pike mence

There are many symmetries between politics and finance, but one in particular has been starkly illustrated in recent months, one whose potential consequences are a bitter mix of the amusing and the terrifying.

The thing about banks failing is that they don’t. When a “normal” company fails, it’s simple, obvious, unavoidable—bills come due, there ain’t enough on hand to pay, and no way to get more. That’s bankruptcy—the equity holders are SOL and the creditors have a couple different ways to deal with what’s left, often a choice between “reorganizing” the failed company into one that could succeed going forward, or simply scrapping it for parts and taking home whatever cash that generates.

Banks don’t do that. Instead, absent outside supervision and intervention, they can often remain liquid—capable of servicing their debts, making full and timely payments to depositors and other creditors—long after they’ve stopped being “solvent,” in possession of assets whose ‘true’ worth* exceeds the bank’s debts. This is, in part, a function of the opacity of banks, and in additional part a function of the various ways that banks have been insulated from some kinds of market pressures, deposit insurance being a primary (though far from sole) node in the network of institutions and policies buffering banks from market pressures. Essentially, banks, uniquely, can pay the bills every month, keeping lights on, workers fed, creditors happy, while nursing a corrosive secret.**

This is what happened to savings and loans in the late 1970s and early 1980s, precipitating the eponymous crisis. But that crisis came years after most S&L’s ‘truly’ became worthless, which in-and-of-itself made the inevitable crisis substantially worse. This is because of something whose name in the finance literature is actually kind of cool and should have been the name of an ‘80s metal band—“gambling on resurrection.”

So let’s say you are in charge of bank (mazal tov). Let’s also say you, personally, own a big chunk of the bank, 10%. And let’s say it’s Tuesday and the bank is worth $100 million, so those shares are worth $10 million. And before you get really excited about having $10 million this hypothetical is going to quickly advance to Wednesday when the Fed decides to quadruple interest rates and you were incautious about maturity risk so now the bank is worth negative $50 million dollars. CFO Fred comes and and tells you, gingerly, that you’re insolvent.

Here’s the thing, though—for the weird reasons we discussed above (among others), the fact of your insolvency has no immediate consequences. You can keep paying all your bills for at least a little while. And from the outside, the fact of your insolvency is totally invisible—nobody knows, unless you tell them! And, most importantly, your 10% stake in the bank? It’s not worth negative $5 million dollars; it’s just worth nothing, zero dollars. That’s what the “limited liability” part of “limited liability corporation” is all about.

So do you call up the FDIC and tell them they should come immediately and close your bank? Pffft, if you were the type to do that, you’d be working for UNICEF or in the Peace Corps or some other hippie-dippie goodie-two-shoes line of “work.” Instead, you immediately realize you have a much better option, which is to plow all the bank’s money you can into comically risky shenanigans. Why? Let’s say these CRSs*** only have a 5% chance of paying off—but if they do they’ll go up in value by a factor of 50. That means if you put $3 million of the bank’s money into them, you have a 95% chance of it just evaporating and the bank being worth negative $53 million—but roll a 20 and it’s suddenly worth $150 million, and the bank is back to being worth $100 million!

A 95% chance of making the bank’s already tubercular condition even worse sounds bad—and it is! But remember, your shares are worth exactly zero dollars whether the bank is worth negative $50 million or negative $53 million or negative $530 million. Your personal material position is completely unaffected by the bet going bad, but is drastically improved by it going well. You have no downside.

This, too, is what happened in the S&L crisis—the insufficient vigilance (and in some ways the actual facilitation) of regulators allowed insolvent S&Ls to keep making crazier and crazier bets. These crazy bets had only upside for the banks and their various shareholders and managers. But they had huge downside for society as a whole, because it meant that lots of “good” money, deposits and investable capital, was being tied to boulders and fired from trebuchets after bad money. What makes gambling on resurrection so toxic is that you’re doing it with other people’s money.

This brings us to Mike Pence, who, though you probably haven’t heard of him, is having an interesting year. It’s not a coincidence that his last name is also the word you see following Donald Trump’s on signs sometimes; he is, in fact, the Republican nominee for Vice-President. What a year for Mike.

Equally interestingly, Pence is the Governor of Indiana, where he’s been having a hard time of it. Around the time Trump was searching for someone to get his coffee someone to be a heartbeat away from the Presidency, Mike Pence’s prospects in Indiana were dimming. Despite his party-line credentials and mutant-persecuting looks, his various SNAFUs had submerged his approval ratings, and polls showed his re-election at risk. All this in a state overwhelmingly likely to vote for Trump in November.

So what’s a guy facing an increasingly likely embarrassing end to his political career to do? Why not hitch your train to Trump’s? Well, he’s an unprincipled lunatic and narcissist utterly lacking the qualifications and temperament higher office requires, and you’d have to very visibly defend his conduct and record for months, which seems like something somebody with live political ambitions wouldn’t want on their own resume.

But Pence didn’t really have live political ambitions anymore; getting booted from the Governorship would’ve left him not just powerless, but a powerless loser. If Pence’s downside was zero if he didn’t run for veep, it couldn’t be any worsened by having his name next to Donald Trump’s (or alternatively, Franz von Papen’s) in history textbooks. But if he wins, he’d get to be in charge of “domestic and foreign policy”—everything short of #MAGA.

And indeed, if you read that story about how Trump settled on Pence (settled being an especially apropos term here), you’ll notice a pretty tight inverse correlation between one’s future political prospects and one’s willingness to flirt changing one’s first name to “Trump hyphen.” And indeed, if you take a look at the folks who’ve found themselves in firmly in Trump’s gravity well, you’ll notice among other types—party hacks, white nationalists, and people with the surname “Trump”—a very particular group of both former and current officeholders who, despite holding or having held high office and having at some point had the potential for even higher ones, currently hold no real cards and have no real political hope. This includes Pence, obviously, but also Chris Christie, Rudy Giuliani, and Newt Gingrich, among others.

This may not seem overly concerning at first glance, but, especially in the context of current officeholders, it should be. Politics is, if nothing else, a coordination game, if not always one as stark as it could be. To the extent that, at various moments along the course of this campaign, at least some Republican voters were unsure about casting their ballots for Trump, that particular threat to his chances seems to have evaporated. And to some extent that evaporation was likely  hastened or catalyzed by Trump being able to hold out not just former but current Republican officeholders, including the governors of two states, one of whom was a candidate for president in his own right this cycle, as a signal of partisan acceptability. One really can point to folks like Pence and Christie (especially the former, whose struggles in his home state are much less visible and telegenic to the national electorate than the latter’s) as noticeably improving Trump’s chances.

In this way, putting all one’s chips on Trump—whether it was being a big early endorser, being a cable news surrogate with a household name, or by joining his ticket—is the political parallel to the comically risky shenanigans underwater banks bet big on when they’re gambling on resurrection. And in the same way that those big bets cost nothing to the gambler, but generate large externalities for the system as a whole, politicians with negative equity backing Trump helped legitimize and amplify everything awful Trump represents, exacerbating the damage done to our polity and civic institutions.

This is also a problem without any simple or obvious solutions. Subjecting politicians to more of the equivalent of market pressure has obvious drawbacks, but less obviously but even more importantly has difficult implementation problems. Even if we could reconstitute all fifty states as parliaments who could execute motions of no-confidence leading to snap elections, the decline in voter turnout in non-Presidential-cycle elections should leave us skeptical that this would lead to democratic outcomes. On the other hand, having a team of FDIC-esque bureaucrats who supervise politicians and put cities and states into receivership when their leaders’ political balance sheets go negative is, uh, problematic. In the end, though, it is likely that this problem is just a symptom of the underlying dysfunction that led to the Trump nomination in the first place—and therefore a sign of all the downstream ways otherwise-everyday aspects of political institutions can suddenly become perverse when core institutions and norms melt down.

*Figuring how much a bank is worth is, in fact, a maddening and unanswerable riddle [https://www.bloomberg.com/view/articles/2014-10-15/bank-of-america-made-168-million-last-quarter-more-or-less].

**Of course, this has the flip side of encouraging bank runs, panicked reactions to bad news that can result in sudden shifts of market and consumer attitudes towards banks. Nipping runs in the bud is part of why those buffering institutions and policies exist.

***These used were later rebranded as CDOs when banking got more corporate.

click to see where I found this image; come on, how could I *not* use it?GDP is “the size of our economy,” the sum total of goods and services produced by “our economy” consolidated into a single dollar figure. In case you didn’t already know this, how big it is, and how fast its growing, is considered by many observers to be important. When it doesn’t seem to be growing as fast as it was in the past, people write books.

It’s also probably not surprising to anyone who reads this blog (BREAKING: it still exists) that how we measure GDP is, when you dig into it, at least a little weird. For starters, the border between what is and isn’t “the economy” as opposed to “stuff people do with their time” is a little fuzzy. Plus, stuff that seems to definitely be party of “the economy” is occasionally hard to measure. This ends up with the rent that homeowners don’t actually pay themselves but are “imputed” to pay themselves to work out to be 5-10% of all of GDP!

When you think about it, that isn’t wrong—we obviously spend a lot of money building houses, buying new and used houses, fixing broken houses, and renting houses we don’t own, in a way that suggests a) houses are definitely part of the economy and b) if we don’t measure the benefits homeowners get from owning very larger economic objects then GDP will look weird as a result. The folks who do this for a living explain it better and more thoroughly than I can.

But when you think about it, it does suggest that the legal and economic structure of relationships between people and institutions can matter a lot in deciding what does and doesn’t go into GDP. To wit, let’s visit a parallel universe, one where America is just the same as it is today except for one big difference.

In this universe, there is a very popular thing called The Netflix Organization that millions of Americans use to stream content. Everything physically and institutionally about The Netflix Organization and how people use it is the same as Netflix in our universe, but legally it’s structured just a little differently:

  • The Netflix Organization is collectively owned by its members, not its shareholders.
  • Its shareholders are actually all creditors who just have a set of unusually-structured debt contracts with the Netflix Organization.
  • The monthly fees that owners pay to The Netflix Organization are actually collective contributions by the owners to
    • pay organization staff and other costs;
    • service debt payments (actual debt + dividends in our universe)
    • cover depreciation; and
    • engage in capital improvements (improving streaming performance and UIs, creating and buying rights to new content).

So here’s what would be weird about this universe—if you just left it here, GDP would be exactly the same as it is in our universe. But you wouldn’t just leave it here. Because the owners of Netflix don’t seem to be making any income! Yet they’re collectively paying billions every year to support this capital that they collectively own, which wouldn’t make any sense if it wasn’t producing economic value to its owners. So you need to impute the value of streaming Netflix content to users, and consider that economic output that would be added to GDP.

And depending on how you calculate it, that’s a lot of value. Netflix claims American users streamed 42.5 billion hours of content last year. How would you impute a dollar value onto that? Well, an average movie ticket last year cost $8.43. The average movie is around 2 hours; so you could impute a value of $4.215/hour streamed. But of course each hour streamed is probably viewed by more than one person; let’s just stipulate that the average works out to around two.

You would then impute a value of Netflix Organization income to its owners of $358 billion—which would add around 2% to 2015 GDP! And not only that—Netflix streaming is growing rapidly, from 29 billion hours in 2014. That figure would’ve only added 1.3-1.4% to 2014 GDP; put another way, the growth in Netflix streaming alone boosted nominal GDP growth by 0.6-0.7 percentage points last year.

Now, the assumptions I used to impute economic value to Netflix streaming are more than challengeable. But the point is that, in this parallel universe, you would very likely have to go through the exercise and impute something. We don’t do that in our universe because Netflix is considered to be selling a product to consumers, and therefore the product is automatically valued at the purchase price when it’s considered for addition to GDP. Which is fine! Fundamentally what I’ve done above is to rearrange a bunch of activity not considered economic in our current framework into something different purely on paper, with no real world change, and yet prompt a potential—and potentially large—reevaluation of our core economic metric.

The point of this exercise—and this post—isn’t that “GDP is bad” or “GDP isn’t accounting for disruptive tech, bro” or “the Lucas critique/Goodhart’s law/Cambell’s law,” although it necessarily includes a little of all those things. It’s mostly just that there’s an inherently arbitrary nature to measuring anything, and that if you want to measure something, you should probably measure it in a lot of different ways.

I wrote something long on Medium, so you should probably Instapaper it and plan to read it on a future flight or something.

Jonathan Chait has a theory of how Bloomberg could win. I’m less interested in engaging with that, though I have my quibbles. Instead, I’d like to focus on something that tends to be elided during election season – what moral duty Michael Bloomberg has to the American people in making the decision to run.

Making a decision to run for a major party’s nomination is generally a pretty clear-cut decision, ethically speaking. One runs if one thinks one is the best option that party has for both winning the Presidency and the best option the nation has in a potential President. This is why there is probably some inherent madness to the act of running, but doing so through the normal channels is inherently straightforward in this regard (though that ignores the ethical questions relating to campaign conduct; that’s a whole different issue).

Running as a potentially-credible independent or third-party candidate, however, is substantially thornier. Doing so is inherently disruptive to the political process; moreover, there is an unavoidable ideological gamble involved. Such a candidate, in an admittedly oversimplified model, is drawing most of their support from the major party candidates; the crux is that they are very likely drawing more support from one candidate than from the other. The paradox is that the candidate from which they are drawing support is almost assuredly the candidate which they are closer to ideologically. While this point is disputable, it certainly seems credible to speculate that, absent Ralph Nader, Al Gore wins in 2000; given the events of just the first W term, one doesn’t need much imagination to see how that could’ve drastically reshaped the last fifteen years.

This issue is exacerbated at times when “normal” politics isn’t working well. Certainly Bush I and Bill Clinton would have governed different in the early ’90s, but neither of them were likely to immediately drastically destabilize America’s political, social, or economic systems.

That is decidedly not the case in 2016. There is, as of this writing, a very real chance that the Republican Party may nominate a candidate with a very high chance of immediately drastically destabilizing America’s political, social, or economic systems if elected.

Everything else that makes the comparison ludicrous aside, this is the fundamental asymmetry between Trump and Sanders. Bernie Sanders is a career politician. He is a left-wing (by American standards) career politician, but a career politician nonetheless. He did a bang-up job as the mayor of a real city, played nice in the House of Representatives for nearly two decades, and was a committee chairman in the United States Senate. His platform, if enacted, would be bad (at least in partial equilibrium) for the wallets of the Mike Bloombergs of the country, and the validation of his tone and rhetoric that nomination and election would bring would be bad for the egos of the Mike Bloombergs of the country. But Bernie Sanders wouldn’t break the country. Donald Trump would. Given the overwhelming likelihood of a GOP Congress in 2017, a Sanders presidency would be further restrained, but a Trump Presidency would face, at best, unpredictable restraint.

So the question for Mike Bloomberg cannot simply be “what are my chances of winning the Presidency?” The question must also be, “if I do not win the Presidency, do I make the election of Donald Trump more likely?” Given the possibility that he may draw at least as many Democratic-inclined voters as Republican-inclined voters if he runs, and given the fact that, should he throw the election to the GOP-donimated House if he denies either major-party nominee 270 electoral votes, the answer to that second question is very likely “yes.”

I am extremely certain that not only does Mike Bloomberg not read this blog, but that nobody of even remotely comparable wealth and prestige who could directly influence his decision reads this blog, either. Nevertheless, I’m going to address my conclusion directly to him:

Michael Bloomberg, you need to think long and hard about the consequences of the decision you are considering; not just about how and why you might seek the Presidency, but what could happen if you fail. I understand that the possibility of a Sanders Presidency seems worse than unpalatable to you, but there are far, far worse things than a left-wing Democrat in office with a Republican Congress to restrain them. If you run for President, and Donald Trump is elected, when history looks back on the dark era sure to follow, you will be first and foremost among those who receive the blame.

U.S. Senator Ted Cruz (R-TX) speaks to members of the Texas Federation of Republican Women in San Antonio, Texas October 19, 2013. REUTERS/Joe Mitchell (UNITED STATES - Tags: POLITICS HEADSHOT) - RTX14H7R

For months now, observers have been wondering why the Republican Party has been failing to rally around one seemingly-obvious candidate in particular. Young, new to the United States Senate, he is smart, well-spoken, represents a large and diverse state, and would be the first Latino nominee of a major party. Despite some bumpiness in his tenure, his positions on most issues are conventional, and he is likely to have similar priorities to a Republican Congress. Even though he’s rubbed some of his colleagues the wrong way, the media has been pretty unified over the last few months in wondering:

“Why won’t the Republican elite rally around Ted Cruz?”

Ha ha ha, just kidding, nobody’s been asking that. Instead, they’ve been asking that about Marco Rubio, get it, he also meets that description. The problem with Rubio, though, is that he’s irrevocably tied to being on the wrong side of what has becoming the defining issue in the primary for nakedly cynical reasons and more generally that he’s an empty suit and even more generally that voters don’t seem to actually, you know, like him or want to vote for him.

But Ted Cruz doesn’t have that problem! He won Iowa! He placed third in New Hampshire despite it being an exceptionally weak state for him, behind the overwhelming winner and the guy who had banked 100% of everything on ekeing out second place, but ahead of Rubio and Jeb! He’s right there! What’s going on?

Ha ha ha, just kidding, we all know what’s going on. The problem with Ted Cruz is that literally ever person who has spent more than a few seconds in his physical presence apparently loathes him. Major publications are practically building out entire verticals devoted solely to aggregating quotes from public figures about the fingernails-on-the-chalkboard-of-the-soul experience that is interacting with Ted Cruz. And, yeah, he definitely hijacked the Senate that one time to shut down the government, putting his interests ahead of the party.

But you know what? It worked! It demonstrated an ability to understand and interact with a complex network of institutions to achieve his goals. It showed savvy. It was entrepenuerial. And unlike Marco Rubio’s immigration SNAFU, it showed he had, and has, his fingers much more squarely on the pulse of key portions of the GOP primary electorate.

Let me be clear – a Ted Cruz presidency would be terrible. And, as the Republican nominee, he would probably lose. He is very conservative! He would probably rub a lot of voters the wrong way because, truly, being a successful politician who nonetheless rubs people the wrong way, deeply, in their bones, is Ted Cruz’s unique gift in life.

But he is decidedly not Donald Trump. Donald Trump is scary. Donald Trump is accountable to nobody. Donald Trump is a monster. A Ted Cruz candidacy would most likely be a Goldwater- or McGovern-esque loss; a Donald Trump’s candidacy has an equal chance of either accelerating centrifugal forces in the Republican Party and coalition past the point of no return, or of being something much, much worse for the future of American democracy itself.

Any long-term thinking on the part of the Republican elite should, at this point, realize that the collective odds of Bush, Kasich, and Rubio securing the nomination are slim; the contest, at this point, may very quickly become an effective two-man race if Trump and Cruz 1-2 South Carolina and Nevada. The long-term viability of the Republican Party is, frankly, in doubt no matter what happens this year, but it is in much better shape if it loses in a large but ultimately controlled and predictable way than if it puts all its chips on…whatever it is we will one day call Trumpism. The GOP and its elite, to put it bluntly, should prefer to “Lose with Cruz” (now there’s a campaign slogan) than to grab the toupeed tiger by the tail and ride it into the dark unknown.

The fact that this decision seems gobsmackingly obvious from anyone outside the group of, at most, a few thousand people who constitute the core of the GOP elite, yet so repulsive to those few thousand people themselves, is a little scary in what is says about the inability of high-level political actors to put the political ahead of the personal. Shoot, just before the Rubio bubble had its brief moment, just before the Rubio bubble had its brief moment, just be[whack], there was a crazy spate of stories about how the Republican elite might actually prefer Trump to Cruz because Cruz is a galaxy-class asshole. How those stories will play out now that Trump is winning primaries and Rubio may have dispelled himself once and for all remains to be seen. But it would be a collective gamble of reckless, amoral, cynical, myopic abandon unlike any in recent American history for a major party’s elites to even acquiesce to the nomination of someone like Trump; it would be staggering if a perfectly viable and much more predictable and conventional, if not exactly promising, alternative were discarded simply because the person inhabiting that alternative has all the charisma of microwaved fish.

Because it’s New Hampshire Primary Day and because I haven’t blogged in a while – time to apply a facile analogy to party politics! For a limited time only, clickbait post title included, no additional charge.

If there is a thing that distinguishes the amorphous categories of “tech” companies from other companies, it’s that the structure of expected returns relative to time is different from non-“tech” companies. Unlike more conventional, competitive companies with consistent margins reliant on either extensive or intensive growth to grow in value, tech companies leverage scale to hopefully strike at a focal position in an existing or emerging network with a combination of quality and timing that allows them to seize that position, a position from which monumental rents can be generated.

This creates a disjuncture between a tech company’s present and future. By many conventional metrics, most tech company’s presents look a lot like a conventional company’s death throes. Tech companies generally spend most of their early life bleeding fantastic sums of money, in the hope that if their gamble pays off, they will reap future sums orders of magnitude larger. In that sense, the better analogy for the tech company is a political one than an economic one; tech companies are like Roman generals who ventured all-or-nothing gambles on seizing the capital, with death or imperial power as binary outcomes.

The Democratic Party, today, is in something analogous to that position. There seems to be a consensus that, should demographic voting patterns not substantially shift, the Democratic Party will have a hammerlock on governing the United States within the next decade or two, as its core coalition quickly approaching majority status in the electorate.

At the same time, the Democratic Party of the present looks for all the world like a failing political party. They face structural obstacles to achieving majority status in either house of Congress; they have a minority position on the Supreme Court, though this is a more complex and mixed situation; and  hold unified control of only seven states to Republicans’ 25. Given the power this gives to Republicans to gerrymander, it is entirely possible for many facets of this dismal state to persist even if demographic harvests prove as bountiful as predicted for the Democrats.

Indeed, the only plus side is that, on the most federalized level, those demographic tailwinds have already lead to a deceptively definitive structural advantage in presidential elections; barring the discombobulation a credible third-party or independent candidate would wreak, Republicans would need to win either an unprecedented share of the nonwhite vote or an unprecedented share of the white vote in order to crack 2016, neither of which seems terribly likely at present.

Therefore, the Democratic Party stands in an odd situation; presently, its goal is to cling to the Presidency and a few key states for dear life, whereas in the future it hopes to assert a position of unprecedented dominance that could only be toppled by some combination of vast leftward movement on the part of the Republican Party (an equal ideological, if not political, windfall for ideologically-motivated activists) and an unforeseeable reshaping of the political landscape.

This disjuncture has both manifestation and exacerbation in the present Clinton/Sanders divide. It is clear that the frankly stunning demographic divides within the Democratic Party signal that a politics and platform substantially to the left of the status quo is the future of the Democratic Party; just as the Democrats expect to reap the windfall of future demographics, the left expects to reap the windfall of seizing the Democratic Party as it comes into its dominance.

But that future is not yet here, and the high odds that a Democrat will sit in the Oval Office next year are the inverse of the odds of Democratic control of either house of Congress. Therefore, no matter who the nominee is, the actual job of the next Democratic POTUS will be twofold – on the one hand, succeed in getting four budgets and as many appointees and judges through a hostile Congress as possible; and on the other hand, give back as little of the legislative and regulatory gains of the Obama administration as possible. That many within the Democratic Party itself are coming to see those gains as inadequate only exacerbates the tensions that come from high expectations of near-future political transformations clashing with a present politics largely predicated on holding patterns and defense.

This is an inadequate guide to who the Democrats should nominate; while Sanders’ politics are the future of the Democratic Party, it’s clear that 74-year-old Sanders himself, and old white men in general, are certainly not; Democrats looking solely at filling the job of President for the next four years have to balance ideology, willingness-to-compromise, and, yes, electability in making what is frankly a non-obvious decision. But of course politics is rarely about careful consideration of filling a job, and Democratic voters are casting ballots, today and for months to come, for reasons well beyond a calculating and decidedly uninspirational assessment of loss minimization. In the past, revolutions were followed by bitter infighting about its meaning, implications, and future; the oddity of the Democratic Party today is that the order has been inverted. The 2016 primary, more than anything, is a fight over not just who controls the future, but when the future will happen.

and on top of everything else you get a sticker, everyone loves stickers

The other day I tweeted that “‘voting is irrational’ is the worst argument smart and reasonable people routinely make” after seeing smart and reasonable Matt Dickinson reference it as an aside when making what I think is a different-but-also-bad argument about why people in certain positions should abstain from voting, and got at least one request to flesh out why I think the argument is in fact so bad. Rather than cite to all the people who make the argument (though also not to single out Matt per se, his was just the reference that led to the tweet that led to this post) , since I think it’s fairly well-established both in terms of its contours (that the odds of any individual vote affecting the outcome of an election is tiny ) and that it’s widely made, but here in only some order is a laundry list of all the reasons this argument is bad and I hate it.

Derek Parfit’s “Harmless Torturers” argument – In “Reasons and Persons” Parfit creates a thought experiment summarizes as succinctly as possible as so – if you have 1,000 people each controlling a single machine that each tortures a single person (say with electric shocks), it is clear that electing to activate the machine is wrong. But if each of those persons controls 1/1000th of a single machine that distributes 1/1000th of that torturous shock to each of 1,000 people connected to the single machine, would we still consider the choice of each to flip their switch wrong even if the marginal torture being distributed is at most barely perceptible? The intuitive, and also correct, answer, is “yes” and this is a very potent argument in the context of many cultural problems as well as climate change. It is similarly potent here as well; so long as we accept that collectively high participating in voting is good, it follows that each individual decision to vote is good. I leave it to the reader to note that, in the absence of substantial counter-forces, that doing good is rational.

Anthropology and sociology hugely militate against the narrow economic view of adjudicating individual actions on a narrow benefit-cost of marginal action – Human societies are vastly complex networks bound together as much as or more by norms and custom than formal rules, and rather than seeing collective action as the sum of individual action it often makes more sense to see individual action as a note in a multidimensional matrix of complex social, economic, familial, and communal networks. This, BTW, is why the whole quest to “microfound” macroeconomics is fundamentally dumb but that’s another blog post.

There’s no reason not to vote – the costs to voting are extremely small, and declining as time in transit or in queue can be spent in communication with others or playing Hoplite which I just discovered and is super fun. It can obviously be irrational to do the ethical thing in a context where that leaves one likely to be harmed or exploited; this is related, in some ways, to the theoretical finding that won George Akerlof a Nobel Prize, as well as just being obvious. If nobody’s paying taxes don’t pay taxes, etc. But in a general equilibrium that is either positive or near a tipping point, especially given the prior point, if the costs of doing the socially beneficial and ethically sound thing are low or negligible, it is absolutely rational to do it. Plus, the time-money equivalence isn’t purely scalar on the margins, most people distribute their time in lumpy ways that don’t make marginal time-use decisions, especially on the scale of “an hour every two years” costly in a way that can be easily quantified.

Voting is fun – I like voting! It is rational to do things one likes to do!

Voting is empowering on an individual and communal level – making one’s voice heard in the formal political process has a two-way legitimation effect, legitimizing one’s own equal right to be a part of the civic process as well as legitimating that civic process as the correct channel for making one’s voice heard. It is rational to pursue this, which also leads into the next argument…

This argument mitigates against all public and civic participation – if voting is irrational, so is signing a petition, joining a protest, donating to a candidate, or even voicing one’s opinion. Unless one takes actions so drastic that purely in isolation they affect political outcomes – and, without getting too much into it, one can clearly extrapolate that most such actions are violent or otherwise bad – this argument mitigates in favor of total non-participation in anything civic or even communal.

This argument is particular to first-past-the-post elections on a very large scale – in a proportional voting system, or in elections for mayor, city council, or even Congress it can be clear that much smaller numbers of votes can affect substantial political outcomes. A ~36,000-28,000 vote in suburban Virginia deposed the second-most-powerful House Republican. But if you’re going to vote for everything, the marginal cost of voting for everything on the ballot is so vanishingly small that even the narrow, economic argument against voting is thin as straw.

Making this argument is immoral from a consequentialist standpoint – even if you think individual voting decisions are irrational, so long as you think high participation in voting generally is good then by making this argument you are helping to damage that. Maybe you think that making the argument is damaging it so slightly it barely matters, but then why are you bothering to make the argument at all? It is clearly irrational to do so since it’s not having any impact.

Making this argument is immoral from an anthropological standpoint – of course, I do think it has an impact, especially as more people make it, and I think it corrodes the necessary normative construct of individual obligation to the collective and civic well-being that makes our society and similar societies function well. Promoting cynicism and non-participating is bad.

Making this argument makes you look like a smug, dislikeable cynic – this is self-explanatory. Seriously, doing this just makes you look like a narrow-minded pedant who wants to prove their intellectual superiority by making an obnoxious debator’s point at the expense of, like, you know, democracy, and people will dislike you for doing it.

And all that without referencing Florida c. 2000, and without referencing the many counter-arguments for voting that play somewhat more on the turf of the original argument for irrationality; for those see Andrew Gelman who is good on this issue (paper here, posts here here and here).

All that being said we should vote less, for less, and on the weekend, and maybe it should even be mandatory, but that’s a different story.

So the Marlyand Purple/Red Line debacle. In addition to all the more-often-explicated reason why Americans Can’t Have Nice Trains, one reason I don’t see brought up is how our ancient, arbitrary, and byzantine system of administrative subdivision creates baffling labyrinths of political economy. The Purple Line is located solely in Maryland, even though it is part of a larger system that serves DC and VA; but the latter two don’t want to pitch in first-order costs for second-order benefits, and nobody can make them. The regional authority governing the system has no ability to extract greater resources, and the same political economy under discussion so starves it of resources that it can barely keep its own shit together and is massively unpopular as a result (remember – starving government makes government bad makes government unpopular, that’s the cycle of outcomes and opinions the last few decades of increasingly conservative governances has deliberately tried to perpetuate). Meanwhile, within Maryland the Purple Line is located solely within two counties that are among the wealthier within the state so why should folks not served by the system pay? The federal government has an interest in the Purple Line but hahahah try getting something like this through Congress and anyway why should square state folk pay for coastal trains? But the logic of the project is just so strong and the constituencies for it sufficiently influential that it hobbles through only somewhat nerfed…at the expense of the entirety of a project of another transit project in a large but poorer city located solely within the same state.

This, of course, is terrible. And goes to a longtime hobbyhorse of mine, which I said really well above so I’ll just say again: our ancient, arbitrary, and byzantine system of administrative subdivision creates baffling labyrinths of political economy. There has been plenty of discussion of what the US should do to revise its federal system under conditions of godmode, and I fully endorse unicameral MMP (though not monarchy, that’s just silly, just make the Presidency a less-power, non-partisan office elected to decade-long terms and inculcate norms that generally-beloved national figures should run. Seriously, even for the limited purposes advocated therein you still have the problems of monarchy, which is total lack of desert, the randomness of birth and lineage, etc – just have folks elect a vector for national love and unity that’s still in line with American values of democracy and meritocracy. President Clooney, President Swift, President Ramos, etc etc).

But as long as we’re rewriting our entire system why leave the entire edifice of day-to-day government intact when overhauling the top layer? Especially since once you abolish the Senate the whole reason to leave “states” in place seems pretty silly.

So, here’s how we should run America:

Keep “states” (so we can keep the name of the country, after all) but have like, 8-10 of them, and make them correspond to large regions of unified culture/interest, something like Census regions or the turf covered by Circuit Courts, Federal Reserve Banks, etc, except with no regard for existing state lines. Then, get rid of counties and municipalities and replace them with metropolitan governments, that would cover whole metro areas, and ward governments, that would cover smaller, local areas. So instead of using our current example (which is admittedly one of the more egregious cases because of the unique nature of DC) let’s look at NYC instead – looking at just the NYC MSA, you’re looking at three states (none of whom have capitals proximate or part of America’s largest metro area, in which 1/15th of the entire country resides) comprising 25 counties and hundreds of municipalities, boroughs, wards, unincorporated areas, authorities, etc. Instead, you might have a “state” encompassing everything from Maine to Fredericksburg, VA, a metro generally aligning to the existing NYC metro, and then a quilt of small governments primarily responsible for purely local governments; NYC is tricky because it’s uniquely dense in the United States, but think something the size/population of SoHo, or even smaller.

This, of course, wouldn’t eliminate conflict or solve politics, but it would make lines of responsibility and questions of political economy clearer and more directly adjudicable. If you can create administrative units that largely encompass most of the people who would benefit, either directly or near-indirectly, from something like a major transit investment, and largely leave out people who wouldn’t.

Anyway, this is all politics as something approaching fan fiction but hey it’s Friday and in our real politics we just spent for-freaking-ever debating whether to control-Z national healthcare because [sic] so a little fantasy now-and-then isn’t the worst.


On an administrative note, while I’ve enjoyed the combination of Ello, tweeting a lot, and “being super busy at work,” I hereby declare the extended period of neglect of this particular space over and plan to at least semi-regular post thoughts here (though, hopefully, not at the expenses of doing other things of fun and value). I also plan on at least occasionally sending something out via Tinyletter so now might be good time of inviting me into your inbox every now and then.

crossposted from ello because does anyone read ello anymore?

This is super late, but in looking back at responses to my post on reparations this bit from Tim Worstall caught my eye:

“Thus today’s value of what was stolen from the slaves is that $1.75 trillion. Which is, when you look at it, a formidable sum of money. Except, actually, it isn’t. The net wealth of the entire country is around $80 trillion or so. So it’s a trivial percentage of the national wealth. Or we could look at it another way. There’s 42 million or so African Americans (defined as having some possibly slave and black antebellum ancestry) so the capital sum would be some $40,000 for each of them. Which, while a nice enough sum to receive isn’t the sort of life changing sum some might think might be due in reparations.”

This is wrong, but the fact of its wrongness itself goes to show how much many folks underestimate the dire economic straits of black America.

According to the FRB’s invaluable Survey of Consumer Finances, the net wealth of all of black households is around $1.7 trillion. So even that $1.75 trillion infusion (which is the most minimal estimate of the amount reparations ought to be my calculations produced) would double the net worth of black America as a hold.

Put another way, two-thirds of black households have less than $40,000 in net wealth. So this wouldat least double the net wealth of two thirds of black households.

Put another way, the entirety of black America has just over $921 billion in debt. So that $1.75 trillion could wipe out all debt held by all black Americans (in practice, just over two-thirds of black households have debts totaling less than $40,000, so it would leave some black households with some debts).

So given that $1.75 trillion is ‘a trivial percentage of the national wealth’ maybe we should just give it to black America then? I doubt they’d find it so trivial.

It seems like discussion of Piketty’s Capital has run its course and much of the commentary has moved on (though not necessarily from the broader topic) so now is as good time as any to peer back and reflect on how the debate around the book ended (if such a thing can be summarized). From my own vantage point, the debate about the book (not necessarily the discussion) stalled out around a single question, so I will do my best to restate and clarify that question so as to focus where more evidence and argument is needed, should this be a conversation anyone wishes to resume. None of this is new, exactly, but it’s worth recanting given the importance of the question and the stakes surrounding it.

Around 1800 AD, living standards in some countries began to rise substantially, and over the past 200 years, that rise (as measured in GDP per capita) has been on the order of a factor of 50. This generally seems to correlate with other indicators of increased living standards to a degree that, with some exceptions (such as thinly-populated resource-rich countries) it is generally, though not universally, accepted practice to use GDP per capita as a good-enough shorthand for broad living standards. Whatever the case, exactly how and why this increase transpired is still a matter of debate, in no small measure because most people would find it desirable to replicate the phenomenon in those areas that have not yet experienced it. Indeed, some countries that did not begin experiencing the phenomenon in its initial emergence have experienced it since, leaving, essentially, three groups of countries – those who have experienced it, those who have not, and those in transition.

Piketty’s book, while not exclusively, overwhelmingly is focused on the first kind of country. A compelling portion of his narrative is documenting that transformation, yet the broader focus of the book is on what has transpired since that transformation was consolidated in the era following the Second World War. There are two key factors to be documented. The first is that the countries that have fully experienced this transformation are themselves not ‘complete’ in this regard – average living standards (recent economic troubles excepted) continue to rise and are generally, though not universally, expected to continue to rise in the absence of extreme calamity on the scale of global catastrophic climate change. The second is the change in the distribution of income – since a moment of ‘peak equality’ in roughly 1970, most of the countries Piketty analyzes have seen a sharp increase in inequality, the specific degree of which dependent on method of measurement but whose general contours is not really disputed. This, Piketty and many other believes, poses a problem for these countries that is not alleviable solely by continuing increases in average living standards or aggregate wealth and income growth.

Piketty devotes a lot of space to developing a simple model of how the aggregate quantity and distribution of capital can drive income inequality. This remarkably simple model requires only three input variables – the growth rate of the economy, the average return to capital, and the savings rate (perhaps better phrased as the rate of capital formation relative to national income) – to generate a long term prediction of two key ratios: the ratio of capital to income, and the capital share of national income. From there, wealth inequality can be used directly to compute a floor on income inequality – for example, if 1% of the population owns 50% of the national wealth and the capital share of income is 30%, then that 1% captures, at a minimum, 15% of national income.

And here we arrive at the crux of the debate. Piketty’s model implicitly assumes a certain exogeneity between those three input variables and the two ratios they converge towards, ie, that they are not inherently correlated with each other. This exogeneity poses a fragility in Piketty’s model and a challenge to mainstream economic theory. The fragility is that, if they are strongly correlated (in the direction such correlation is expected), and especially if there is iterative feedback between them over time, then Piketty’s model no longer produces outcomes in which wealth inequality drives income inequality. The key example here is the average return to capital; were it to fall in proportion to the rise of total capital accumulation, then the capital share of national income would be invariant to the quantity of capital, and thus largely undermine the mechanism by which present wealth inequality drives future income inequality. Furthermore, were this anticipatable decline in the in return to capital to drive a decline in savings, the capital/national income ratio would converge at a substantially smaller value than that projected by extrapolating from the initial period. This further depresses the likelihood of ever-increasing wealth-driven income inequality.

This is also precisely the challenge to mainstream economic theory. These correlations and feedbacks are precisely what are predicted by fundamental, strongly-held ideas about economics held by economists; most centrally that investment behavior is driven by that most central economic force, supply and demand. Piketty, however, is not simply laying down an alternative model, but an empirical challenge to this challenge. The most crucial assertion made by his model – that the return to capital fails to decline in proportion to the supply of capital – is not simply a theoretical alternative but one derived from the meticulously researched and calculated estimates in his unprecedented data. As I myself pointed out in my write-up of Piketty’s book, the data show that the return to capital is sufficiently resilient to its accumulation to justify Piketty’s model. At least, that is, without controlling for any additional factors.

And here is where debate stalled, with one side asserting that theory demands these variables be tightly correlated, and the other side responding that empirics demonstrates that they are not. The problem, of course, is that macroeconometric panel empirics is extremely sensitive to model specification, to the point of being perhaps the perfect example of how any decent statistically-versed researcher with strong priors can generate the outcomes from the data they which to receive. Certainly it is more than possible to generate a superfluity of complex models demonstrating the theoretically-predicted correlations, and these models will collectively have zero persuasive power because it is trivially easily to create as many or more equally-plausible equally-complex models that demonstrate the obvious.

Why does this all matter, to the degree it’s worth recounting in such detail to the tune of a thousand words? Because it strikes directly at the heart of the most important argument for tolerating high income inequality.

There are basically three arguments in favor of tolerating high income inequality, which I will attempt to summarize as fairly as I can.

  •  The ‘Just Deserts’ Position: incomes reflect the inherently just outcomes of markets. Beyond a certain threshold to prevent the worst form of miseries, it is therefore a violation of justice to take from the deserving and distribute to the undeserving.
  • The ‘Pink Salt’ Position: income inequality is irrelevant except to the irremediably envious, resentful, or spiteful. What matters is preserving and increasing human happiness, which is largely driven by civil liberties, non-market institutions such as family and community, and the secondary impacts of economic progress.
  • The ‘Golden Egg’ Position: income inequality may be ceteris paribus bad but aggregate economic growth is extremely good to a degree that in most plausible scenarios swamps income inequality. Furthermore, income inequality and economic growth may be conjoined outcomes of our economic system and cannot be modified independently. Therefore, we should be extremely cautious about attempting to alleviate income inequality through policies that slow the rate of economic growth, as this may reduce not just aggregate utility but the utility of those benefiting directly from redistribution.

It will shock nobody to hear that I reject outright the first argument in the strongest possible terms, and the second in quite strong terms as well. Indeed, I believe that the majority of Americans, and certainly the majority of voters in developed countries, disagree with those arguments as well. It is that third argument that gives pause to many – including, to a degree, me (though that pause is still far from convincing in my own case). The average person living in a developed country today as compared to a person living in that same country in 1800 is vastly better off, and it is not impossible to imagine that the average person living in a developed country in 2100 will be vastly better off than that average person today. Impeding our shared progress in that regard could simultaneously defer developments that improve the quality of most lives while simultaneously deferring developments (like innovation in renewable energy sources and storage) that could mitigate or reverse the worst consequences of economic growth to date.

This all converges on something of an ironic surprise. In this debate, it has been the left that has been advocating, implicitly or explicitly, on behalf of the resilience of capitalism (broadly defined) and its ability to deliver human prosperity, whereas it has been the right that has claimed, implicitly or explicitly, that capitalism and the prosperity it delivers is fragile, so much so that even increasing post-market redistribution (as opposed to pre-market regulatory redistribution through minimum wages, stronger protections for unions, and abridging the current rights and privileges of lenders and shareholders) could, to use a tired aphorism, kill the goose that lays the golden eggs. This ideological positioning isn’t wholly novel, and whether it is instrumental and ephemeral or representative of something larger remains to be seen; but it is notable, and worth pondering for what it says about the state of both the contemporary mainstream left and right movements in the United States (if not beyond).

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