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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 summarized 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 participation in voting is good, it follows that each individual decision to vote is good; and in the absence of substantial countervailing forces, doing good is generally 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.



“To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring te appearance of scientificity without having to answer the far more complex questions posed by the world we live in. There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact they they know almost nothing about anything.”

Thomas Piketty, Capital in the 21st Century

A couple weeks ago Noah Smith wrote a very sharp piece for the Atlantic about the limits of macroeconomic models that nevertheless, IMHO, fails to reach the most important conclusion of all.

Let’s say I devise a macroeconomic model that can accurately predict the economy. Whoohoo! Now, what to do about it? There are two broad categories of action I could proceed to take, both which end in the same confounding paradox – either publish the model, or proceed to make a massive killing in the markets.

Either way, someone is going to make a massive killing, either immediately or once the value of the model becomes clear. So much so that model-adherent traders and investors will quickly grow to the point where they are a substantial share of the market itself. So the model will make a prediction and traders and investors will act in such a magnitude as to alter the economy’s path. But the model will then consume all the new data and spit out a new prediction, which will then spur traders into a new path-altering round of trading, and is the paradox clear yet? Essentially, the very existence of this model would send markets into a Gödelian-loop of accelerating paroxysms of wild trading. Imagine this model connected to HFT algorithms and you get the idea – volatility without end, markets seizing.

The moral of the story is that all finite formal systems are limited by their inability to account for themselves (ie, can never be complete, consistent, and decidable) and that more broadly human behavior is in part determined by human knowledge about human behavior and thus as the latter changes so does the former and thus can never be complete or settled.

Or to simply quote Ambrose Bierce:

Mind, n. A mysterious form of matter secreted by the brain. Its chief activity consists in the endeavor to ascertain its own nature, the futility of the attempt being due to the fact that it has nothing but itself to know itself with.

A musing after a long week buying, shopping, and returning various and sundry items at various and sundry brick’n’mortal establishments:

You run a large chain of clothing retailers – say, HC Annstrom’s. You decide you aren’t using enough data in designing your stores and incentivizing your employees and customers, so you hire a team of data analysts to report back on what works and what doesn’t.

The findings are returned, with great news – there are certain things that, when your employees or customers do them, result in more sales or more profit. So you begin to implement them post-haste:

When a customer touches an item, they are 27.4% more likely to purchase it, so employees are incentivized to hand items to customers.

When a customer tries an item on, they are 17.1% more likely to purchase it, so employees are incentivized to encourage customers into the dressing rooms.

When small, inexpensive items are placed strategically around the register and queue, overall sales volume increase 7.2%, so placed they are.

When clerks recommend signing up for the HC Annstrom’s store credit card, customers are 21.9% more likely to sign up for a card; when they ask again after an initial refusal, this time stressing the discounts, they are still 9.3% more likely to sign up for it. Cashiers are duly incentivized.

This is going to be great!, you think. But there is one thing you didn’t realize: everyone else is doing this too. And not just that, but each of these were measured in isolation, not in tandem.

So what you and every other brick’n’morter clothing retailer is collectively make shopping a miserable, pressure-filled, harrowing experience.

Your homework assignment: explain what this story tells us about:

-The future of internet retail

-The future of Big Data

-The quest to establish “microfoundations” for macroeconomics.

Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.

Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!

Wait, let’s start over.

The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).

Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.

Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.

And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.

So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.

But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:

Inline image 1

So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.

So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.

Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.

Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.

And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?

So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.

The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:

1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity

assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).

Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.

And the same in real-world examples. There would definitely be differences between these two alternative scenarios:

1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).

But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.

The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”

Can you smell the underlying distribution of socioeconomic endowment dictate market mechanisms?

There is a world with just three farmers; one makes wheat, two makes apples. Theirs is a barter economy with no saving – all income (ie, all the apples and bread) are consumed between each harvest. Since there is no money, each farmer’s demand curve is another’s supply curve.

Each farmer produces 10 units, so the market as a whole produces 20 units of apples and 10 units of wheat. Here is each farmer’s demand curve:

Apple Farmer 1 (let’s call him Splitty) wants to consume half his own production and sell the rest at any price. Therefore his demand curve is:

Q = X/2P where X = production, so in this case Q = 10/2P = 5/P.

Apple Farmer 2 (let’s call him Carby) really wants wheat. He will try to get three units; failing that, he will get as many as his apples can by. Therefore his demand curve is:

Q = 3 ↔ (X-3P>0); else Q = X/P, so in this case Q = 3 ↔ (10-3P>0); else Q = 10/P

The Wheat Farmer (let’s call him Hungry), on the other hand, doesn’t want a certain amount of apples or wheat as much as he simply wants as much as possible, subject to certain diminishing marginal utility; therefore, he is willing to part with more wheat in proportion to the number of apples he can get for each unit. His demand curve looks like this:

Q = 1/P

From here forwards, let’s look at the market from an apple-demand/wheat-supply perspective. Therefore, the market demand curve is the sum of the apple farmers, Splitty and Carby, and the market supply curve is P = Q. Some simple algebra tells us the market price is √15, which means Hungry parts with 3.87 units of wheat in exchange for 5 units of apples from Splitty and 10 units of apples from Carby.

Now, a great calamity happens – but to whom? A quantum event happens, splitting our nice universe into parallel universes:

  • In World-1, an infestation of apple maggots cuts Splitty’s harvest in half.
  • In World-2, an infestation of apple maggots cuts Carby’s harvest in half.

What happens to our apple-wheat market?

  • In World-1, Splitty’s demand curve shifts leftward to Q = 5/2P.
  • In World-2, Carby’s demand curve shifts leftward to Q = 3 ↔ (5-3P>0); else Q = 5/P.

Hungry the wheat farmer still produces the same amount of wheat, and still wants apples in the same proportion to their price. What happens? Again, some simple algebra, and:

  • In World-1, the price is now √12.5, with Hungry parting with 3.54 units of wheat in exchange for 2.5 units of apples from Splitty and 10 apples from Carby.
  • In World-2, the price is now √10, with Hungry parting with 3.16 units of wheat in exchange for 5 units of apples each from Hungry and Splitty.

Did you see what happened there? In both World-1 and World-2, the economy as a whole produces 10 units of wheat and 15 units of apples; but in each case the post-trade equilibrium is different because different initial distributions of resources were converted via differing inherent preferences into different market demands which led to different prices.

In evaluating the social costs and benefits of public policy, our standard methodologies are inherently biased towards market prices, and with good reason – they are known, transparent, and based on revealed preferences. Those costs and benefits that are not precisely priced by the market (such as the health costs of air pollution or unhealthy foods) are imputed market prices via a combination of methods to determine “willingness to pay” as a proxy for a market price.

Many people are skeptical of such methods because they believe it is impossible or improper to impute prices onto certain things, such as a human life or or the health of the environment. Beyond this, though, there should be an additional layer of skepticism – willingness to pay, even that willingness as expressed through market prices, is inseperable from ability to pay. The pre-existing distribution of resources determines market prices even in perfectly competitive markets as long as there is no systematic correlation between the distribution of preferences and the distribution of resources. In our example, we showed a transition from an initial state into two seperate worlds struck by random calamity; but what if the two worlds were instead determined by which apple farmer had a productivity-doubling machine? And what if that farmer had that machine not because they invented it, but because they inhereted it? In that case, the difference in pre- and post-trading distribution of resources (and thus the market price) between World-1 and World-2 would be driven solely by which farmer had inhereted the machine.

Obviously, our modern economies, with money, saving, and capital, are vastly more complex than the simple model used above. But the lesson should still hold – and it should make us skeptical (though not entirely averse) of the utility of using market prices to determine social costs and benefits.

Let’s model a kingdom. In this model, the kingdom is a closed economy, and (very importantly) it is “well-normed” – it has strong norms relating to governance and society that tend to be widely honored and respected.

This kingdom is governed by two individuals: the king, and the wizard. Most formal power, as well as the titles of head of state and head of government, is vested with the king. The king has formally unlimited powers to tax and spend, raise armies, and adjudicate disputes, but in practice is limited by norms, sense of duty (symbolized in a sworn oath to serve in the interest of the whole kingdom and its subjects), and the patience of subjects; therefore, the king tends to maintain inherited intuitions to which their power has been delegated, like courts and military bureaucracy. The crown is hereditary – the first-born child of the king (this is a gender-progressive kingdom) inherits the crown, and in the past, though there have been occasional hiccups, most transfers of power have been peaceful and orderly.

The king must retain a wizard, who is charged in vague terms with independently securing the safety, security, and prosperity of the kingdom. The wizard bears a hat that grants them vast yet mysterious magical powers. Unlike the crown, which is symbolic, the wizard’s hat is in fact where the magical powers are vested, and is not hereditary. When the existing wizard dies, the king selects the next wizard, who receives a lifetime appointment. Extremely strong norms dictate that the king select whomever is widely acclaimed the wisest scholar in the kingdom, regardless of their personal feelings towards that individual or inclination to select an ally as wizard. Often the wizard will survive the king.

As stated above, the wizard has vast powers, but they are mysterious and to some extent ill-defined. There is no user manual for the wizard’s hat, and often throughout history wizards have surprised themselves with the consequences of exercising their powers. Therefore, norms have developed that the wizards exhibit strong restraint in exercising their powers, even in times of emergency. Extremely strong norms have also developed against the king making formal or open requests of the wizard, as well as against the wizard interfering in the quotidian or terrestrial business of the king. In the past, there have been some violations of this norm in both direction, but for the most part it tends to persist. Consequentially, the wizard tends to be reclusive, speak carefully and opaquely, and avoid commitments to use their powers. There is much dispute among the subjects of the kingdom to exactly what the wizard is doing or could be doing, and when the wizard ought to exercise their powers.

Your assignment: model the governance and economy of this kingdom.

Spark Letterpress Pic

I linked to a bunch of stuff lately talking about how small businesses were over-rated and that consumers benefit when more efficient firms can expand and replace their less efficient competitors. True! Yet when firms become more efficient it often means they can do more with less, and specifically less labor which means there could be fewer consumers to take advantage of the efficiencies. I wrote about the potentially horrific endgame of this scenario as well. But I think there is a more complex third way to all this where this all plays out in different directions, as I learned this weekend when my fiancée and I went searching for wedding invitations.
First we went to a larger store in downtown DC. That store showed us a brochure of invitations made by a very efficient firm that allows for some customization within their constraints, and apparently have some sort of agreement to license with vendors. This store, though, didn’t offer any input or very good service, and we didn’t like them.

Then we went to another, smaller store further from that seemed to be primarily the work of one or a handful of people. And the individual we met there showed us the same brochures from the same firm to which the printing could be outsourced! But this individual was much more attentive and engaged then the clerk at the large store, and was much more involved in our ideas and interested in using the capacity of the larger printing firm but not their pre-made designs.

Lastly we met an independent designer in a coffee shop in Old Town Alexandria who did everything from scratch with equipment she purchased herself, and her work was awesome and she was also very engaged with our ideas and questions.

So what we have here, I think, is multiple paths to the way that big, efficient firms can empower smaller, more independent firms. If a centralized firm is doing the grunt work of actually printing the designs, then the economies of scale that often make bigger, more efficient firms more cost-effective even while they are drained of unique personality don’t really apply, since the big store and the little store both get to take equal advantage of those economies of scale. So why would we ever go with the big store that has worse service and no constructive creative input?

Also, to speculate, the totally independent designer was probably able to invest in her own letterpress equipment because the cost of the equipment has dropped drastically relatively recently due to opening new labor markets and replacing human labor with mechanical labor.

So ideas about how to empower small and independent businesses:

· Allow more efficient firms to gobble their competitors (without forming monopolies), thus freeing resources for other pursuits.

· Try to provide things that robots or people very far away can’t provide, like creativity or personalized and engaged service.

· Allow the surplus of cheaper and cheaper goods to not only allow people to collect small benefits from consumption but also to allow them to control the means of production on a smaller scale so they can compete with larger firms.

· Contracting, licensing, and franchising can be a way to combine the economies of scale that only larger firms can achieve with the benefits of smaller firms.

Of course, as long as we remain mired in recession we won’t be able to take full advantage of innovation and efficiencies – for example, I can’t find a link, but I just heard on NPR the other day that a million marriages essentially didn’t happen due to the recession. This obviously represents lots of lost economic activity, as well as lost happiness.

Tyler Cowen continues his German sympathy tour with this little number:

You meet an employed professional with a $300,000 house, $100,000 in the bank, a nice car, a few (illiquid) Renaissance paintings, and very nice shoes. His name is Fabio.

He is $60,000 in debt, which is about equal to his yearly income. An unanticipated ARM reset requires him to pay off that debt at a faster pace than expected, which means he must restrict his consumption.

He threatens to mistreat his longstanding girlfriend Angela, unless she works harder to maintain his previous level of consumption. Angela refuses to help much, citing a false economic theory in defense of her position.

Fabio’s brother relentlessly attacks Angela’s false theory. His cousin in Naples claims that Angela is obliged to help because she has benefited from being in the relationship.

Forget, for just a minute, whether this "feels" wrong or right, or accurately analogizes the current situation in Europe. Tyler Cowen is not the German "mensch on the street!" He is the Holbert C. Harris Chair of Economics at George Mason University! He is General Director of the Mercatus Center! He has a Ph.D. from Harvard! He has written informative, challenging, and well-received books! He is a popular blogger about economics and ethnic food, and writes a column for the New York Times!

All this is to say that Tyler Cowen is an expert – the kind of person you turn to when you’re not sure if your gut instincts or folk wisdom or "common sense" are sufficient to devise a solution to a complex or esoteric problem. The kind of person who doesn’t merely relate or rephrase those kinds of objections but corrects or rebuts them when they are not guiding one towards a solution! I could get Tom Friedman or David Brooks to tell me why the Germans feel a certain way. I want to turn towards Tyler Cowen to tell me what should be done.

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