.

I hear a lot of conspiracy theories about women in the workforce. On the left, women in the workforce are being exploited and kept down by a sinister patriarchy. On the right, women in the workforce are a satanic plot to weaken our moral fiber.

But so far I’ve never heard the conspiracy theory that women never actually entered the workforce, that all the working women you see around you are animatronic robots or carefully crafted stage illusions.

Maybe this is the surest sign that the conspiracy is working.

In other words, in a sufficiently screwed-up system, doubling everyone’s productivity is a net loss. The gains get eaten up by proportional increases in the prices of positional goods, and you’re left with nothing except complete dependence on a shaky advantage that could disappear at any time.

I don’t know exactly how serious I was. But Elizabeth Warren makes almost the exact same argument in The Two-Income Trap, and I’m pretty sure she’s very serious. At least, she used it as a platform that got her elected to the US Senate, which is a kind of serious.

So on the advice of Alyssa Vance, I decided to take a look.

I.

Warren’s not talking about stimulants. She’s talking about the effect of an extra family income – usually moving from a system where the husband works outside the house and the wife stays at home, to a system where both parents work outside the house. Like a stimulant that removes the need for sleep, this can be expected to double economic productivity and family income.

In practice it doesn’t, because wives usually earn less than their husbands, but it comes pretty close. The average family income in the 1970s was around $40,000. The average family income in the 2000s was around $70,000 (all numbers in the book and in this post can be considered already adjusted for inflation). The husband’s income didn’t change much during this time, so the gain was due mostly to the wife getting an extra $30,000.

If families now have twice the income of families in the 1970s – who themselves were usually pretty financially secure and happy – then people should be really secure and rich now, right? But Warren meticulously collects statistics showing that the opposite is true. Home foreclosures have more than tripled in the past generation —

[Sorry, I feel at this point I should mention that my edition of the book was published in 2004, so all of these statistics about how awful home foreclosures are and everything are before the housing bubble burst and before the Great Recession. All of these statistics were when we were supposedly in a boom economy. You can assume that now they’re much, much worse.]

— Sorry, where were we? Oh right. Home foreclosures have tripled in the last generation. Car repossessions doubled in the five years before the book was published. Bankruptcies have approximately quintupled since 1980. Over the same period, credit card debt has gone from 4% of income to 12%, and average savings have gone from 10% of income to negative.

Seventy percent of Americans say they have so much debt burden that “it is making their home lives unhappy”. In 2004, for the first time, “get out of debt” passed “lose weight” for Most Popular New Years Resolution.

So, Warren argues, the common-sense conclusion that a modern family making $70,000 is nearly twice as well-off as a traditional family making $40,000 clearly doesn’t hold. Why not?

II.

One thing that finally got me writing this up was a post on Bleeding Heart Libertarians which, like all posts on Bleeding Heart Libertarians and in accordance with the philosophy of the same name, was about how although libertarianism is commonly thought of as a heartless philosophy it can actually be reconciled with the care/harm-based ethic of deep compassion for the weak and needy.

Wait, sorry, actually it was about how we should cancel Social Security and let old people starve to death on the streets:

The baby boomers spent their entire lives buying new cars they didn’t need, buying houses that were too big, taking extra vacations, splurging on eating out, and the like. They enjoyed a higher standard of living than they could really afford. Why? Because they figured that when they retired, they could just use their voting power to force younger generations to pay for their retirement. These selfish narcissists pretty much want to steal as much as they can from their children. So, while I, Jasper, and my good twin brother Jason put tens of thousands of dollars into index funds each year, thereby forgoing fancier cars, vacations, and the like, the selfish, narcissistic baby boomers laugh gleefully, knowing that they’ll find a way to eat our nest eggs.

Jason is of course a sensitive soul and feels bad for these boomers. Not me. I say let them die. They knew what they were doing, and they spent their entire adult lives making the wrong choice over and over and over again. Does starving on the streets seem too inhumane? No problem. You’ve read Logan’s Run, right? Good idea, but wrong age limit.

This claim is pretty common. If true, it would explain the phenomenon cited above – that even with twice as much money, the Boomer generation is much less financially stable than their parents’ generation. But in Chapter 2 of Two-Income Trap, “The Over-Consumption Myth”, Warren tears it apart.

The Boomers “spent their entire lives buying new cars they didn’t need”? Warren, page 47:

When we analyzed unpublished data by the Bureau of Labor Statistics, we found that the average amount a family of four spends per car is twenty percent less than it was a generation ago. [Families spend $4000 more on automobiles in general, but instead of luxuries they are spending it on] something a bit more prosaic – a second car. Once an unheard-of luxury, a second car has become a necessity. With Mom in the workforce, that second car became the only means for running errands, earning a second income, and getting by in the far-flung suburbs.

In other words, it sounds like a family with two working parents requires two cars as a sound money-making strategy, but that Boomers compensate by spending less per car than past generations.

The Boomers “splurge on eating out”? Warren again:

Today’s family of four is actually spending 22 percent less on food (at home and restaurant eating combined) than its counterpart of a generation ago.

The Boomers “buy houses that are too big?” Warren:

The size and amenities of the average middle-class family home have increased only modestly. The median owner-occupied home grew from 5.7 rooms in 1975 in to 6.1 rooms in the late 1990s – an increase of only half a room in more than two decades…the data showed that most often that extra room was a second bathroom or third bedroom.

The BHL article doesn’t mention appliances, but in case you were worried, moderns spend 44% less on appliances than their parents’ generation, which is partly compensated for by a 23% increase in home entertainment (probably things like DVD players). Warren says that:

This same balancing act holds true in other areas. The average family spends more on airline travel than it did a generation ago, but less on dry cleaning. More on telephone services, but less on tobacco. More on pets, but less on carpets. And when we add it all up, increases in one category are offset by decreases in another. In other words, there seems to be about as much frivolous spending today as there was a generation ago…Sure, there are some families who buy too much stuff, but there is no evidence of any epidemic in overspending – certainly nothing that could explain a 255% increase in the foreclosure rate, a 430% increase in the bankruptcy rolls, and a 570% increase in credit card debt. A growing number of families are in terrible financial trouble, but no matter how many times the accusation is hurled, Prada and HBO are not the reason.

Curiouser and curiouser. Today’s families earn twice as much, spend the same amount on luxuries, yet are much less financially secure.

III.

So as to not keep anyone in suspense: the problem is nice suburban houses in good school districts.

Around a vague period of time centering on the 1970s, a couple of things happened.

First, the cities became viewed, rightly or wrongly, as terribly unsafe ghettos full of drugs and gangs and violence. As far as I can tell, this is a pretty accurate description of the 70s, although things have gotten a little better since then. Families didn’t want their children living in terribly unsafe ghettos full of drugs and gangs and violence, so they moved to the suburbs. Warren gives the testimony of a suburban mother:

We were close to The Corner and I was scared for my sons. I didn’t want them to grow up there. I wanted something away from this neighborhood to get my boys out to better schools and a safer place. The first night in [my new] house, I just walked around in the dark and was so grateful…at this house, it was so nice and quiet. My sons could go outdoors and they didn’t need to be afraid. I thought that if I could do this for them, get them to a better place, what a wonderful gift to give my boys. I mean, this place was three thousand times better. It is safe with a huge front yard and a backyard and a driveway. It is wonderful. I had wanted this my whole life.

Second, education started to be really, really important. As Warren puts it:

A generation or so ago, Americans were more likely to believe that there were many avenues for a young person to make his way into the middle class, including paths that didn’t require a degree. I recall my parents encouraging me to attend college, since my grades were high and they hoped I might become a teacher one day. But they were equally pleased when my eldest brother joined the Air Force, my middle brother entered a skilled trade, and my youngest brother became a pilot – even though all three of the boys had given up on college. My parents’ views were pretty typical a generation or two ago. Education was valued, but no one in our neighborhood would have claimed it was the single most important determinant of a young person’s success.

Warren is a Harvard professor. Think about that for a second. How many Harvard-professor-producing-type families can you think of today who are also happy with three of their children getting non-college-degree jobs? As Warren puts it in what might be my favorite passage from the whole book:

97% of Americans agree a college degree is “absolutely necessary” or “helpful” compared with a scant 3% claiming that a degree is “not that important”. According to one recent poll, 6% of our fellow citizens believe the Apollo moon landings were faked. In other words, Americans are twice as likely to believe that man never walked on the moon as they are to believe that a college degree doesn’t matter!

Certain school districts are known to be vastly superior to other school districts in terms of test scores, college admissions, et cetera. Usually these are school districts inhabited by rich people with very high property taxes and therefore very high levels of per-pupil spending in schools – although we’ll get back to that eventually.

These school districts are positional goods. Not everyone can be in the best school district. Only the people willing to spend the most money on their houses can be in the best school district. But rightly or wrongly, people believe that being in the best school district is vital for their children to succeed and become Harvard professors, as opposed to gang members or drug addicts or menial laborers. As Warren puts it, good education is the ticket to the middle class. And being in the lower class is too horrible to contemplate.

People want the best for their children [citation needed]. They’re not going to say “Well, we aren’t as rich as those other people, so we should probably live in a crappy school district with other people of our approximate wealth level”. They’re going to leave no stone unturned. And there are two big stones available for modern middle-class families: working-motherhood and debt.

If your family earns $70,000 and the other family earns $40,000, you have $30,000 extra to convince the banks to give you a really big mortgage so you can buy a much nicer house and get your kid into Oak Willow River View Hills Elementary, while their kid has to go to City Public School #431 and get beaten up by scary gang members every recess.

On the other hand, this is everybody’s cunning plan, so what you end up with is all houses costing a lot more, everyone working two jobs without any extra money, everyone burdened with massive debt, and everyone living exactly where they would have anyway.

Warren lists some points in support of her hypothesis:

A study conducted in Fresno found that, for similar homes, school quality was the most important determinant of neighborhood prices – more important than racial composition of the neighborhood, commuter distance, crime rate, or proximity to a hazardous waste site. A study in suburban Boston showed the impact of school boundary lines. Two homes located less than half a mile apart and similar in nearly every aspect will command significantly different prices if they are in different elementary school zones. Schools that scored just 5% better on fourth-grade math and reading tests added a premium of nearly $4,000 to nearby homes, even though these homes were virtually the same in terms of neighborhood character, school spending, racial composition, tax burden, and crime rate.

A lot of the causal claims here are very complicated and iffy at best, but here are two numbers that cuts through a lot of the debate: between 1984 and 2001, the median home value of the average childless couple increased 26%; the median home value of the average couple with children shot up 78%. So families are spending a lot more on houses nowadays and the disparity seems to be heavily concentrated in families with children. Combine that with the observation that houses only have 0.4 more rooms today, and you get a pretty good argument that families with children are competing much more intensely on house location.

IV.

When Warren does a very unofficial Fermi-estimate style breakdown of what is happening to the extra $30,000 that modern two-income families earn over traditional one-income families, she thinks they are paying about $4,000 more on their house, $4,000 more on child care, $3,000 more on a second car, $1,000 more on health insurance, $5,000 more on education (preschool + college), and $13,000 more on taxes.

The taxes are not a result of higher tax rates nowadays, just a result of the family making more money and so having to give more money – plus maybe being in a higher tax bracket. The health insurance isn’t surprising either to anyone who’s been paying attention. And the $4,000 extra on the house is a big part of what she’s been talking about the whole time.

The $4,000 on child care, $3,000 on the extra car, and $13,000 on taxes are the results of the second income. Mom needs a car to get to work, the children need care now that Mom’s not home to look after them, and not only does Mom get taxed but Dad may move into a higher bracket. That means that of the $30,000 Mom takes home, $20,000 gets spent on costs relating to Mom having a job – meaning that Mom’s $30,000 job only brings in $10,000 in extra money.

The $5,000 on education is a bit more complicated. In Warren’s example family, it’s spent on preschool. She points out how a generation ago, practically no one went to preschool, whereas nowadays it is viewed as another one of those important legs up (“If little Madison doesn’t get into the best preschool, she’ll never be able to make it into the science magnet school, which means she’ll be unprepared for high school, which means Harvard goes out the window”). Warren points out that today two-thirds of American children attend preschool, compared to four percent in the mid-1960s. Once again, parents are told if they want the best for their kids they need to compete for good preschools:

The laws of supply and demand take hold, eliminating the pressure for preschool programs to keep prices low. A full-day program in a preschool offered by the Chicago public school district costs $6,500 a year – more than the cost of a year’s tuition at the University of Illinois. High? Yes, but that hasn’t deterred parents. At one Chicago public school, there are ninety-five kids on a waiting list for twenty slots.

It’s a little bit sleight-of-hand-y to put that in the family budget as Warren does – preschool only takes up two years of a child’s life, for a total of four years per two-child family. But I forgive her because college expenses are higher and also need to be budgeted for. Also, she’s saying her $4,000 child care estimate is for one child, which means that once the second child is out of preschool she’ll need to be in child care as well, for an insignificant price drop.

So I think Warren partially supports her points. The second income goes partially to increased house costs due to bidding wars, partially to increased education costs due to bidding wars, and partially to supporting the ability to have a second income. In her (admittedly slightly cooked) model, the family’s discretionary income – what it has left to spend on variable expenses like food and luxury goods – actually decreased from the 1970s one-income family to the present, $17,834 to $17,045.

V.

In my essay on stimulants, I suggested that the benefits of the stimulants would be wasted on positional goods, leaving only the side effects. In the same way, Warren says the benefits of the second income are lost, but the side effects remain.

The most important side effect she talks about is the loss of flexibility.

One nice thing about having a non-working mother is that she can, on relatively short notice, become a working mother. This is especially true in the Old Economy where even people without much college education could get okay jobs.

In the old model, financially healthy families subsisted on one income, and financially unhealthy families put the mother to work to get back on their feet. The most common disasters were the husband getting fired or a family member becoming sick. If the husband got fired, then even if he could get a job relatively soon afterwards it might be at lower pay until he could work himself back up the totem pole. Suppose he loses his $40,000 a year job and can only find a $30,000 a year job. Luckily, as we already established a wife’s second income can contribute $10,000 to the family. So she goes to work, they have as much money as they did before, and they are able to pay off their debts and continue to have a good quality of life.

Even if the wife doesn’t go back to work, having a flexible person with lots of free time is a huge benefit. If Grandma gets very sick, the wife has a lot of time available to take care of her – whereas now, if Grandma gets sick, either one parent has to quit their job to take care of her (meaning that standard of living goes way down and the family is at risk of not being able to pay debts it took out when their prospects looked much higher) or Grandma gets sent to a nursing home, which is very expensive and also risks unpaid debts or loss of standard of living.

Last of all, it means that getting a nice suburban home is more important than ever. If in the old days children spent most of their time with their mothers, it might be possible for the mother to pass down important values like education and hard work to her children. When mothers have very limited time with their kids, schools and peer groups take over a lot of the socialization role. For example, a mother with a very young son might talk to him, read to him, take him to childrens’ museums, et cetera, providing the crucial intellectual stimulation that children need at an early age to develop their full brainpower. If the mother works full-time, then it becomes really imperative to get the son into preschool to make sure he’s not just sitting around staring at a wall and losing brain cells. If the mother isn’t around much when the child is ten, it becomes a lot more important to be certain he’s in a good elementary school that’s teaching him the right values. If you can’t watch your kid to make sure he’s not doing drugs, it’s more important his school be drug-free. And so on. I don’t know to what degree any of these social psychological hypotheses are true, but the important thing is that people think they are and so the competition for nice neighborhoods and nice schools intensifies.

The last loss of flexibility Warren talks about is divorce. Something like a third of couples with children can expect to get divorced. Consider a scenario where a working single mother gets the house and custody over the children. If the house took two incomes to afford, she’s not going to be able to afford to keep her house. Suggestions that the father be forced to pay more child support don’t work – unless he pays 100% of his earnings to her, she’s not going to have as much money as the couple did when they bought the house – and they deliberately spent every cent they could on the mortgage because if they didn’t they would be outcompeted by people who did and their kids would end up in gritty urban school districts and never get into Harvard.

So Warren says that the reason so many families go bankrupt or get into debt is because the extra income doesn’t make a difference, but the loss of flexibility does. Everything has been sunk into the home for risk of getting outcompeted. And that means when someone loses their job – and Warren calculates that in a two-income family, this will happen to one parent or the other about once every sixteen years on average – or costs go up even a little, there is no buffer room and the only solution is to go deeper into debt. That just adds another unpayable cost – interest – and means the whole thing can only end in bankruptcy.

In another of my favorite passages, Warren notes that if the myth of over-consumption was true – if the guy in Bleeding Heart Libertarians were exactly right – there would be no problem. In fact, she encourages families to overconsume as the road to financial health. She says families should save, but if they can’t save, that should spend their money on restaurants, vacations, jewelery – anything but large fixed-income monthly costs like houses, cars, schools, et cetera. That way, when something goes wrong, they can easily just stop taking the vacations and be back to financial health. It’s only when money is trapped in mortgage payments that can’t be gotten rid of that things can get as bad as they are.

VI.

There’s a chapter on debt. It’s really cute. She’s all like “Did you know there are things called subprime mortgages? And that some people think banks might give them out too easily? I sure hope this doesn’t do something bad to happen.”

I am pretty sure no modern reader needs this chapter, but it sure increases her credibility.

VII.

Oh, right, I’m supposed to have an opinion.

Let’s start with the negatives. I don’t think she does a great job of proving her housing-school-positional-goods theory. When she talks about school district effects on housing prices, she comes up with numbers like “a 5% difference on test scores add $4,000 to housing costs.” Okay. That means, assuming linearity, that a 50% difference on test scores – which is way more than we could possibly expect schools to produce – would only add $40,000 to house costs. When house prices for the middle class are routinely around $200,000 to $300,000, that’s just not enough to be causing the destruction of the American family.

Likewise, studies that look for effects of school district on house price – usually by looking at otherwise identical houses on either side of a school district line – generally find modest effects.

The whole area is really hard to research. Suppose Neighborhood A has lots of minorities, low house prices, and bad schools. Neighborhood B has few minorities, high house prices, and good schools.

You can tell a story where Neighborhood B’s good schools raise land value, which prevents crime and pushes out minorities. Or you could tell a story where Neighborhood B’s high land values push out minorities and increase property taxes which improve the schools. Or you can tell a story where Neighborhood A’s many minorities cause racist homebuyers to stay out, depressing land values, and also minorities tend to have worse school performance. Except in real life there are like twenty factors like this rather than three. Although lots of different studies try to control for confounders, that’s always hard and requires a lot of assumptions that might not necessarily be true.

There’s another problem, which is that the usual measure of school quality – standardized test scores – is not necessarily the one families are going to be looking at. Suppose only a few very smart people know where to look for standardized test scores. Maybe everyone else tries to guess at how good schools are. Maybe those people assume that schools with higher percent minorities are worse. Maybe they assume that schools in prettier neighborhoods with higher land values are better. In that case, studies could find all they wanted that test scores don’t correlate with home prices, because what’s actually happening is that high home prices are causing belief in school superiority which is causing higher home prices.

But a bigger problem here is that the average family only spends $4,000/year more on housing than they did a generation ago. Warren can talk all she likes about how that forces families to adopt a second job, but it’s really not a very big share of what the second job’s meager extra income is being spent on. The average husband earns $3000 more at his own job nowadays, which means that it would be possible in theory for him to soak up pretty much all of the extra housing cost. To say the wife gets a $30,000 extra job just to soak up $1,000 in extra mortgage money seems like a stretch, even though Warren does a good job of pointing out how many extra burdens this places on people. But when you add positional education costs to the mix – preschool and college – it becomes a little more believable.

I guess it’s just hard making the numbers add up. Suppose you have two kids, but they’re not in preschool – or that you’re indifferent to preschooling your kids versus having the mother take care of them. Then the costs of the mother getting her $30,000 job are $24,000 – $13,000 in extra taxes, $8,000 in child care, and $3,000 in a second car. Are mothers really so desperate they’ll work full-time for the extra $6,000? Doesn’t this whole model break down once the mother gets a raise and starts making $40,000?

VIII.

How about the good?

The good is that Warren backs all her points up with excellent statistics, is very good at explaining complicated economic things, and has exactly the right level of contempt for everyone in politics.

Her view on politics is very very close to my heart. My impression is that she thinks of it as noise. It’s not good, it’s not evil, it’s something that you have to adjust for. Like, “Well, this would be a good policy but we could never pass it because the Left would throw a fit, this other thing is a good policy but we could never pass it because the Right would throw a fit, but I’m pretty sure this third thing would also help and not get anybody too enraged.” For example:

The politics that surrounded women’s collective decision to migrate into the workforce are a study in misdirection. On the left, the women’s movement was battling for equal pay and equal opportunity, and any suggestion that the family might be better off with Mother at home was discounted as reactionary chauvinism. On the right, conservative commentators accused working mothers of everything from child abandonment to defying the laws of nature. The atmosphere was far too charged for any rational assessment of the financial consequences of sending both spouses into the workforce. The massive miscalculation ensued because both sides of the political spectrum discounted the financial value of the stay-at-home mother. There was no room in either worldview for the capable, resourceful mother who might spend her days devoted to the roles of wife and mother but who could, if necessary, dive headlong into the workforce to support her family. No one saw the stay-at-home mom as the family’s safety net.

(in case you’re wondering, she doesn’t recommend women leaving the workforce. She says families where both parents want to work should keep one of the two incomes in reserve by either saving it or spending it on non-fixed luxury items. She admits that this is unfair because they will have problems getting into the best school districts, but says it is the safest solution until the wider societal problems are fixed.)

As a result of her disdain for established partisan groups, she manages to totally transcend politics. I noticed that when the Bleeding Heart Libertarians article got up on Xenosystems, one commenter protested:

The accusations of excess are no doubt sound but I always pause when someone mentions the housing excess of the boomer generation. They bought giant houses in suburbia, but how much of that was due to the lack of civilization in the city limits? If there was a sane enforcement of laws and no public schools or at least public schools where you didn’t fear for the safety of your children would they have bought so many giant houses?

In other words, the commentariat of one of the larger reactionary blogs is more or less on the same page as the Democratic Senator being pushed by the liberal wing of her party to run for President.

Her proposed solutions are also all over the map. Yes, she pushes for taxpayer-funded universal preschool, which should make liberals pretty happy. But she also pushes for school vouchers, which she hopes will decouple school quality from housing prices and let people live wherever they want and still be able to get an acceptable education for their children. She even has a states’ right style solution to one problem – she points out that banks used to be kept under control very well by state laws until the Supreme Court legalized free interstate commerce between banks which means all of them moved to the states with the fewest regulations and could not be kept under any control at all. In order to rein in banks again, all we need is for Congress or the courts to grant those powers back to the states.

And I will say one more thing in Senator Warren’s favor. She often suggests non-free-market solutions, like regulating something or banning something or proposing the government spend money on something. Every time she does this, she says very clearly something like “I understand the free-market arguments against this, and why in general we would want to use the market to take care of these sorts of problems, but this is a case where there is a likely market failure because of reasons X, Y, and Z. I recognize there is a burden of proof on someone saying something is a market failure, so I will now proceed to meet that burden of proof with a lot of statistics.”

People talk about dogmatic libertarians, but honestly this is all I ever wanted from anybody. Just an “oh, by the way, I have reasons for what I’m saying and they’re not just coming from a total failure to have ever grasped freshman economics.” I know it seems unfair to make people say it explicitly each time. But given the overwhelming number of people who say these things exactly because they never grasped freshman economics, it’s welcome a breath of fresh air.

I am sure if Warren ends up running for President, we will end up getting those ads where someone repeats “MOST LIBERAL SENATOR OF ALL TIME” on a black-and-white background, followed by saucy rumors that she once had a fling with Karl Marx.

But I for one intend not to believe them.

IX.

But aside from doing some legal work to solve the bankruptcy crisis, we need some science work as well. The question is: are good school districts really that important?

I can’t find great research on this at the school district level. The closest I can find is the teacher value-added research, which finds things like “At age 28, a 1 SD increase in teacher quality in a single grade raises annual earnings by about 1% on average”. I can’t find good data on how this adds up – for example, do twelve great teachers in a row increase earnings 12% (linear addition)? Do you need one great teacher to inspire you for life, and after that it doesn’t matter whether or not you have more (ie sublinear addition_? Or can multiple great teachers build on one another’s successes by not having to constantly go back and review things the students should’ve learned before (superlinear addition)?

I don’t think it matters, because it doesn’t look like there are very big value-added score differences between teachers at rich and poor schools.

What about district-level issues like superintendents? According to the Brookings Institute report, difference in school district competency explained only 1.1% of variance in student test scores. Difference in schools explained another 1.7%. Teachers explained 6.7%. The remaining 90.4% was explained by demographic factors (class, race, parent’s education level) and individual variation among students.

Teachers are kind of a crapshoot – as we saw before, going to a better school district doesn’t increase your chances of getting a good one much. So the sorts of things you can easily affect by choosing what school district to live in are 2.8% of your kid’s total variation.

The research on preschool is so complicated it would take ten posts of this size to get through it. It seems strongly beneficial for low-income children and of controversial benefit for higher-income children. I will try to route around the controversy like so: home-schooled children do much better on every measure of academic achievement than school-schooled children. Preschool is basically teaching kids to share and playing fun games with them. If the alternative to sending your kid to preschool is that they stay home with you and you teach them to share and play fun games with them, you are home-preschooling your child and can expect them to do much better than school-preschooled children. And if the reason there’s no parent at home with the child is that both parents need to work in order to earn enough money to send the kids to a good preschool…well, that’s just a little bit circular.

So I think that in addition to various legal and policy changes, there needs to be more of a scientific effort to confirm (or disconfirm) these suspicions and, if they turn out to be true, publicize them to a society that clearly believes the opposite.

I know that talking about genetics and IQ too much makes people mad. And a lot of people have asked me – why do we have to do this? It’s going to offend a lot of people, and give a lot of unsavory people a lot of ammunition, so even if we shouldn’t ban research entirely, why not exercise the virtue of silence and let the whole thing stay in a few obscure journals?

And one of many answers to this is – suppose you see some school districts in rich neighborhoods, and all of the children in those schools can do calculus and read James Joyce and get great high-paying jobs. And next door is another school district, in a poor neighborhood, serving poor kids, and those kids are struggling.

If you’re not intimately familiar with behavioral genetics and IQ research, it is obvious that the rich-person school is much better and that’s why all the children of the rich people are doing so much better. And you will do anything, make any sacrifice, to get your kid into that rich person school, and so you work a back-breaking job and gamble your family’s financial security, all because you want your kid to have the same opportunities those rich kids do.

If you are intimately familiar with behavioral genetics and IQ research, a separate possible explanation leaps to mind: the rich people made their money by things like going to college, which means they probably have higher cognitive ability on average than the poor people, and cognitive ability is 50% genetic so they pass that on to their kids, and so it’s no surprise at all to see the rich person school having smarter students. That doesn’t prove that if your child switches from the poor person school to the rich person school, she will switch from average-poor-school-outcomes to average-rich-school-outcomes, and it doesn’t even provide any evidence whatsoever that it will make her do even a smidgeon better. So maybe you should, like, not sacrifice your life for it.

I’m not saying the behavioral-genetics-informed view is correct here. That’s going to require a lot more research. But I’m saying if you at least agree it’s something we’re allowed to talk about, maybe it will pan out and do nice things like save you from the horrible zero-sum competition destroying your country’s middle class.

Because if it could be confirmed that preschool attendance and expensive school districts had low impact – or even a merely moderate amount of impact – on success for middle- to high- income children, then even in the absence of legal changes that would relax the pressure on everyone to spend more money than they have to get into the best preschools and best school districts.

X.

Overall I recommend this book. I think the conclusion comes on a little too strong but that it sheds a lot of light on a lot of trends and throws important statistics at you such that you read them. Equally importantly, it sheds a lot of light – in a positive way! – on somebody who’s becoming an important national figure. The chapter about her meeting with Hillary Clinton and the subsequent break between the two of them seems likely to take on a lot more meaning in the years ahead.

What I really want is Elizabeth Warren vs. Rand Paul 2016. Imagine a Presidential race when both candidates have very different but very consistent philosophies, and you’d be pretty proud to see your country run by either. Wouldn’t that be a change?

Economist 1: Look, there’s $20 on the ground!
Economist 2: No there isn’t. If there were, someone would have picked it up already.

It annoys me because it makes fun of a point of economic theory which, when phrased a little more realistically, is not only clearly correct but actually useful even in the context of this analogy.

Imagine the first economist had said “There’s $20 on the ground in the middle of Times Square, and it’s been there all week.”

It’s not so unlikely that you’re the first person to notice a bill that has just been dropped on the ground. It is so unlikely that a bill on the ground would go unnoticed for an entire week in Times Square, and if it looks like it has, you should start wondering if something more sinister is going on, like somebody spray-painting a picture of a bill on the sidewalk.

But that’s exactly what the original economic principle is trying to tell you!

So if there is what seems to be a drop-dead simple, no-risk money-making opportunity that no one has picked up on, and it’s been available more than a very short amount of time, expect it to be something more sinister.

I’m still iffy on Vox. Some of its reporting is excellent – their article on Governor Cuomo and the shift away from progressivism in the Democratic Party was especially enlightening. Other parts, especially the editorials, are atrocious and utterly without subtlety.

Ezra Klein’s article on compound interest was the latter.

The reaction to Ta-Nehisi Coates’ magisterial essay on the lingering effects of American racism is polarized around people’s reaction to the word “reparations.” But much of the story he tells is about something simpler, and completely uncontroversial: the power of compound interest.

You might remember, as a kid, getting this problem on a test: Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?

The answer, of course, is you want the penny that doubles in value every day. If you take the $10,000 you end up with $300,000 after the first month. Take the penny and you end with about $5 million.

What Coates shows is that white America has, for hundreds of years, used deadly force, racist laws, biased courts and housing segregation to wrest the power of compound interest for itself. The word he keeps coming back to is “plunder.” White America built its wealth by stealing the work of African-Americans and then, when that became illegal, it added to its wealth by plundering from the work and young assets of African-Americans. And then, crucially, it let compound interest work its magic.

Today, white America is one of the richest and most powerful populations the world has ever known. And it wonders why African Americans just can’t seem to keep up. “In America,” Coates writes, “there is a strange and powerful belief that if you stab a black person 10 times, the bleeding stops and the healing begins the moment the assailant drops the knife.”

[…]

“The popular mocking of reparations as a harebrained scheme authored by wild-eyed lefties and intellectually unserious black nationalists is fear masquerading as laughter,” Coates writes. It’s also the intellectually unserious response of people who believe that because they never owned slaves or drank from a whites-only water fountain they weren’t the beneficiaries of American racism. They may not be the villains of American racism, but they are the beneficiaries of it. The average white southerner in 1832 was far poorer than the average white southerner today, and part of that vast increase in wealth and income and knowledge and social networks is the result of compound interest working its magic on what the slaveowners and the segregationists stole.

It’s as simple and clear as a child’s math problem. The people who benefitted most from American racism weren’t the white men who stole the penny. It’s the people who held onto the penny while it doubled and doubled and doubled and doubled.

There are many many complicated moral arguments for and against reparations. Like Klein, I don’t want to get into any of them except the financial aspect of how much modern whites benefit from the lingering effects of slavery, and how much modern blacks are harmed by them.

I want to make one very loose argument and then one based off of empirical research.

The loose argument is that the best way to determine whether modern whites have gained from owning slaves (and I know Klein’s argument takes into account other forms of oppression beyond slavery, but slaves will be a good first approximation) is to see if formerly slave-owning societies are richer than formerly non-slave-owning societies.

The state with the highest percent slaves before the Civil War was South Carolina, with Mississippi number two. Mississippi is the poorest, and South Carolina the fifth poorest of the fifty states today. Except for Virginia, every single state in the former Confederacy is poorer than the US average.

This is somewhat confounded by the high level of poor blacks in these states, but remains true even when you look only at the income of white residents. For example, if Mississippi whites were their own state, they would be 39th out of 50 in terms of per capita income. South Carolingians would do better but still be below the national average. If all states suddenly became all white, Mississippi and South Carolina would drop right back down to the bottom.

So the whites who had the most opportunity to benefit from a supposed ability to earn compound interest on slavery earnings clearly didn’t do that.

While one could make the argument that the gains from slavery left Mississippi and the Deep South to enrich all whites, this seems a bit forced. The US was much less interconnected in those days. And other places that had no connection to slavery still outperform the Deep South: Italian whites, for example, still do comfortably better than whites from most Southern states.

One could always argue that Southerners would be even poorer today if not from all the compound interest they received on their slavery earnings. But Southern poverty is already a bit of a puzzle. To make them too much poorer would require them to descend into levels of squalor totally unknown in any First World country.

I think we should at least look at an alternate hypothesis: people are really really really bad at passing ill-gotten wealth through more than a generation or two.

II.

The descendants of rich people tend to stay rich even three hundred years later. For example, Gregory Clark looked at social mobility in Sweden. A famously mobile society, Sweden is also a good place to study social mobility since nobles and commoners had different last names back when the feudal system was in place around 1700. Non-nobles are forbidden to change to noble-sounding surnames even today, so names should be a fossil record of who’s descended from the really rich people.

Clark found that among highly-educated well-paying professions like doctors and lawyers, people with aristocratic surnames are represented around four to six times the level expected by chance. He uses this to describe a statistic “b” signifying the rate of regression to the mean with each generation.

Suppose nobles are eight times more likely to be doctors at the end of the feudal period. If b is low, say 0.35, then they will quickly regress to the population’s average – according to Clark’s graph, it will take about 80 – 90 years (= 3 – 4 generations?) before this happens. If b is high, say 0.75, it will take practically forever – he demonstrates that even after 200 years, there will be noticeable differences.

Clark finds b to be between 0.6 and 0.8 in Sweden, and then goes on to show it is similar pretty much everywhere and across all time periods. The Economist describes his research by saying:

With surprising consistency across countries and eras, mobility is found to be painfully slow. Birth has predicted more than 50% of one’s income or education status, Mr Clark reckons. Erasing the legacy of past prosperity takes 10-15 generations rather than the three or four implied by sunnier estimates. So the shadow of 18th-century wealth still darkens income distributions today.

This sounds very promising for Ezra Klein’s compound interest argument and really bad for my “Southerners are really bad at holding on to wealth” argument. But Clark takes it in a totally different direction. The Economist again:

The most unexpected finding [is that] efforts to democratise education and eliminate discrimination over the past century appear to have had no discernible effect on mobility, leading Mr Clark to conclude that mobility is strongly linked to underlying social competence—an “inescapable inherited” trait. Only the intermarriage of people who are more prosperous and educated with those less fortunate will dilute the genetic resources of well-off families, slowly pushing them back towards the average and preventing the rise of a permanent overclass.

I just want to briefly pause our economics discussion to point out that Professor Clark has written two books on his theories, and they they are called A Farewell to Alms
andThe Son Also Rises. Please take a moment to be delighted by that.

III.

Okay, so wealth lasts a really long time, and Klein thinks that’s because of compound interest and Clark thinks it’s because of “inescapably inherited social competence” which sounds a lot like a euphemism for genes. To differentiate between these two hypotheses we would need to randomly select a bunch of people, give them a lot of wealth, and follow them for a couple of generations to see whether their descendants compounded that advantage or regressed back to their genetically programmed level.

I am familiar with only one well-studied example of this happening.

In 1830 the government stole the land of the Cherokee Indians. Lots of white people wanted to settle the newly available territory, so the state of Georgia proposed a lottery, where the winners would get large fertile farms on the conquered area. Not only were the farms available in the lottery much bigger than those owned by the average Georgia farmer at the time, but lottery winners were totally allowed to sell the farm they had just won to someone else and pocket the cash. Nearly every single white person in Georgia at the time entered the lottery, because hey, free money.

Bleakley and Ferrie track the winners and losers of the land lottery for several generations. They find that the first-generation winners did very well. The average farm won in the lottery was worth $900 in 1830 dollars, which was the equivalent of three years’ unskilled labor (so think about $60000 today). It was also a gift that kept on giving, since most people would farm the land and be able to grow lucrative crops every year indefinitely. According to the study “two decades after the lottery, winners are on average $700 richer than a comparable population that did not win the lottery”. Remember, this is back when $700 was real money.

In a second study, they look at the effect a couple of generations down the line. They find:

Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines […]

[This] should have relaxed the budget constraint faced by poorer households and allowed them to invest more in the human capital of their children. If human capital was unaffected in the next generations, this is evidence in favor of the view recently advanced by Clark and Cummins that a substantial portion of the intergenerational correlation in outcomes is driven by fundamental, family-specific effects (the family’s cultural and genetic infrastructure)

Studies of modern-day lottery winners show much the same, albeit on a much-reduced time scale. And closer to the original issue, studies attempting to compare enslaved blacks versus free blacks appear to show it didn’t actually take that many generations for outcomes to equalize.

IV.

I am disappointed that all we have to go off of are these kinds of hints and whispers.

This seems like maybe the most important question in economics. Certainly in sociology. It seems terribly important to public policy, not just in terms of reparations but in how much we spend helping poor families and more important how we help poor families. If Clark’s view is right, the best we can do is alleviate their suffering by making sure that being poor isn’t an especially unpleasant state and everyone has good access to social services. If Klein is right, we should be making huge cash transfers to get people out of poverty traps so that their descendents will reap the compound interest and become rich.

(there’s also the slight confounding factor of the South being demolished during the Civil War, which could disprove Klein’s particular example while not necessarily supporting Clark or the general case)

I want to repeat Clark’s quote to the Economist for emphasis:

The most unexpected finding [is that] efforts to democratise education and eliminate discrimination over the past century appear to have had no discernible effect on mobility.

If Clark is right, almost everything we’re doing is a waste of time.

There are some good arguments about why poverty might make people less successful over long time periods, like cognitive load effects. But there are also some good counterarguments – if that’s true, how come the second-generation descendents of Vietnamese boat people, who came to America with nothing, now have notably higher household incomes than white Mississippians, with all their years of benefitting off other people’s slave labor?

Overall, these are the sort of really complicated problems I would have expected a supposedly more sophisticated media outlet like Vox to cover or help raise awareness on.

Instead it uses mere assertion to tell use that denial of compound interest is an “intellectually unserious response” and that Klein’s case is “as simple and clear as a child’s math problem.”

Sorry, Vox. I’ll keep reading you for your occasional article about the case for raising chickens in virtual reality. But intelligent and sophisticated you are not.

EDIT: Tyler Cowen gives a different perspective on the same Klein article over at Marginal Revolution

EDIT 2: The quote I stole the title from is probably not legit

EDIT 3: One could try to reconcile Klein and Clark by saying that sure, wealth doesn’t persist in families across generations but it does in societies (presumably it gets transferred from family to family within the society but continues to exist). But then there would be no reason to favor white people and their descendants as especial beneficiaries.

Today I learned about social impact bonds. They are a thing that exists. I would expect them to be in an adequate civilization like Raikoth or dath ilan. But they are a thing that exists on Earth.

The basic idea is: government could save a lot of money if some problem got fixed. For example, if people stopped committing crime, they could spend less money on prisons. So they make a deal with a corporation. The corporation agrees to spend a certain amount of money to prevent crime for five years. And if crime goes down and the government saves on prisons, the corporation gets half the savings (or a third, or whatever).

Zero taxpayer money gets risked. It is entirely up to the corporation to fund the problem-solving effort. If they fail, then it’s their own loss. If they succeed, then the government pays them money, but less than the government made, so the taxpayers still get a profit.

(The main exception I can think of is if by coincidence, crime was about to drop by 50% anyway right when the program started, and the government ends up giving half of its prison savings to the corporation for no reason. But presumably you hire a couple of mediocre economists and they are able to price out this risk. Also, a lot of the social impact bonds use a slightly different method of assessment, where they compare crime among the people the corporation has helped to crime among a control population to be sure it was the intervention that did it.)

The particular article I read about this today was How Goldman Sachs Can Get Paid To Keep People Out Of Jail. It was the name “Goldman Sachs” that got me excited. They’re an investment bank. Their job is predicting risk. I don’t know if they’re any good at it or not. But they’re the sort of organization that potentially could be. So we have people who understand risk trying to figure out what social policies will produce which results, with money riding on the decision.

This is looking impressively close to prediction markets. Futarchy says “vote on values, bet on beliefs”. Asking a corporation to invest money in crime-solving is a form of betting on belief – they are betting on what anti-crime programs will decrease crime most and win them the most reward. You still have the elected government deciding what bonds to place – voting on values – but you’re outsourcing your beliefs to the corporation involved and giving them an incentive to get it right.

Think of all the possibilities.

Right now we have a system where we don’t really help people in need, unless the need becomes desperate, in which case we would feel bad about not helping, so we do, but then the cost of helping has gone up by an order of magnitude. This is exactly the sort of stupid thing that a market should be able to profit from solving.

We could have a health insurance company giving free preventative care to the poor, and the government paying them out of decreased emergency room visits.

A psychiatry clinic giving therapy to at-risk patients, and the government paying them out of decreased involuntary commitments.

A university accepting students without tuition, and the government paying them out of the increased tax revenue when they take higher-paying jobs.

Planned Parenthood offering free IUDs for women who need them, and the government paying them the money it saves from not having to put the kids through school.

Trade schools offering free classes to people on welfare, and the government paying them back from not having to give them welfare checks once they get good jobs.

I’m not sure what it means that we’re not doing those sorts of things already. But if we can’t figure out a way to solve those problems without bringing in a corporation to profit off of our incompetence, I say bring in the corporations.

II.

I think many people are against government social programs for a lot of the same reason that The Last Psychiatrist is against maintenance of certification exams (a position I totally called). There’s too much temptation to use it as a signal that you are Doing Something while in fact funding programs like DARE which look virtuous, but do nothing or even actively make the problem worse.

If you lean this way – and I think I do – then it is not solely out of stupidity that we wait until problems have become dire before doing anything about them. Yes, it would be great to give free job training to people on welfare and save money when they come off welfare more quickly. But actual job training programs for welfare recipients are abysmal and have been denounced as a “charade” from both the left and the right. They may be a lost cause, but I would like to see someone who has an incentive to succeed try first before writing them off – or at least get the evidence that would be provided by no such person being willing to try.

III.

For a while I was confused by the old libertarian talking point that “greed is good”. I think I could phrase it a little better now. Greed isn’t good, per se. It is honest. You know where you stand with greed. You never wonder if greed has an ulterior motive, because it’s already the most ulterior motive there is. Greed feels no temptation to corruption, because the thing it would do if it were corrupt is precisely what it’s doing anyway. Greed is like the Harlot in one of Khayyam’s rubaiyat:

A Sheikh beheld a Harlot, and said he:
“You seem a slave to drink and lechery”
Replied the Harlot: “What I seem … I am!
Are you, O Sheikh, all that you seem to be?”

As I see it, capitalism isn’t about worshipping greed, but about figuring out how to make greed work for good ends. So far, it has mostly tried to apply greed to get us cheap and attractive consumer products. And the amount of cheap and attractive consumer products is, like, the one thing that everyone can unambiguously agree our civilization hasn’t dropped the ball on. If we all die tomorrow and aliens discover Earth ten thousand years from now, their anthropologists will publish books saying “They sure were screwed up, but man did they have a lot of cheap and attractive consumer products.”

And I think some of the most exciting proposals for the future involve finding ways to use this privileged incorruptible perfectly-incentivized status of greed to do other things. Prediction markets are promising because they use greed to fix epistemology. Neocameralism is promising because it uses greed to fix governance. And social impact bonds are promising because they use greed to fix social problems.

…which isn’t to say it’s going to be easy. Ozy’s first response is that Goldman Sachs should use their $10 million to give ten thousand people in the control group a $1000 bribe each to commit a small crime; this will be more than enough to demonstrate a vastly reduced probability of criminality by being in the intervention group and earn Goldman $20 million.

I told Ozy zir plan is unnecessarily complex. Look at the numbers. Two hundred potential criminals. And they need a 50% decrease in jail time to meet their target and earn $20 million.

So go to the potential criminals and tell them “I’ll give you $50,000 to not commit any crimes in the next few years. $25,000 now, in order to help you solve whatever problems turned you to criminality. And $25,000 at the end, after you’ve successfully avoided jail, as a reward.” If half of them stick to it, then boom, you get $20 million and you’ve made a $10 million profit. And incentivized the next generation of criminals, but you’ve already got your profit, that’s the next generation’s problem.

The fact that this would work probably says a lot about the inefficiency of prison compared to any other conceivable way of dealing with crime. And about the profits Goldman Sachs or anyone else willing to face the inefficiency head on could make.

I don’t know if it’s exactly a good idea to bring in the people who caused the financial crash to help the people who came up with the prison system. But since all we’ve got is incompetent institutions, maybe sticking different incompetent institutions in different roles might at least shake things up a little.

Yes. From Marginal Revolution:

Consider “The Wedding Dance,” a 16th-century work by the Flemish painter Pieter Bruegel the Elder. Detroit museum visitors have enjoyed this painting since 1930. How much would it cost to preserve that privilege for future generations?

A tidy sum, as it turns out. According to Christie’s, this canvas alone could fetch up to $200 million. Once interest rates return to normal levels — say, 6 percent — the forgone interest on that amount would be approximately $12 million a year.

If we assume that the museum would be open 2,000 hours a year, and ignore the cost of gallery space and other indirect expenses, the cost of keeping the painting on display would be more than $6,000 an hour. Assuming that an average of five people would view it per hour, all year long, it would still cost more than $1,200 an hour to provide the experience for each visitor.

So the question of “should Detroit keep this painting?” reduces to “does the average visitor to the art museum derive $1200 in value from seeing this particular painting?” which is very close to “would you pay $1200 for a ticket to an art museum that only had this painting in it?”

(other people may be more cultured than I am, but I find when I’m in an art museum I spend about ten seconds looking at each painting before moving on to the next one. So for me, at least, the cost is $120 per second of viewing time)

In If It’s Worth Doing, It’s Worth Doing With Made Up Statistics, I endorse trying to think quantitatively – not because we are always very good at quantifying things, but because sometimes just the attempt to quantify things makes the right answer so drop-dead obvious that whatever errors you make won’t change things one way or the other.

In the comments on MR people object that maybe some of the numbers in the calculation are a bit off, and that’s probably true. But just by trying the first numbers we think of, we realize we’re three orders of magnitude away from the spot where this would be a hard problem. And our numbers aren’t that off.

And this is why I continue to identify as consequentialist even though consequentialism is very hard and we can never do it exactly right. You don’t need a complete theory of ballistics in order to avoid shooting yourself in the foot.

Since I’m already being all soulless and analytical, let me just come out and say it – sell every piece of art in Detroit, but hire skilled forgers to make exact copies of them for a couple of hundred dollars each. You’ll have made billions of dollars, and the Detroit Art Museum will look exactly the same to anyone who’s not examining it through an electron microscope.

Sure, it’ll make it a little harder to signal snooty cultural superiority. But if you’re living in Detroit and trying to signal snooty cultural superiority, man, I don’t know what to tell you.