Sunday, July 21, 2013

Living in Detroit Makes Me Think All Greater Metro Areas Should Be Amalgamated

Reading this brief post by Robert Reich on Detroit led me to have the knee jerk reaction that all cities she be amalgamated into their greater metropolitan areas. The damage caused by wealth segregation in these areas is potentially enormous, as Detroit so clearly shows. Something that has really struck me since moving here is the plethora of tiny, tiny municipalities that exist. Some of them so small that a good football kicker could probably punt across their entire city limits (I'm barely exaggerating).

While the inequality issues are enormous, there is also the issue of huge inefficiency of it. How many city halls does one metro area need? How much could we reduce the government footprint if all these small towns were amalgamated? While too great of centralization can be a problem there's really no defense for cities of less than 10,000 that don't have a visible break from the central city they are so obviously a part of.

Obviously there are too many entrenched interests and Detroit is too weak of a central hub for this issue to be resolved in the near term but I can at least complain about how completely crazy the situation is. Amalgamate the metro area and Detroit's problems would basically be solved. Not overnight, of course, but the right incentives and necessary resources would be available to make a long term solution just about inevitable.

Living Wage vs. Helping People Live

W.W. at the Democracy in America writes a blog entry on living wage laws (I've noticed that there is an awful lot more ignorant wingnutty comments over the past year or so, though early posters are generally still good. This has been making me less desirous of spending time there, however).

The progressive impulse to make employers rather than the government ensure workers a decent standard of living seems to me to be based in these sorts of considerations. Yet I cannot see how forcing Walmart, or employers generally, to guarantee minimum incomes helps. There is, no doubt, a great deal of dignity in work, and there is also a certain indignity in receiving government transfers. Hiding transfers inside paychecks is therefore an excellent strategy for rewarding work while getting people what they need in a way that makes them feel good about it. That's a great reason to support wage subsidies. However, forcing employers to directly bear the economic burden of the subsidy is mostly just a strategy for reducing the supply of paychecks, which would benefit neither the dignity nor economic security of the American worker.
On the whole I agree with W.W. but with a couple of important caveats.

First of all, for market wages to really be market wages power considerations have to be eliminated.* In the early days of our economy the relative small size of employers and the relative strength of municipalities could achieve this. Later in our history, unions achieved much the same thing. Today, however, we have atomistic individuals trying to bargain with large, centralized corporations. This is an easy recipe for exploitation of the weaker individual party by the organized, stronger party.

In the American situation this has tended to lead to liberals being forced to support statist intervention, without other intermediate bodies to push back against corporate power we are left with the state. Hardly ideal, often too broad in application, and always slow the reality is its the only tool left to provide a countervailing force against more powerful firms. A regeneration of unions would, of course, provide an alternative but for whatever reason too many people see unions as a market distortion rather than a necessary countervailing force to firms that would lead to more efficient outcomes.

A second caveat is that, as Adam Smith observed about Scottish Highlanders,** there are groups who do not depend upon wages for survival that will drive wages below what their natural clearing rate would be. Groups such as teenagers and the elderly who can depend respectively on either their parents or old-age pensions often choose to work for below market wages for reasons peculiar to these sub-groups. These marginal workers tend to drive wages below what would be demanded by workers if these groups were not present.*** [Update: To clarify, most labor markets are composed of individuals whose primary income come from markets. At the very low end of the wage spectrum, however, individuals dependent on markets for their incomes are competing with individuals whose primary income is non-market, whether household production like the Scottish highlanders or based on family ties or social guarantees like teenagers or the elderly. Imagine if you had to compete in your job with someone who worked simply to buy video games and had their house, food, and other living expenses taken care of for them. Would you like to be involved in that competitive wage negotiation?]

With these two caveats in mind, however, I do agree that insofar as state power is being used to address these inequities it is better to do so through general taxation than it is through employer mandates. After all, there are a lot of negative externalities to having lots of poverty ridden people in the population and we all benefit from addressing their poverty. Subsidies would also serve to address the problem of people working for pocket money rather than a roof over their head and food in their bellies.****

However, I think the idea of a fair price has a lot more gut appeal than does the idea of a guaranteed minimum income or other policy interventions that could turn the residents of our trailer parks into bourgeois.***** So I don't see W.W.'s or my favored interventions gaining much traction, especially when the necessary taxation for these policies is taken into account. A better policy lever to pull would be interventions like universal healthcare and other universal insurance schemes to get benefits off employer's books. After that our businesses will be in a much better position to pay for the likely inevitable higher minimum wage laws.

*Economists have a terrible tendency to handwave away power. While I'm aware they deal with it tangentially through issues like transaction costs and in some studies bargaining, power plays a deeply influential role in our economic interactions and economists really need to come to terms with this if they want to be scientific and based on observation rather than philosophical and based on abstract reasoning.

**I think it was Scots. Though for some reason my memory is also thinking his example had something to do with the Caucuses and Russians. I'm probably conflating two different books, but I know Smith mentioned this phenomenon and am simply too lazy to look up the exact reference.

***Without the presence of a pool of workers not dependent on their wages for survival workers would naturally tend to bid up wages over time as their not making ends meet and the pressures force their productivity to decline. With a pool of workers not being driven to distraction by poor living conditions, however, wages can remain artificially low and the employees with inadequate living conditions can be called lazy rather than miserable.

****On the whole I do think the evidence also shows that people work harder for their pocket money than they do for the bread in their bellies. Someone working to eat will generally want to stop working once they have enough to live off of, having so few prospects to earn real resources there is little incentive to work past this point. Provide them with enough resources to get by, however, and people find that there are actually goals they can work towards rather than immediate needs they have to satisfy. Social advancement is an infinite treadmill but the human stomach can only fit so much.

*****While it is a respectable intellectual standpoint to not like the bourgeois I think there is a powerful state interest in encouraging people to think and act like the bourgeois.

Why Do Economists Hate Consumption?

I'll admit upfront that this is an off the cuff remark I haven't thought through. I was reading Tyler Cowen's piece in the New York Times on wealth taxation. This passage struck me:

Historically, economists — including me — have generally favored taxes on consumption, on the grounds that they would do the least damage to long-term savings, investment and economic growth. Yet in some eyes, rising wealth will become a tempting target for short-term political gain. And note that while most Republicans currently oppose consumption taxes, they may dislike the relevant alternative, namely wealth taxes, even more.
Now, it is of course true that savings = investment as an accounting identity. However, the link between savings and productivity growth is far more complicated.

The reason for this, of course, is that investment can mean many things. It can mean investment in productivity enhancing equipment which is what savings proponents seem to think of and which increases overall welfare. Or it can mean setting aside ever more of our earnings to simply inflate real estate prices by flipping houses to each other. Both these things are under the umbrella of savings and investment but only one of these things is welfare enhancing.

Frankly, the emphasis on investment has always seemed to me to be influenced by a misreading of history combined with a combination of availability bias and ingroup bias. The misreading of history comes from the tendency to see the rise of capitalism in the textile mills and other machine oriented industries while ignoring that studies over the past several decades show that these large industrial enterprises don't even come close to explaining the rates of growth experienced in these years. Also ignored is the fact that the early modern world had an abundance of wealth tied up in land and industries that had been invested heavily in throughout history, like mining. Ignored is the shift in consumption patterns away from simple foodstuffs and towards tradable goods, throughout Europe people were expressing a preference for commodities like sugar and coffee and devoting more of their labor to acquire these goods and substituting market goods for household labor more generally.

Availability and ingroup biases come in two forms. First, classical economists after Smith focused too much on industrial enterprises. It is easy to see the changes being made by factories and steel plants, it is harder to notice the increased velocity of commerce that involves the little people making small purchases not produced by large industrial enterprises. While this perspective has largely been corrected in more recent economic history, the fact that large scale aggregate evidence was mostly unavailable to classical economists amounts to something of an original sin that has carried over into modern economics. The stories told, if not the evidence, continues to overemphasize the contributions of the industrialist over the butcher, the baker, and the candle-stick maker* despite the fact that the increased level of trade amongst these small time professionals probably contributed more to the rise of capitalism and the early period of remarkable growth than did the industrialist.

Ingroup biases resulted from the kind of people these earlier economists, and most modern economists, associated with. Early universities did not recruit broadly, the people these thinkers came into contact with were the up and coming investors in large enterprises. Their notion of business shows the influence of these titans of industry rather than the small time entrepreneur who was the real engine of growth but whose kids were lucky to get much formal schooling at all, much less reach university. This leads to a story told by the people that had more interest in justifying their success than they did describing the efforts of the millions of souls who made the far larger contribution to modern prosperity than they did.

There's more to the story of course, like the increased durability of machinery in this period. But the more I read economic history the more convinced I become that the largest piece of the puzzle is that wealth became more mobile, it had to be put to work. Before the modern period wealth was tied up in land, mines, and grain stores. After a number of changes it became essential to put this money to work, try to sit on your previously safe assets and your fate was to fade into irrelevance.

Which brings me back to the wealth tax. Wealth in the United States is incredibly skewed. While much of it is invested in machinery and other productivity enhancing investments another portion is invested in relatively non-productive assets such as land, commodities, and certain forms of intellectual property. Since not all forms of wealth are equal it seems to me at least plausible that a wealth tax could be growth enhancing.

My thoughts on this rest on a simple fact. The point of the economy is ultimately consumption, any investment pays off because someone wants to buy what was produced by that investment. To the extent the investment was simply being made for security, whether something as primitive as putting grain in a grainery or as complex as a financial derivative, an investment can potentially make us all poorer by taking assets out of active circulation. Ultimately, a properly structured wealth tax may make us all richer by reducing incentives to plow wealth into non-productive assets like land or gold and instead into growth enhancing machinery or human capital. The key thing is circulation, capitalism is about wealth flowing rather than staying static in a musty vault or wild expanse of private forest. This is basically what I see as the story of capitalism, a transition from static wealth and security to a consumption driven economy where investments are made simply to keep up with demand. The more wealth is redistributed in the form of income and economic activity the better off we all are. If it instead stagnates in idle luxury, or is siphoned off to those that won't use it to consume in the form of returns on real estate, consumer, or student loans the worse off we become.

This is, of course, more complicated than what could be achieved by a simple wealth tax. But I think the supply side driven economic perspective is basically wrong. Growth was driven by people trying to keep up with the increased consumption of the masses, mostly by the masses producing for each other. As a side effect this made a few people very wealthy, this form of income inequality is a natural side effect of the system and neither good nor bad. But to the extant that society changes to protect these lucky few we all become worse off, their wealth lies mostly idle and there is less need to invest in productivity since those that consume have less wealth to spend. What we need is wealth to change hands more often and for people to consume more, policy should bias income to earnings rather than savings. Unfortunately, I don't see this happening.

[Frankly, this piece needs some cleaning up, but I'll sit on it for another month if I don't hit publish now. Too busy lately.]

* I'm being a little too cute here but couldn't resist. To the extent that these professions were artisans they were probably actually losers from the rise of capitalism and the industrial revolution. The real emphasis should be on the multitude of small shops that sprung up using simple machinery and specialization of labor like Adam Smith's pin shop. This is the real story of economic growth, the small shop with cheap equipment that doesn't require a lot of savings or investment to set up. Just a small windfall for an artisan and the desire to expand operations. A dirty secret of entrepreneurship is that it isn't the result of careful husbanding of resources, more commonly it's a lucky break, like an inheritance gained earlier than expected, and a bit of local capital scrounged up rather than long term husbanding of resources. The notion of long term savings being tied to economic success strikes me as more of a medieval story fitted to medieval ethics and economic conditions than a capitalist one. The conflation of medieval attitudes towards investment with the radically different incentives provided by capitalism that seems so common in our culture is something that never ceases to amaze me. Capitalists are grasshoppers, not ants. Ants are the medieval artisans and landowners that got bought up and dispossessed by the faster and more aggressive capitalist grasshopper innovators.

Saturday, July 20, 2013

Sexism and Sacredness [Part 2]

[After a long delay I finally found some time]

So, here's what gets me about the whole sacredness angle. Supposedly the loud protestations about gender roles and the importance of family is supposed to somehow lead to stronger, more stable families. Haidt, somewhat obliquely, seems to suggest that these norms achieve this by activating our group impulses which should supposedly help to form the kind of nested groups to make a healthy, functioning Durkheimian society.

The problem is that I see little evidence of this. Even the most basic units, families, seem weaker in the more Conservative areas where these supposedly groupish values are expressed so strongly.

While I can't make a concrete case for this without doing substantial research I can throw out some suggestive data.

The first are these maps of divorce rates and age of first marriage. There is obviously a lot more going on here than just political attitudes, however it is immediately notable that the areas where groupish conservative ideas dominate are not markedly more superior on these measures than states where the opposite attitudes dominate. While it's hardly definitive I'd say this is certainly suggestive that conservative attitudes aren't very successful at increasing the stability of family units.

While probably not the most reliable site, and I'll mention some data that provides nuance to the above,  there are a number of notable statistics that cast doubt on the socially stabilizing force of conservative attitudes.

First of all, increasing age at first marriage shows a strong negative correlation with divorce.

Age Women Men
Under 20 years old 27.6 percent 11.7 percent
20 to 24 years old 36.6 percent 38.8 percent
25 to 29 years old 16.4 percent 22.3 percent
30 to 34 years old 8.5 percent 11.6 percent
35 to 39 years old 5.1 percent 6.5 percent

It is difficult to square this pattern with an insistence on abstinence until marriage and other aspects of traditional family and gender roles. It also supports the notion that blue states generally have lower divorce rates than red. Further it mentions that atheists have lower divorce rates than many other religious groups.*

In the end, I just don't see evidence for the argument that moral intuitions on the sanctity, loyalty, and authority are leading to a conservatism that reinforces group bonds. Families seem weaker in the areas of the country that most strongly identify with these values. Meanwhile in areas where these values are less vocally expressed the disruption of the past 50 years seems to be rapidly healing with new patterns in marriage and family life emerging and proving stable. While I don't disagree with Haidt that people display the moral traits he writes about I don't see the evidence that they continue to play the functional role he claims for them within the United States.

The problem is that the content of these sacred beliefs and the groups from which cues of authority are taken matter very much. Unfortunately, American conservatism has always been highly identified with business elites and the free market has been the most powerfully atomizing force ever encountered by human society. It's impossible for conservatism to promote groupish tendencies and to create the kind of stable, Durkheimian society written about by Haidt when it holds as sacred principles that lead to atomization rather than community and when its authority figures are those that have succeeded within the atomistic competition of the market rather than those whose position is rooted in deep ties to place and community and moral bonds instead. Heated talk about values does nothing but conceal the fact that America's business leadership has no idea how to build social institutions that would reinforce communities rather than tear them apart. The central blindness is that owing their power and position to the market forces they cannot face squarely the fact that it is market institutions that are the root cause of the atomization of our society leading to the failure of these moral beliefs to fulfill their social role. More on this later, I plan one more post on the subject of marriage and family life to tied up loose ends.

* This is contradicted by a later survey by the same group. I mention it just to add complexity to the argument, in both surveys the sample sizes look far too small to break out the sample into sub-groups as they do. The sample size is certainly sufficient to answer some questions but not to pick up divorce rates among small groups like atheists. Also, the later survey has a strong conservative skew that doesn't match with overall population data. Fun stats that reveal a complicated picture but not ones too be taken too seriously.