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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.

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

I’ve been working on collecting some longer thoughts on Piketty’s book now that I’ve finished it (so yes, keep your eyes open for that) and in the meantime I’ve been having fun/getting distracted by playing around with his data, and especially the data from his paper with Gabriel Zucman, which, you know, read, then play too.

One thing I realized as I was going through is that Piketty and Zucman may have incidentally provided a new route to answer an old question – were America to at last make reparations for the vast and terrible evil of slavery, how much would or should the total be?

What is that route? Well, they provide certain annual estimates of the aggregate market value of all slaves in the United States from 1770 through abolition:

slavespikettyzucman

As you can see, the amount was persistently and stunningly high right through abolition.

Now, without wading too much into heck who am I kidding diving headfirst into the endlessly-resurrected Cambridge Capital Controversy, the price of capital is determined in large part by the income it generates; so the market value of an enslaved person was an implicit statement about the expected income that slaveholders receive from the forced labor of their prisoners. So we can (by imputing the intervening annual values in their time-series, which I did linearly, which may not be a great assumption but it’s what I did so there it is) compute the real aggregate dollar market value of slaves from 1776-1860, then impute the annual income produced by, and stolen from, America’s slaves. For that, I used 4%, being conservative with Piketty’s 4-5% range.

Then you have two more steps: firstly, you have to select a discount rate in order to compute the present value of the total of that income on the eve of the Civil War in 1860; then you have to select a discount rate to compound that through 2014.

Well, that’s where things get interesting. For now, let’s pick 1% for both of those discount rates (which I am doing for a reason, as you will see). That makes the value in 1860 of all the income stolen by the Slave Power since the Declaration of Independence said liberty was inalienable roughly $378 billion*. That $378 billion, compounded at 1% annually for 154 years, is worth just about $1.75 trillion.

But those discount rates are both low – really, really low, in fact. Lower than the rate of economic growth, the rate of return on capital, and lower than the discount rate used by the government. When you increase those discount rates, though, you start to get some very, very, very large numbers. If you increase just the pre-1860 discount rate to 4%, for example, the 1860 figure leaps to over a trillion dollars, which even at a discount rate of 1% thereafter still comes to well over four-and-a-half trillion dollars today. Even vaster is the increase that comes from increasing the post-1860 rate, even if you leave the pre-1860 rate at 1%. At 2%, today’s bill comes due at just under $8 trillion; at 3%, $35 trillion; at the government’s rate of 7%, it comes to over $12.5 quadrillion. That’s over six times the entire income of the planet since 1950, a number that even if we concluded it was just – and given the incalculable and incomparable horror of slavery as practiced in the antebellum United States, it’s difficult to say any amount of material reparation is adequately just – is in practice impossible to pay.

There are three conclusions I think are worth considering from the above analysis:

1) First and foremost, slavery was a crime beyond comparison or comprehension, since compounded by our collective failure to not only to make right the crime as best we are able but to not even make the attempt (not to mention Jim Crow and all the related evils it encompasses).

2) Compound interest is a powerful force. Mathematically, obviously; but also morally. These large numbers my spreadsheet is producing are not neutral exercises – they are telling us something not only about the magnitude of the grave injustice of slavery but also the injustice of failing, year after year, to begin to pay down our massive debt to those whose exploitation and suffering was our economic backbone. And that only refers to our material debt; our moral debt, although never fully repayable, grows in the absence of substantive recognition (or the presence of regressive anti-recognition).

3) Discount rates tell us a lot about how we we see our relation to our past and our future. The Stern Review, the widely-discussed report that recommended relatively large and rapid reductions in carbon emissions, became notable in good part because it triggered a debate about the proper discount rate we should use in assessing the costs and benefits of climate change policy. Bill Nordhaus, hardly a squish on the issue, notably took the report for task for using a very low discount rate – effectively, just over 1% on average.

It is hard to crystallize precisely the panoply of philosophical implications of how discount rates interact differently with different kinds of problems. In the case of climate change, a low discount rate implies that we today should place a relatively higher value on the costs future generations will suffer as a consequence of our activity, sufficiently high that we should be willing to bear large costs to forestall them. Commensurately, however, a low discount rate also implies a lower sensitivity to the costs borne by past generations, relative to the benefits received today. High discount rates, of course, imply the inverse in both situations – a greater sensitivity to the burden of present costs on future generations and the burden of past costs on present generations.

There is no consensus – and that is putting it lightly – over what discount rates are appropriate for what situations and analysis, and whether discount rates are even appropriate at all. And when we decide on how to approach policies whose hands stretch deeply into our past or future, it is worth considering what these choices, superficially dry and mathematical, say not just about inputs and outputs, but also the nature of our relationship to the generations that preceded us and those that will follow.

Data attached:

piketty slave reparations

*2010 dollars throughout.

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