Dylan Matthews brings our attention to this map from the Tax Foudation:

all about the variable purchasing power of a benjamin

Basically, they inverted the BEA’s Regional Price Parities and mapped it – cool!

It needs a bit of context, though. Specifically, there’s something very clearly driving this outcome. Fortunately for us, BEA subdivides the RPPs into Goods, Rents, and Other Services, and provides us with a good-enough guide to how it weights them that we can create a parallel “non-housing cost” index and see what happens. And what do you know?

histograms ftw

Once you exclude housing, the distribution of outcomes is much narrower and much more clustered around its central tendency. Or more bluntly – everywhere costs a lot more like everywhere else when you don’t consider housing.

Of course we should consider housing! It’s really important! But we should also be clear what expensive housing means – lots of people want to live somewhere. Often because wages are high. And guess what? If we graph the state rent index against state per capita income:

mo money mo housing demand

It becomes pretty clear that higher wages (or at least higher average incomes) are likely the reason housing prices are high.

So if you live in DC, you’re probably not paying that much more for most things than an Alabaman is; you’re just paying a premium to live in a high-wage area that can’t – or won’t – build enough housing to keep up with the demand to live somewhere wages are high.

Tyler Cowen posted this the other day:

A typical cow in the European Union [in 2002] receives a government subsidy of $2.20 a day.

And if your next thought isn’t “of course he’s going to reconstruct this figure” then you haven’t read this blog before, have you?

Turns out, though, that doing so was surprisingly challenging, in part because it meant recreating all the assumptions behind that figure and in part because European agricultural policy is an epic rabbit hole (cow hole?). But, after some slogging and some tweaking, I was able to recreate the methodology that produced the original $2.20/day (and subsequent $2.60/day) figure, but it came with a wallop of a surprise:

the cow jumped over the moon but didn't exactly stick the landing

I didn’t adjust the currency because that’s it’s own field of cow holes, but yes, those 2002 and 2003 numbers basically check out. But look what’s happened since then!

Before you get too excited about the EU attempting a radical break with subsidizing agriculture, it turns out that this is a consequence of the ‘decoupling’ – the shift in EU ag policy from subsidizing specific commodities to subsidizing practices and benchmarks that cut across commodities, which has lead the OECD to basically throw up its hands in terms of trying to derive consistent commodity series. Don’t worry, though, I used a rough previous average of milk as a share of total ag subsidies to impute the recent numbers:

ma he's imputing cows!

And given the wealth of data and anecdotal evidence that dairy farmers in Europe are still getting plenty of government (don’t say cheese don’t say cheese)…tofu?…anyway, there’s no reason to think European cows are getting too shafted, even though it does seem like 2002-03 was perhaps peak season for cow bucks.

But this doesn’t get into the larger issue with this number – that the vast majority of the total subsidy to dairy as computed by the OECD doesn’t come in direct government-to-producer payments but in implicit support, for example through tariffs, whose impact is much harder to quantify – they impute it through trying to measure negative consumer surplus. As Jacques Berthelot wrote at the time, their methods are far from bulletproof. Either way, the figure gives the at least somewhat-misleading impression that the $2.20/cow/day is received entirely in the form of cash transfers, which I suppose is misleading to the extent that you draw a distinction between the two.

Anyway, in conclusion – we no longer know how much subsidy European cows get, and maybe we didn’t really know at the time.

A final thought – a dairy cow in Great Britain will put you back, roughly on average, $2,500 (or just under 1500 GBP, or just over 1,850 EUR). So you could always try this yourself.

Here’s two humans:

fav men rt women

Remember them for later.

So UBI (a universal basic income) has been out and about on the tubes lately – here’s Dylan Matthews, pro, PEG, anti, Jeff Spross, pro, Stephanie Slade, anti, Max Ehrenfreund, pro. One of the key questions that has become perhaps the crux of this most recent debate has been labor force drop-out, both its magnitude and its meaning. I thought I’d try to clarify this debate, though, by trying to dig a little deeper into exactly who we think might withdraw some or all of their labor if a UBI were made available.

I’ll propose three theses:

  • Labor force withdrawal is likely to come from the low end of the income spectrum
  • Labor force withdrawal is likely to come from occupations that are unpleasant, difficult, unrewarding, and/or low in advancement potential
  • Labor force withdrawal is likely to come from occupations that are less central to the core functioning of the economy (and therefore less likely to see wage increases correspond strongly with diminished labor supply

So let’s step back and take a look at the workforce.

Firstly, let’s take stock of the major trend of the American workforce – the changing balance between goods and services.

America has been shifting strongly towards producing services over goods…

you got served

…and employing people in service over goods production as well.

you served

These charts, though, mask an interesting trend – the differing productivity in those two sectors. What happens if we take a very raw measure of productivity (output/employment)?

you got gooder at gooding

Whoa. Sadly, the necessary data only goes back to ‘November Rain,’ but even since then output/employment in goods has increased 75% whereas in services it has only increased 28% – the relative CAGRs are 2.7% and 1.2%.

So first broad conclusion – most Americans are in service industries, and goods employment is likely to increase in productivity and therefore decline unless demand for domestically-produced goods relative to services (or government) increases sharply.

But that’s not really a good enough answer to the question of ‘how will UBI affect the workforce?’ I mean, what are services, as experiences on the ground by American workers? So let’s dig a little deeper into the BLS’s occupational wage data to see if we can pinpoint where labor force exit might be most pronounced.

The BLS uses 820 detailed occupational categories, grouped into 23 top-level major occupational groups. Below is a chart showing the average annual wage in each of those 23 groups; the area of the circle is proportional to the total employment level in that sector.

not lovin' it

That big bubble at the bottom? The one with nearly 12 million workers making an average wage of just $21,582.50? That’s “Food Preparation and Serving Related Occupations.” If you break it down to the detailed occupation level, six of the seven lowest-paying occupational categories are in food service. The second-worst paying occupation in America is “Combined Food Preparation and Serving Workers, Including Fast Food,” which pays just $18,880 and yet employes over 3 million Americans, more than any other detailed occupation group except ‘Cashiers’ and ‘Retail Salespersons.’ After the bottom seven, another eight of the next 36 lowest-paying occupations are in Food. Of the 18 different occupations within Food, only two – ‘Chefs and Head Cooks’ and ‘First-Line Supervisors of Food Preparation and Serving Workers’ make over $30,000 annually on average.*

If you, like me, are completely insane, you may enjoy scrolling through this chart, which is structured similarly to the above chart except it has all 820 detailed occupations. Enjoy, you crazy person.


The other really-poor-paying major occupational groups in America are ‘Farming, Fishing, and Forestry Occupations’ – which, as we have recently learned, is a pretty awful job – and ‘Personal Care and Service Occupations,’ which is anchored on the lower end by over 1.1 million ‘Personal Care Aides’ making less than $21,000/year, on average.

So who were those two women above? The one on the right was Deb Perelman. Perelman has a really awesome website named ‘Smitten Kitchen‘ where she shares her favorite recipes along with tips, personal stories, and awesome pictures of her food, like these cookies I’m going to make tonight:


Yum. She has a cookbook, too.

The woman on the left is Julia Stewart. Stewart is the CEO of DineEquity, which owns both IHOP and Applebee’s. Applebee’s serves food that looks like this (according to their promotional materials):

nom [cardiac event]

You can find which of the 2000+ Applebee’s locations is nearest you here and which of the 1500+ IHOP locations is nearest you here. The company is currently worth $1.65 billion.

Without putting political positions into either of these persons’ mouths, from a purely material standpoint Perelman should be rooting for UBI and Stewart rooting against it. I’d be willing to bet dollars over donuts that the biggest direct impact of a UBI would be an exodus from the food service industry, especially from the mid-range to the lower end where wages are lowest and customers are most price sensitive. An increase in the price of, and decline in the availability of, cheaper restaurant meals will mean more meals cooked at home, and less work means more time to cook meals. That likely means more sales for groceries and farmers’ markets, but also more clicks for recipe sites and more purchases of cookbooks.

This should be unsurprising to anyone who follows fights for increased minimum wage or universal worker benefits and protections at the state and local level – the leaders of those fights are never the factory owners, but the big restauranteurs. A UBI will empower people to opt out of serving others cheap food, and empower them to take the time to prepare their own food, cutting out the purveyors of cheap (and often very unhealthy) food in the middle.

Wonkblog’s Matt O’Brien had a great reminder last week that Eurozone policymakers’ obsession with low inflation is fueling a monetary policy that is extremely damaging to the broader European economy and the lives of millions of Europeans. A recent paper, though, suggests the problem may be even worse then we thought.

Jessie Handburt, Tsutomu Watanabe, and David E. Weinstein recently published a paper that purports to have assembled “the largest price and quantity dataset ever employed in economics” to assess how well the official Japanese CPI is measuring inflation. The answer is ‘not so good’ – but the reason for that answer is scary. To wit:

We show that when the Japanese CPI measures inflation as low (below 2.4 percent in our baseline estimates) there is little relation between measured inflation and actual inflation. Outside of this range, measured inflation understates actual inflation changes. In other words, one can infer inflation changes from CPI changes when the CPI is high, but not when the CPI close to zero.

What does that mean? They draw two clear conclusions. Firstly, that national CPIs routinely overstate inflation – here is their (better) measure stacked against the official measure:

the decline and fall of the nippon yenmpire

Since 1993, the official Japanese statistics show a net decline in prices of just a few percent, whereas the authors’ numbers show a decline close to 15%.

The other conclusion is that, even though over the long term the CPI overstates inflation, when inflation is low, the CPI is basically no better than a random guess as regards any particular measurement.

find the pattern [hint you can't]

This means that while, on average, the CPI inflation rate is biased upwards by 0.6 percentage points per year, one can only say with 95 percent confidence that this bias lies between -1.5 and 2.8 percentage points. In other words, if the official inflation rate is one percent per year and aggregate CPI errors are the same as those for grocery items, one can only infer that the true is inflation rate is between -1.5 and 2.8 percentage points. Thus, a one percent measured inflation rate would not be sufficient information for a central bank to know if the economy is in inflation or deflation.

you say toe-mae-tos (are more expensive) i say toe-mah-tos (aren't) let's call the whole thing off

In case it wasn’t clear enough, Europe is definitely in the ‘flying blind’ zone:


As is more and more of the developed world in general:

if all the other countries were blowing up their economies to satisfy a bizarre price stability fetish would you do it too?

This is, errr, kind of terrifying. Because what it all adds up to is the conclusion that monetary policy makers are throttling growth because they’re relying on data that is both inaccurate and imprecise. The inflation fears that have crippled Western recoveries for half-a-decade and running are based purely on phantoms.

My post last week on the case for homeownership as an investment has received some good feedback (the e-word is hereby banished from this blog), a good chunk of which has been constructively critical. While I responded to specifics in comments, I also wanted to supplement the post by fleshing out the remainder of the argument and adding a couple of points.

It has been pointed out to me that there are certain costs – mostly taxes, insurance, and maintenance – that weren’t included in my spreadsheet and only implicitly in my analysis. This is – for the most part – true! I did handwave away depreciation, as much for the sake of simplicity as anything, but I only touched on the other two to the extent that they’re wrapped up into the rent counterfactual. Let’s delve into that some more.

Rent – the price of shelter to non-owners – is in the simplest analysis driven by the same things that drive all markets prices: supply and demand. That means rents aren’t directly responsive to the costs of housing, but those costs do impact the supply curve. If the costs of creating and renting new housing can’t be justified by rents, then supply will not rise even if demand does, driving up prices until they are so justified. Therefore, in general we should expect the costs of renting shelter to be similar (though not equivalent) to those incurred by the owner of the same. In fact, I bet if you play around with The Upshot’s ‘Buy vs. Rent’ calculator, you’ll find that housing and rental costs are very similar.

This brings me to my next point; while people have pointed out what costs I didn’t include, fewer have mentioned the benefit I didn’t include in my analysis, even though that benefit is much vaster. I focused solely on the capital gains returns of buying a house to demonstrate the power of leverage, but the huge share of the returns to a house are the rents you receive as an owner. This is central to any complete case in favor of homeownership. It is further worth noting that these imputed rents are, in fact, an enormous share of our economy.

a vampire weekend song entitled "david ricardo"

Net imputed rents, as I pointed out in my Piketty thinkpiece which seriously you must have read this thing by now also tend to be fairly stable, returning between 4-6% of the house’s price over time.

seek those rents seek them hard 

This chart actually understates the stability of imputed rents (as the former chart makes clear) since most of that volatility is driven by volatility in the denominator. For context, here’s the Case-Shiller index, since basically forever (with bonus real interest rate series):

 oh hai the aughties

While volatility has more recently increased (consider that my application for the Understatement of the Year Award), note that houses, at the very worst, tend to be inflation proof (the Case-Shiller is a real, not nominal, index) – an asset whose nominal price grows alongside inflation while consistently returning 4-6% annual net returns is, hey, not too bad, and if you can use tax-privileged leverage to buy it, not too bad at all. Especially since we’re going to pay a bundle for housing no matter what we do:

 what would a cake chart look like

…using housing as a vehicle for savings makes an additional sense.

That leads me to an additional point on volatility; here’s Shiller’s stock price index, also since basically forever:

 oh hai the 20s oh and the 90s hello

That looks a lot more volatile than house prices, huh? Which brings us to a key point – as asset price volatility increases, so does the importance of investment timing. This, as Neil Irwin recently noted, can make long-term averages of returns misleading.

seriously though fuck umberto nobody likes that guy anyway

While his examples are obviously stylized, they clearly-enough make the point that otherwise-identical savings behavior in a volatile market can achieve vastly different outcomes depending on the timing of returns even holding long-term average returns constant. Therefore, the relative stability of housing returns – prices + rents – helps savers reduce long term risks.

I want to conclude, though, by taking a major step back and examining the whole purpose of this exercise. When we’re talking about savings from a consumer perspective (not from an investment perspective) what we’re talking about is retirement; and when we’re talking about retirement, we’re always talking about the same somewhat-odd phenomenon. When a person retires, they cease all economic production through labor, yet continue to demand a share of the economic output of their society. We tend to view these claims as just and deserved because they are made by the elderly, who we feel have earned it/are unable to work/are generally venerable (as opposed to similar claims from the non-elderly poor, which we treat very differently) but that doesn’t change the underlying structural nature of the phenomenon, in which we are trying to ensure that a substantial portion of the adult population is consuming an broadly-equally-substantial portion of present economic output while providing no inputs.

Debates about savings and retirement, therefore, are all about how to structure this phenomenon – specifically, what network of programs, policies, mechanisms, incentives, and behaviors we want to establish to justify to the working and capitalists that a portion of their labor and capital outputs be directed to the non-working old, which we often do by creating mechanisms that somehow tether those portions of redistributed present income to guarantees of future income. All governments in wealth nations do this, and the ways in which they vary are influenced heavily by politics, ideology, and other socioeconomic factors. In the United States, our prevalent ideology around a certain kind economic freedom means we tend to be less generous in direct public redistribution and instead attempt to subsidize private savings through the tax code and public insurance – ergo, 401(k)s, the home mortgage interest deduction, and the Pension Benefit Guaranty Corporation. Indeed, the increasing prevalence of that ideological strain is driving defined benefit plans into extinctions in favor of defined contribution plans.

good thing we don't have unions anymore

This leads us to many debates about the best savings vehicles for middle class Americans, yet those debates are to a decent extent a red herring – the vast majority of retirees receive the majority of their retirement income from Social Security, and for many, it’s all the income they have - though to be consistent, I’m nearly certain the figures in the chart below don’t include imputed rents, though I could be wrong, and this is important because 80% of seniors are homeowners:

society secured 

This is very good evidence for the proposition that a vastly disproportionate share of the private-savings-for-retirement subsidy network flows to those who need it least. And it suggests that questions like “houses v. stocks” are, for many Americans, mostly a red herring – if we want to put more money in the hands of retirees, we should simply make Social Security more generous – or, in a better world, maintain it at its current level of generosity while implementing a Universal Basic Income.

stewie "david ricardo" griffin

Linking to Dylan Matthew’s generally-excellent piece on the correct way to manage one’s personal finances, Matt Yglesias says “stocks are on average a much better long-term investment than houses.”

This, of course, is an increasingly common view in the “internet wonk community” (one I consider myself an member of), distinct from the related and equally-prevalent view that ‘homeownership should be much less subsidized than it it now.’

This is also a view I take issue with, which you’d already know if you read my big Piketty #thinkpiece – you read my big Piketty #thinkpiece, right? right? – and one that I think needs a little elucidating and defending in detail.

There are three basic reasons that buying a house is a vastly better investment than current wonkpinion suggests. The first is that making large leveraged investments can pay off hugely even if the underlying growth rate of the purchased asset is slow. Let’s demonstrate.* Let’s take an average American buying an average house in an average way – $200,000 purchase price, 20% down, 4% closing costs, 5% interest rate. Now let’s say the value of that house grows reeeeeeeally slowly – just 0.3%/year, which just so happens to be the compounded annual growth rate of the Case-Shiller index since 1947.

If our average American sells their house after 10 years, their initial $48,000 equity investment will become $67,691.08 – which means their equity grew at a CAGR of 3.5%! If they sell after 15 years, they’ll net $92,209.57, which is a CAGR of 4.45%. Hey, that’s a lot higher than the 0.3% growth rate of the house’s price itself, isn’t it?

It sure is! The amazing power of leveraged investments is that you can turn a little bit of equity into a large return, as Matt Yglesias notes concisely here. Here, in fact, is a nice little graph demonstrating the implied return rate of selling your house after making regular mortgage payments for a given number of years, given the interest rate paid, assuming that meager 0.3% growth rate:

n33ds m0Ar l3vr1j

After 13 years, you’ll get a 3% return even at a very high interest rate; at 19 years, you’ll get a 4% return. In fact, you can assume zero growth and still get a substantial return on your initial investment – as long as you don’t count the regular payments on the debt.

Hey, what about the regular payments on the debt?

Good question! This brings us to my next two points. Because if leveraged investments are so awesome, why don’t we empower (and perhaps subsidize) average people to make large leveraged investments in stocks, which have a much larger underlying growth rate? Beyond all the other problems with that idea (not that nobody has pitched it), the thing about a house is that it has an unusual counterfactual. If you buy stocks with leverage, in theory the payments on the debt should come out of your savings, creating a counterfactual of simply saving and investing that money. But the counterfactual to owning is renting. This creates some curious conditions that lead to my next two points in favor of buying a house – inflation protection and subsidies.

There is obviously some connection between the purchase price of a house (and therefore the amortized monthly payment on the mortgage) and the rent it could fetch – regardless of where you fall on the capital controversy that dare not speak its name, there must be some fundamental link between the price of an asset and its expected returns. However, a mortgage is detached from the imputed rent (the flow of sheltering services) a house delivers, and therefore is nominally frozen in a way that rents are not. So therefore even if a mortgage today is substantially more expensive than the rent payment on an equivalent housing unit, in thirty years even very low inflation will change that drastically. Just 2% average annual inflation entails an 80% increase in the price level over three decades, meaning the annual mortgage payment declines by nearly half over that time. Rent, in the meantime, keeps going up (except in rare cases which can entail its own problems), at least as fast as inflation. Therefore even a mortgage whose monthly payment is more expensive than a rent payment today will be much cheaper than renting in a few years.

Aha, you might say, but there is a problem with this – the magic of compound interest means that the difference-in-monthly-payment savings accrued today by the renter will be much more valuable in retirement than the parallel savings accrued years from now by the owner. This is true! But that’s where the subsidies kick in. Our primary national subsidy for homeownership is to allow mortgage-payers to deduct the interest portion of their payments from their income – and the amortization structure of mortgages means the share of payments comprised of interest are highest right when the mortgage begins, and declines until the loan expires:

interest on your interest

This benefit comes when “housing” costs – really, housing-purchase-debt costs – are at their highest, also because earlier in life is when incomes are their lowest. It is difficult – very difficult – to defend the home mortgage interest deduction as currently structured, as such a large portion of the benefit goes to such a small and disproportionately well-off group. It is worth considering, though, whether the idea at the core of the program is sound. And either way, whether you think we should have them or not doesn’t mean that you don’t consider them when considering what constitutes a good investment under the status quo.

Of course, I haven’t even touched on imputed rents once a house is fully-owned (or, conversely, actual rents), which are of course the most important return to a house, well beyond the capital gains discussed heretofore. But this leads to the most important conclusion: not that houses are such a great investment per se; just that they’re a great investment for people without a lot of capital because of their unique pathway to leverage. If you had half-a-million dollars, should you buy a house (or apartment) to rent or a portfolio of financial products? Almost always the latter. But if you only have an order of magnitude less than that to your name, it may make sense to buy something with a lower return (not to mention wholly undiversified) because you can lever up. Just another way that large capital concentrations can secure higher returns – or at least exercise more freedom of action.

Spreadsheet, as always, attached – calculate your own expected returns on your housing investment!

House Investment

*All of these numbers are real and net-of-depreciation unless otherwise noted.


some people never bayesian learn

Noah Smith had a great post yesterday about becoming a Bayesian Superhero. Because I am an inveterate nitpicker and a routine abandoner of my commitment to Spreadsheets Anonymous, I want to dig into the math behind his example. In this case, it actually matters quite a bit, because the math in this case mutes the power of the example somewhat:

But nevertheless, every moment contains some probability of death for a non-superman. So every moment that passes, evidence piles up in support of the proposition that you are a Bayesian superman. The pile will probably never amount to very much, but it will always grow, until you die.
The thing is that ‘the pile will probably never amount to very much.’ Here are the Social Security’s life tables. I am a 27-year-old-male, so my probably of dying (without adding in any other life expectancy modifying factors) is just 0.001362; as odds, that’s 1 in 734. That means Bayes’ Rule is not going to make very much of my not dying as evidence. Just to put it as starkly as possible, if I believed right now that there was a 48% prior probability of my being an invincible superhero, living to 40 (ceteris paribus) would be still be insufficient to push the posterior over 50%.
What does that mean? To ever believe you are a superhero through Bayesian inference, at least one of two things have to be the case:
1) You have to have a very large prior – essentially, superderp.
2) You have to do survive things that drastically increase your odds of dying.
The first thing, I think, is what Noah was getting at with teenagers; the latter thing is basically the plot of Unbreakable. If you want to generate real evidence for the proposition that you are a superhero, you need to survive some deadly encounters. And even then, you could still just be Boris.
that thing where the gold star runs out
Actually, though, the real meat of Noah’s post is in this aside:
But this gets into a philosophical thing that I’ve never quite understood about statistical inference, Bayesian or otherwise, which is the question of how to choose the set of hypotheses, when the set of possible hypotheses seems infinite.
To which I actually have a good answer! When selecting hypothesis from the infinite, simply go with the existing consensus and try to generate evidence that supports or undermines it at the Bayesian margin. This should actually be the right strategy whether you’re operating under a Popperian or a Kuhnian framework.


A great deal of the vital information that forms the backbone of the social sciences is collected through surveys. The problem with this is that most of the surveyors are academics, and therefore the surveyees they have ready access to are unrepresentative of the population at large. They are, to use a popular acronym, WEIRD – Western, Educated, Industrialized, Rich, and Democratic. Beyond that, college students tend to be unrepresentative of even the WEIRDos; they are the weirdest of all. Even if it is very hard to imagine surveying many non-WEIRDos at less-than-prohibitve cost, we should strive to find a way to make at the very least a broader cross-section of Americans available to social scientists, somehow.

What if I told you, then, there is a place where millions of Americans from almost every stratum of America’s diverse socioeconomic fabric spend a tremendous amount of time just…waiting? Doing nothing? Simply sitting? That almost any engaging activity proposed to them would sound amazingly appealling right about now?

Well, there is such a place – the Department of Motor Vehicles. Americans rich and poor, old and young, of all colors and faiths spend hours just waiting to renew liscences or take exams. And it is during those long and painful waits that America’s social scientists should shake down that captive audience for all the input they can muster.

So my proposal is – DMVs should generally open their doors, free of charge, to any researcher from any accredited university who would like to conduct a survey of folks waiting at the DMV, obviously still contingent on the individual consent of each subject. I imagine plenty of people, otherwise bored out of their wits, would love to spend that time conversing with a human being, taking a test, whatever. There you go. Free idea, America.

he came dancing across the water

The spouse and I travelled to Mexico and Colombia this year (Mexico City and Cartagena, to be precise), our first journies to Latin America. In keeping with our general belief that travel should entail and encourage learning, we read up on our destinations before, during, and since our trips. In addition to some excellent books more particular to the nations we visited (Earl Shorris’ The Life and Times of Mexico in particular is an amazing book) we also read, of course, Eduardo Galeano’s Open Veins of Latin America. If nothing else, the book makes vivid and imemdiate the scale and depth of the horrors visited upon Latin America by its conquerors, crimes comparable in their systematic brutality to almost any evil ever visited by man upon man.

In conversations with my wife, we discussed the seeming impossibility of those conquerors, most notably Spain and Portgual, to ever make substantive amends for those crimes. That got me thinking if it was possible, and since I’m apparently now the internet’s foremost specialist in reparation spreadsheets, I tried to see if and how pecuniary restitution could be made.

Unlike my calculation of the reparations for slavery, though, I decided instead to take a forward-looking approach. Rather than calculate a number equal to the crime, I instead tried to, through a very simple model, see if Spain and Portugal could ever, even over a very long time, ever put together enough cash to substantively make an impact on the whole of Latin America. Spain and Portugal are far from the only offenders on the long list of wrongdoers in Latin America, but I decided to limit my analysis to them mostly for the sake of simplicity.

The key problem facing Spain and Portugal in trying to make restitution to Latin America is that they are currently far, far smaller parties than those they might be making restitution to; their combined GDP just over a quarter of that of Latin America and the Carribean as calculated by the World Bank. To fork over enough wealth in the short term to make a dent on the fortunes of Latin America would involve a degree of impoverishment of the present citizens of those nations that most would find untenable. So I decided to give them a little time – 150 years, to be exact. Specifically, they would make annual contributions into a wealth fund equal to a fixed share of national output for a century and a half, and during that time 100% of all returns would be reinvested. In 2166, Iberian contributions would cease and Latin America would be free to do with the accumulated capital what it wished.

Would this be enough? Well, it depends – depends, specifically, on four-and-a-half variables – the averagegrowth rate of the Spanish & Portugese economies (two variables that I simplified into one), the average growth rate of Latin American GDP, the return to capital, and the size of the annual contribution. That’s a lot of moving parts, and a lot of big assumptions.

At this point, I clarified the question I wanted to ask – conditional on fixing two of those variables (Iberian growth at 1% and the return to capital at 5%), how large of an annual contribution would Spain and Portugal need to make to this fund to target a total valuation equal to one-quarter of Latin American GDP in 2166?

Where is this all going? Well, in what is a wholly unsurprising result for anyone who’s read their Piketty, the key to the answer to that question is Latin American growth. Specifically – is r>g? And by how much?

Here is a quick table of possible answers:

If Latin American Growth Is… Then The Annual Share of GDP Devoted to The Fund Needs To Be
2.0% 4.8%
2.5% 10.2%
3.0% 21.3%
3.5% 44.6%

The World Bank projects Latin American growth over the next 20 years at ~3.5%; should that growth persist for another thirteen decades, that would make the Iberian task almost impossible, nearly half of GDP being devoted to the project. But should average Latin American growth fall over that time, the Spanish-Portugese lift becomes easier and easier, to the point where if Latin American growth is still even double that of Spanish-Portugese growth, they can devote less than 5% of GDP to the fund each year and still hit their 25% target.

What conclusions can we draw from this? Firstly, it is an excellent demonstration of the long-term impact of r>g. The larger the gap between r>g the easier it is for accumulated wealth to grow relative to an economy (though this case is somewhat muddled by the annual contribution of non-return income to the fund).

Secondly, it shows how public-good wealth funds can turn r>g from an anti-social force to a pro-social force. The larger we expect the gap between r and g to be, the more pernicious it can be if most wealth is private, untaxed, and unregulated, but the more beneficial it can be if wealth is public, taxed, and regulated. In my Piketty write-up (you didn’t think you were getting away without a reference to that, did you?) I advocated for a sovereign wealth fund devoted to funding a national university system; this idea, too, becomes more compelling if you are pessimistic about growth or bullish on long-term returns to capital.

Lastly, it highlights certain ironies particular to this situation; two in particular stand out. It demonstrates most clearly to me the futility of plunder as an economic model – if all the blood-soaked gold and silver stolen from Latin America has made the lives of modern Iberians better off, it’s hard to see how. It also highlights the irony of the tradeoff between growth and wealth accumulation. If Latin America really does maintain a growth rate of 3.5% over the next 150 years, real Latin American GDP will just surpass $1,000 trillion; even if Latin American population quadruples to over two billion in that time that would still imply a real GDP per capita of nearly half-a-million dollars per person by then, ten times that of the modern American – and several times what these figures project Spanish GDP per capita to be in 2166. Indeed, for all Latin America to reach parity with Spain and Portugal in fifteen decades at most only 2.5% annual average real growth is required over that time even assuming the highest bounds of population estimates. The irony, then, is that the largest obstacle to the descendents of the conquista state making meaningful reparations to the descendents of their conquests is the conequered surpassing the conqueror.

As always, data attached. LAmerRep

itsame! satoshi nakamoto!

I’m nearing the end of David Graeber’s Debt: The First 5000 Years (don’t tell Brad DeLong) and at the very least it is most certainly an interesting book, and on that basis I can highly recommend it even if I’m not sure what to make of some of its generalizations and conclusions. One of the most important and lasting contributions I think the book will make is in its discussions of the origins and purposes of money, but to some extent I think Graeber himself doesn’t quite get what he has. Let me explain.

Money is classically defined by its use, not by its nature; it is some thing, anything really, that can be used as a unit of account, medium of exchange, and store of value. By these lights, anything can be money – coins, surely, but also livestock, shells, cloth, cronuts, anything. Indeed, defining anything as definitively “money” at all can be tricky, which is why one of the best contemporary thinkers on the subject, JP Koning, has focused instead on money as a spectral phenomenon, in which various things have differing amounts of “moneyness” over time. “Moneyness” is, in fact, the name of his blog, and its tagline stresses the adjectival nature of money over its nounitude.

Graeber spends a good deal of time at the beginning of the book deflating the myth that money arose primarily to serve as a medium of exchange to alleviate the inefficiencies of barter, and noted rather that exchange happens nearly everywhere as a credit-based processed and that money arose as a unit of account to tally those credits. He notes that coinage appears much later, usually in periods of instability, and is often induced into circulation by the state, who concurrently pays soldiers wages with it while simultaneously demanding it in taxes.


Come on, Alex. You can do it! Come on, Alex. There's nothing to it!

This dual embrace of the credit and chartalist accounts of money, though, are a little muddled, because it confuses two very intimately related but ultimately distinct concepts – money and currency. Let’s disentangle them. Money is anything that is used as money, that humans imbue with moneyness to facilitate relations, and therefore really is more of a category or an adjective than a specific noun. No one thing is, quite, definitively, money. But currency is most definitely a noun; it is a definitive, definable thing that is used as money. So overwhelmingly has currency become our money, in fact, that we often use the latter term to refer interchangeably to both concepts. It’s this confusion that I think makes one of the key passages in Graeber’s book, where he outlines the credit and chartalist accounts of the origins of money, less clear than it ought to be, since the credit theory explains the origin of money, and the chartalist account the origin of currency.

Let’s tie this back to something I wrote recently, something that makes a little more sense when wrapped into this insight:

I think trying to sort those and the myriad other solutions to the money problem into “fiat” and “backed” is as irrelevant as it is obscurant. In each of those schemes there are two identifiable foci from which value regulation derive and distinguish various schemes from each other:

-The algorithm – the rule governing the value path of the currency.

-The credibility – the likelihood of the currency following the value path promised by the algorithm, and the accountable party for those outcomes.

It’s not so much that this isn’t true – it is – as much as that it is an equally good way of describing debt, which makes sense since money – and currency – are, essentially, debt instruments. Debts are contracts, and what are contracts if not algorithms, nested and intertwined sets of calculations and if-then statements that govern the interaction of inputs and outputs? And what determines the value of debt more than credibility – the belief that a debt will be redeemed as promised? This view of debt as an algorithm-credibility matrix can go back to the earliest virtual credit moneys, those that existed solely as units of account to quantify and record credit relations.

The algorithm & credibility heuristic described in my post and repeated above, though, refers specifically to currencies - state-issued debt instruments designed and intended to serve as society’s money. Money predates currency, and currencies were introduced by states because they induced forms of socioeconomic organization that were hospitable to state aims under prevailing conditions. Currencies are, and always have been, impersonal, interchangeable increments of state liability. And in spite of the oft-prevailing metalist fiction that metallic backing meant the nature of the state’s currency debt was a quantum of metal, currencies have always, in fact, been totally self-referential. A dollar bill is an instrument that entitles the bearer to one dollar. What is a “dollar?” A purely abstract quantum of economic value. And the state owes it to you. If you go to the state and give them your dollar bill and try to claim your dollar, the state will comply and gladly give you…another dollar bill. Or maybe a coin with Warren Harding’s face on it. The point is that the state pays its bills with dollars, and demands taxes in dollars, and therefore the money-space in society is most effectively inhabited by currency under those conditions.

This is what squares the credit and chartalist theories – money is credit and emerged as such, currency was induced chartally because when society uses currency for money it benefits the state. It also explains the bonanza of secondary currency-denominated instruments that make up our broader “money supply,” such as commercial paper and T-Bills. It also explains the unifying thread between debt, money, currency, and algorithms.

This, of course, leads to one final question – what about cryptocurrencies? If all money is debt, and state currency is a liability of the state, whose liability is a Bitcoin? Technologically, of course, Bitcoin is a major step forward in distributed trust and secure decentralized transaction; but in some ways Bitcoin is also a return to something older. Bitcoin is almost a reification of Graeber’s note that, if money is fundamentally a unit of account, “[y]ou can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.”

much cheddar, so checking

Bitcoin, and cryptocurrencies in general, are liabilities of the code itself, and in that way are pure liabilities of the social system. Bitcoin leverages the most advanced and modern of technological innovation to create a currency that occupies the most archetypal space money can occupy. Yet at the same time, its volatility works at cross-purposes. And while it is possible to solve the volatility problem in using Bitcoin as a medium of exchange, it’s at the expense of using Bitcoin as a unit of account. But if accounting, and not exchanging, is the original genesis of money (as opposed to currency) then cryptocurrency’s potential, barring further innovating, is handicapped.

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