Saturday, August 03, 2019

Why Kevin Williamson is wrong about poverty and bad behavior


I recently wrote a post at Bloomberg Opinion arguing that "bad behavior" - drug use, violence, single parenthood, and idleness - is not the main cause of poverty in advanced nations. As evidence, I cited the country of Japan, which has extremely low rates of drug use, violence, single parenthood, and idleness, and yet which has a poverty rate almost as high as that of the U.S., and significantly higher than those of wealthy European countries. Since Japan has so little bad behavior and still has a pretty high poverty rate as advanced nations go, it must be the case that bad behavior, in aggregate, is not the major cause of poverty.

Kevin Williamson of the National Review took issue with my post. In a strongly worded rebuttal, he calls my piece "a stale slab of conventional wisdom", "sloppy thinking", "tedious writing", a "mishmash of tendentious platitudes and misunderstood truisms", and "sloppy analysis, if it counts as analysis at all." Yet despite this vitriol, Williamson fails to substantively rebut any of the points I made. In some cases, his arguments contain logical errors; in others, he simply misunderstands my argument.

Let's go through Williamson's post, and show why it fails to rebut my arguments.


1. Absolute poverty or relative poverty?

Williamson's first attempted rebuttal relies on the idea that Japanese poor people are not really poor:
 It is not obvious that Japan “has lots of poverty.”...Smith here relies on a useless measure of “relative” poverty, the share of the population earning less than half of the median income. You can see the limitations of that approach: A uniformly poor society in which 99 percent of the people live on 50 cents a day and 1 percent live on 49 cents a day would have a poverty rate of 0.00; a rich society with incomes that are rising across-the-board but are rising much more quickly for the top two-thirds would have a rising poverty rate, and some people who are not classified as being in poverty this year might be in poverty next year even though their incomes are higher, etc. It would be far better to consider poverty in absolute terms, but our progressive friends are strangely resistant to that.
Let's leave aside the question of whether poverty is best conceived of in absolute or relative terms. There are good arguments on both sides (and perhaps room for even more definitions of poverty than those two!). But it's definitely true that the average Japanese poor person enjoys a significantly higher standard of living than the average poor person in, say, Ethiopia.

But this is also true of American poverty! The kind of deprivation that conservatives like Williamson often blame on bad behavior in the United States is also relative poverty, not absolute. "Poor" Americans, including the residents of Garbutt, NY that Williamson famously blamed for their own economic difficulties, are also much richer than the average poor person in Ethiopia. So when evaluating conservative beliefs about behavior and poverty, we should look at relative poverty, because that's exactly the kind of poverty conservatives are generally talking about.

Now, if Japan were richer than the U.S., it might not be an appropriate country to compare ourselves to. If Japanese people making 50% of Japanese median income were materially better off than Americans making 50% of American median income, then Williamson's argument would have some bite. But in fact, the exact opposite is true. In purchasing power parity terms, Japan's median household income is only about 63% of Americans' median household income.

In other words, in absolute terms, someone at the Japanese relative poverty line is doing even worse than someone at the relative American poverty line. So it's not clear why Williamson thinks that insisting on an absolute standard of poverty, rather than a relative one, will advance his case.


2. What does looking at national averages tell us?

Williamson's next argument is that instead of looking at national averages of behavior (violence, drug use, etc.), we should look specifically at the behavior of the Japanese poor:
Secondly, it is not entirely clear that the Japanese are as free from the pathologies that attend poverty in many other places as Smith suggests. It is true that Japan as a whole has low rates of chronic unemployment, drug use, single motherhood, etc., but the relevant question here would be how Japanese who are poor compare on these metrics with Japanese at large. To assume that the situation with the poor can be approximately deduced from national averages is pretty sloppy analysis, if it counts as analysis at all.
Williamson is wrong about the relevant question. The relevant question is P(relative poverty | absolute bad behavior). In other words, the relevant question is: "How much does bad behavior change my chances of falling into the lower echelons of my developed country?". The percentage of Japanese people who are badly behaved is much smaller than the percentage of Americans who are badly behaved. Yet about the same fraction of people there fall into the lower echelons of that society (which, as noted above, are actually lower in absolute terms than the lower echelons of American society, at least at the 25th percentile). Thus, even if there are individual Japanese people who become poor due to bad behavior, it can't statistically be the biggest factor, as long as poverty has roughly the same causes in both countries.

Just to show how this works, let's do a simple example. Take one measure of bad behavior, e.g. violent crime. Suppose, hypothetically, that the violent crime rates per 100,000 population were:
Poor Japanese people: 2
Non-poor Japanese people: 1
Poor Americans: 20
Non-poor Americans: 10

In this hypothetical, there is a behavior gap between poor and non-poor Japanese people. In fact, the ratio of bad behavior between poor and non-poor is the same between the two countries! But as long as the causal relationship between bad behavior and poverty is the same for both countries (and I'll talk more about this assumption in point #9 below), American poverty could not be reduced much simply by telling the poor Americans to stop being violent; in fact, they'd have to lower their violent crime rate by 95% just to catch up with their poor Japanese counterparts!

Statistically, it could also be the case that Japanese poor people are about as badly behaved as poor Americans. In other words, there could be one cohort of really badly behaved Japanese people hogging the lower end of the income distribution, while everyone higher in the distribution acts like a saint. In this case, the differences in the averages of Japan and America all come from the middle and upper classes of the two countries. (This example is totally unrealistic and false, but let's run with it, just for fun). In this example, non-poor Americans are much much worse behaved than non-poor Japanese people...yet still, this bad behavior doesn't cause them to fall into poverty. In other words, even this imaginary and extremely contrived situation would support my argument instead of Williamson's!

These are just two examples. But in general, you won't be able to find a single function relating bad behavior to poverty that fits both the Japanese data and the American data. The math just doesn't work.

So as long as we're willing to assume that the causes of poverty are similar from country to country, then just from looking at the national averages, we can conclude that bad behavior is statistically not the main cause of poverty in rich societies.


3. What about alcohol?

In my article I focused on four dimensions of bad behavior - illegal drug use, out-of-wedlock births, violence, and idleness. Williamson suggests there is another type of bad behavior I failed to consider: alcohol.
Third, it emphatically is not the case that Japan is a society that is largely free from substance abuse. In Japan, as in the United States, the most socially significant and destructive mode of substance abuse is legal: alcohol abuse. Japan has a big problem with alcohol, and alcohol abuse is related to joblessness and poverty, although the question of causality (Are they unemployed because they drink, or do they drink because they are unemployed?) gets complicated, and some studies suggest that in Japan some kinds of destructive drinking increase with income.
It's true that alcohol is typically the drug of choice in Japan. But even here, America is worse-behaved. Several different data sources all agree that the number of alcoholic drinks consumed per person in Japan is around 7, while the number in America is around 9. France, Germany and Australia, which have lower poverty rates than the U.S., are around 12.

It's also instructive to examine the Reuters article that Williamson links to regarding alcohol in Japan. The article notes that alcoholism is a problem in the country. But its three examples of alcoholics are 1) a civil servant who remained employed after six months in the hospital, 2) the country's finance minister, who died in office, and 3) a prince. These examples illustrate how differences in institutions affect the relationship between behavior and economic outcomes. Despite alcoholism, the civil servant was still employed, the finance minister was still finance minister, and the prince was still a prince. More on this later.

But in any case, suppose Williamson has a point, and alcohol, not illegal drug use, out-of-wedlock births, violence, or idleness is the big behavior-related cause of poverty. That would imply that conservatives' emphasis on the former four types of behavior is probably misplaced, and they should focus more on encouraging temperance and taxing alcohol more highly.


4.  Why isn't Japan's system preventing more poverty?

Williamson asks, if Japan has higher employment rates and national health insurance, why is their poverty only slightly less than that in the U.S.?
Smith is correct that Japan has high work-force participation, and that it has a universal(ish) national health-insurance scheme. To which he adds: “Too many people fall through the cracks in the capitalist system because of unemployment, sickness, injury or other forms of bad luck.” This is an odd thing to write immediately after noting that Japan has 1. low unemployment and 2. a national health-care system that helps people through sickness and injury. 
Perhaps those things are not sufficient?
This is absolutely true; these things are not sufficient. But nowhere did I say they are.

National health insurance helps reduce individual bankruptcy risk and (if done right, as in Japan) control costs. Maintaining low unemployment also reduces bankruptcy risk, and the risk of losing one's skills and connections. But Japan does show that neither of these will be sufficient to attain low European levels of poverty. For that, we will need more - other forms of income transfers, and/or institutions to ensure that more of society's income flows to lower-wage workers.


5. Is poverty due to "capitalism"?

Williamson argues that to attribute poverty to "capitalism" ignores the differences between countries' systems:
“Capitalism” is a very broad term. The United States is a capitalist country, and a rich capitalist country at that. So is Japan. So is Singapore. So is Sweden. So is Switzerland. These countries have radically different health-care systems, tax codes, family lives, cultural norms, etc. Unsurprisingly, these produce different outcomes on a great many social fronts — but all of them are comprehended by “capitalism.”...To argue that the problem is “the capitalist system” is to retreat into generality and to refuse to consider the facts of the case, each on its own merits.
It is true that different advanced countries have different systems, and that labeling them "capitalism" tends to obscure more than it clarifies. In fact, I recently wrote a whole article about that topic, which Williamson should read!

But since the time of Vilfredo Pareto it has been well-known that every country has a substantial amount of market poverty - that is, poverty before taxes and transfers. Here is a graph from the Economic Policy Institute of market poverty rates vs. post-transfer poverty rates:


In other words, no matter how you set up your system, you're going to get a lot of people who will experience relative poverty without government transfers. Hence, the social safety net matters a lot.

Capitalism is not a bad thing. Capitalism, in some form, is an amazing engine of wealth creation. Capitalism of some sort, as far as we know, is absolutely necessary to maintaining high standards of living and eliminating absolute poverty.

But capitalism is not omnipotent. Drowning government in a bathtub and leaving individuals to sink or swim on their own in a free market economy will result in some people failing and being poor, no matter how well they behave. Thus, any capitalist system can be improved with a social safety net.

That was my point. I think most people got it!


6. Extreme poverty and mental illness

Williamson notes that much extreme poverty in the U.S., including chronic homelessness, is caused by mental illness:
In New York, Los Angeles, and other big cities, it is common for people to sleep on the streets even as beds in shelters go unoccupied. There are many reasons for that, but the main one almost certainly is mental illness (and substance abuse as a subset of that). That is the nearly universal opinion of the professionals who work with the urban homeless. 
There are better and worse ways to deal with mental illness in a wealthy, complex society, and we in the United States have settled on one of the worst: After the “deinstitutionalization” of the 1960s and 1970s, in which left-wing liberationist thinking combined with right-wing penny-pinching to gut the public mental hospitals, we punted the problem to the police and to the jailers, who are ill-equipped to handle it. The United States is not alone in this. Many (perhaps most) Western European countries have more effective social-welfare systems than we do, but even in Sweden, with its fairly comprehensive welfare state, mental illness is the leading cause of “work force exclusion,” as they call it.
As far as I know, this is all absolutely true. But notice that mental illness is not generally a behavioral issue - alcohol, drugs and violence can exacerbate your chances of becoming a schizophrenic, but there are tons of people with mental illness even in well-behaved countries like Japan. As Williamson notes, the most effective way of dealing with mental illness is government-funded treatment. And as Williamson notes, "right-wing penny-pinching" was indeed one reason the American government stopped providing the classic form of such treatment - compulsory institutionalization (which still exists in Japan). The question of how best to treat mental illness is an open one, but it's basically certain that the answer will be carried out by government intervention rather than by some improvement in personal responsibility - again, speaking to my thesis.


7. Would more antipoverty programs reduce poverty in America?

Williamson writes:
[T]he big changes that progressives generally propose for the United States — a national health-care system like Japan’s, an enlarged welfare state more like Sweden’s — do not seem to have been entirely effective in the places where they have been tried. And there is good reason to believe that Swedish or Swiss practice cannot simply be imported into Eastern Kentucky or Baltimore and replicated locally. That does not mean that there is nothing to learn from Japanese or European practice — perfection is not our criterion — but it does complicate the conversation. We have, in fact, spent a tremendous amount of money on anti-poverty and economic-development programs, and much of that has not delivered anything like the promised return.
Well, it is the case that the U.S. spends less on social welfare than most European countries:

But it's also true that Canada and Australia have lower poverty rates than we do, despite lower rates of welfare spending (at least according to this measure). Williamson is almost certainly right that the U.S. has different challenges than these other countries. That may mean we need to spend more in order to achieve the same effect. But before we go claiming that government social spending won't work for the U.S., we should at least try spending as much as the UK or Germany (or Japan!). 

As for Williamson's statement that "We have, in fact, spent a tremendous amount of money on anti-poverty and economic-development programs, and much of that has not delivered anything like the promised return", that may or may not be the case, but much of it has delivered the promised return. Just looking at recent examples, we see that government transfers have been entirely responsible for the fall in the child poverty rate since the early 1990s:


Also, thanks to policies begun by George W. Bush and continued by Barack Obama, homelessness in the U.S. has fallen substantially:


These approaches are working. Tell me again why we shouldn't double down on things that work, especially if we can afford to do so?


8. Sentimentality and poverty reduction

Williamson, whose work I cited in my original post as an example of a conservative blaming poverty on bad behavior, writes:
In my own reporting on poverty in the United States, I have tried to present the facts as unsparingly as I can. Perhaps Noah Smith thinks that I do this in order to savor the exquisite delights of moral condemnation. But the intended purpose is to scour away the crust of sentimentality that poverty has acquired in order that we may deal with the actual facts of the case in a way that is productive and that does not end up deepening the very problems we hope to mitigate. (emphasis mine)
Here are some quotes from the Williamson article I cited:
Yes, young men of Garbutt — get off your asses and go find a job... 
[N]obody did this to them. They failed themselves...There wasn’t some awful disaster. There wasn’t a war or a famine or a plague or a foreign occupation. Even the economic changes of the past few decades do very little to explain the dysfunction and negligence — and the incomprehensible malice — of poor white America... 
The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap. Forget your sanctimony about struggling Rust Belt factory towns and your conspiracy theories about the wily Orientals stealing our jobs. Forget your goddamned gypsum, and, if he has a problem with that, forget Ed Burke, too. The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles.
 And in the article Williamson himself cites, he wrote:
Thinking about the future here and its bleak prospects is not much fun at all, so instead of too much black-minded introspection you have the pills and the dope, the morning beers, the endless scratch-off lotto cards, healing meetings up on the hill, the federally funded ritual of trading cases of food-stamp Pepsi for packs of Kentucky’s Best cigarettes and good old hard currency, tall piles of gas-station nachos, the occasional blast of meth, Narcotics Anonymous meetings, petty crime, the draw, the recreational making and surgical unmaking of teenaged mothers, and death...
If this represents "scouring away the crust of sentimentality", what does poverty reporting look like with the crust of sentimentality still on??


9. What an actually good conservative critique of my article would look like

It's true that an 800-word comparison of two countries can't make a watertight case that bad behavior is not the biggest cause of poverty. It would definitely be possible for a conservative to read my article and then poke holes in my arguments. I don't think Kevin Williamson has done this. But if he did, I think it would look something like this:

"The U.S. and Japan don't have comparable economic systems, so comparing their behavior and their poverty rates is inappropriate. America is a meritocracy where you can climb high if you work hard and act right. Therefore if you're poor in America, it must mean that you chose to sabotage yourself. But Japan's combination of lifetime employment, an inefficient corporate system that doesn't reward effort and achievement, sexism, and permanent social stigma for failure means that poverty there is usually caused by bad luck."

In other words, different countries, even different developed countries, might have fundamentally different reasons for allowing people to fall into poverty.

This is a real possibility. If this is true, it would mean that Japan has lots of room to reduce poverty by making their system more like America's, so that their well-behaved, hard-working poor people can escape poverty by the sweat of their brows. And it would mean that America is already doing about as well as it can do in terms of institutional set-up, and that the best it can do is to urge its poor people to try harder and be more moral.

Of course, I could also marshal plenty of data against that case - for instance, the aforementioned success of U.S. government transfers in reducing child poverty and homelessness in recent decades. Or the big decreases in American violence and drug use since 1990 that haven't been accompanied by decreases in market poverty. But at least I would need more than just the example of Japan!

(In fact, this is the counterargument that I was prepared for, since people often respond to Japan-based arguments by saying "Japan is just different". But Williamson didn't use it.)


So even though my article does not completely settle the question of the root causes of poverty (and indeed, no article will), Kevin Williamson's attempted rebuttal does not hit the mark. For a good follow-up to my article, see this post by Scott Sumner. And thanks to Sumner for the photo at the top of this post.

Wednesday, June 19, 2019

The Middle Eastern Thirty Years War?


I know sweeping historical analogies are silly, but I've always been partial to the analogy between the Middle East's recent decades of war and the Thirty Years War of early modern Europe. So let's run with that and see where it takes us.


The Thirty Years' War

In the early 1600s, most of Europe was involved in a gigantic war (which really lasted more than 30 years if you count other associated wars). A good history is C.V. Wedgwood's creatively named classic, The Thirty Years War.

Most people think of the war as a Protestant-vs-Catholic fight -- an extension and climax of the Wars of Religion that had been going on in Europe since the Reformation a century earlier. And religion was a big fault line between the two sides, and a big motivator for both people and regimes to keep fighting. But Wedgwood believes that the war was primarily a proxy contest between France and Spain for control of Europe. "There was enmity between France and Spain" is an often-repeated line throughout the book.

Spain, at that time, was under the control of the Habsburg family, Europe's most famous set of blue-blooded aristocratic schemers. Europe was still in transition between the old feudal form of political organization and the modern nation-state system, and the Habsburgs definitely represented the former -- besides Spain, they had tons of possessions in Germany, Belgium, and elsewhere, in addition to the Spanish Empire in South and Central America. The Habsburgs wanted to control Germany, which was the richest and most densely populated part of Europe, but which at that time was divided into a ton of tiny little micro-states loosely under the control of the increasingly irrelevant and rickety Holy Roman Empire:


The Habsburgs had maintained loose domination of Germany by constantly winning the elections for Holy Roman Emperor, but when some Protestant states rebelled against the emperor, they decided it was time to conquer Germany for real. They had massive resource wealth (silver and gold) from the New World, and they had the feared Spanish fighters, so they seemed to have a pretty good shot.

But that didn't work out, and one big reason was the Habsburgs' chief rival in Europe: France. France was Catholic, but had no desire for pan-Catholic solidarity with the Habsburgs. When the war broke out, France was in the process of becoming an absolute monarchy, and -- especially after subduing the Protestant Huguenot rebellion -- looked increasingly like an effective centralized state. Under the effective control of the famous Cardinal Richelieu (villain of the Three Musketeers!), encouraged first Denmark and then Sweden to enter the war against the Habsburgs, as well as supporting various Protestant leaders. In the end, the Habsburgs were unable to conquer most of Germany, and their holdings in the south part eventually turned into the Austrian Empire.

Spain finally got pissed enough to attack France directly, but -- to many people's surprise -- France gave them the boot. France's counterattack also failed, but by then Habsburg power in Europe was broken forever. The idea that a noble house with distributed feudal possessions could dominate the region was over, and absolute monarchies and modern nation-states started their long climb to preeminence. In fact, the Peace of Westphalia, the series of treaties that officially ended the Thirty Years War, is often cited as the blueprint for the modern concept of state sovereignty.


The Saudi-Iranian Rivalry

In the modern Middle East, a royal family with ample flows of natural resource wealth (the House of Saud) is engaged in a long proxy conflict with a autocratic, centralized rival state (Iran). Here's a slightly out-of-date map, from back when the Islamic State still had territory:



Religion is involved, as Iran is Shia and the Saudis are Sunni; both sides have sought at various times to whip up religious fervor as a weapon against the other. But most observers think the conflict is as much about which regime controls the Middle East as it is about religion.

The conflict has its roots in an ancient Arab-Persian rivalry, but it really began after the Iranian Revolution of 1979. Ayatollah Khomeini was hostile to all of the Middle Eastern monarchies, and wanted to replace them with Islamic Republics. In response, Saudi Arabia backed Saddam Hussein's invasion of Iran in 1980; the king of Saudi Arabia actually wrote to Hussein and told him to "crush these stupid Iranians". The Iran-Iraq War killed around 800,000 people, and Saudi Arabia and Iran nearly came to blows at least once during that conflict.

The Saudi-Iranian conflict quickly became entangled with religion. Sunni and Shia Muslims had coexisted more-or-less peacefully for a long time, but Saudi Arabia and Iran have both been eager to destroy that comity in order to motivate their citizens and proxies. In 1987 Khomeini said that "these vile and ungodly Wahhabis are like daggers which have always pierced the heart of the Muslims from the back”, and called the Saudis “a band of heretics". In that same year, Iranian pilgrims and Saudi security clashed at the Hajj in Mecca, leaving over 400 people dead. Meanwhile, Saudi Arabia increasingly sponsored and supported Sunni radicalism around the world, partly as a bulwark against Iranian influence. The Saudis also repressed Shia within their borders, and there are accusations that the regime supports anti-Shia sentiment abroad as well.

The Saudi-Iranian rivalry was effectively put on hold during the Gulf War in the early 1990s, but it never quite went away. Iran and the Saudis backed rival factions in the Afghani Civil War in the late 90s, and Iran almost went to war with the Saudi-supported Taliban. In Lebanon in the 2000s, the Saudis backed efforts against Iranian-backed Hezbollah, and Lebanon has continued to be a locus of proxy conflict. During the U.S. invasion of Iraq, the Saudis supported the U.S. presence while the Iranians backed Shia militias.

But the rivalry really kicked into high gear after the Arab Spring in 2011. A Shia uprising in Bahrain was crushed by Saudi soldiers, and the Sunni Bahraini royals accused Iran of stirring up the unrest. The Saudis supported some of the rebels in Syria, while Iran vigorously supported the government and even sent troops to help. Now, Saudi Arabia is fighting a war against the Shia Houthi movement in Yemen, which many claim is backed by Iran.

This conflict has now been going on for 40 years. By my rough guesstimate, the various wars related to the conflict have now cost about 2 million lives. That is a lot less than the Thirty Years War, in both absolute numbers and percent of population, but the carnage is still significant.


Parallels and Differences

The House of Saud is a bit reminiscent of the Habsburgs -- a hidebound, sprawling royal family supported by natural resource wealth (oil, vs. gold and silver from the Spanish colonies). That would put Iran in the role of France, its autocratic/bureaucratic rival. Like France, Iran has made use of various proxies -- Bashar al-Assad, Hezbollah, the Houthis, etc. And like France, Iran has generally chosen the more effective proxies -- Assad has crushed the rebels (with Russian help), Hezbollah dominates its Lebanese rivals, and the Houthis have proven far better fighters than Saudi's Yemeni proxies, and have even scored wins against Saudi Arabia's own military.

But there are at least two big differences between Iran now and France in the 1600s. First, whereas France crossed the religious divide and employed Protestant proxies, Iran's proxies are mostly either Shia or quasi-Shia sects like the Syrian Alawites. Thus, there seems to be the possibility that the Saudi-Iranian conflict will stay religious in character, as opposed to the Thirty Years War, where the religious aspect eventually took a back seat to the intra-Catholic conflict between France and Spain.

Second, Iran has a lot of oil too. While this might appear like an advantage, it can lead to the dreaded Resource Curse (which arguably helped sink Spain in the Thirty Years War, when its shipments of silver were interrupted and it went bankrupt several times due to the habit of relying on steady flows of free money). Oil wealth could actually inhibit Iran from becoming an effective modern bureaucratic state. It seems possible that both the Saudis and the Iranians will be able to fuel their conflict with oil money for years to come, without being forced to cultivate more effective economic institutions. While France came out of the Thirty Years War looking stronger than ever, Iran might not be so lucky.

Meanwhile, the Saudis differ from the Habsburgs in one important way -- they exist in the modern, Westphalian world of nation-states. Thus, they cannot hope to gain influence by taking personal possession of territory, as the Habsburgs could. Instead, their hope for long-term influence probably depends on continued use of proxies in places like Iraq, Syria, and Yemen. And the Saudis will probably try to motivate and bind those proxies with religious ties.

In other words, while the Thirty Years War signaled a shift from religion to nationalism as the organizing principle of Europe, the Saudi-Iranian conflict might not be able to repeat the trick for the Middle East -- instead, it might leave the region more polarized between Sunni and Shia.

Another big difference between the wars is the importance of outside powers. The Thirty Years War really had only one relevant outside superpower, the Ottoman Empire, which offered limited help to some anti-Habsburg forces. But the modern Middle East has seen major interference from both the United States and Russia. The U.S. invaded and occupied Iraq, helped smash ISIS, supported autonomy for the Kurds, has provided financial and military support for the Saudis, and has occasionally threatened war with Iran. Meanwhile, Russian intervention proved decisive in Syria. Middle Eastern oil is so important to China's economy that China could conceivably become involved in the region as well.

Thus, while the Thirty Years War ended with the consolidation and increased independence of European proto-nation-states, a similar process in the modern Middle East might be harder to achieve, thanks to the influence and domination of outside superpowers.

Still, it does seem like the Saudi-Iranian conflict might lead to big and lasting changes in the Middle East, and some of those changes might not be too dissimilar from the aftermath of the Thirty Years War. The depredations of ISIS and other extremist groups -- almost as savage as the atrocities in 1600s Europe -- might convince Middle Easterners that fundamentalist sectarian warfare is not a source of power and unity, but a one-way road that leads nowhere good. Already, the legitimacy of the Islamic Republic in Iran has eroded, as young people come to resent the constant conflict, social repression, and lack of economic development.

Second, the wars might end up leading to increased nationalism. If pan-Shia and pan-Sunni solidarity are seen as leading to endless conflict, young Middle Easterners may instead decide to think of themselves as Syrians, Iraqis, or Yemenis. Granted, this future looks fairly remote right now, but the rise of nationalism in Europe took centuries.

Third, the constant warfare might simply create a weariness with war and conflict, especially when paired with the big drops in fertility rates across the region. After the smoke clears from the wars in Syria, Yemen, Iraq, and elsewhere, the Middle East might enter an era of enlightenment, much as Europe did. Science, literature, and institution-building might replace violence as sources of mass inspiration. As oil becomes less important to the global economy, Middle Eastern states will have the chance to shrug off the Resource Curse and diversify their economies to more productive, inclusive industries.

Though the Thirty Years War was insanely savage and destructive, some good things did come out of it in the end. I hope that the same is true of the Middle East's current era of wars.

Sunday, March 31, 2019

Examining an MMT model in detail


What is MMT, the heterodox economic theory that has captivated Alexandria Ocasio-Cortez, made its way into the Green New Deal discussion, and inspired dozens of thinkpieces and critiques? What does it say? How can we tell if it's a good theory or a bad one?

These are incredibly important questions. Thanks to Ocasio-Cortez and the Green New Deal, MMT has very quickly gone from an obscure heterodox idea to one of the most potentially influential and important theories in all of economics. 


Formal Models vs. Guru-Based Theories

These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don't have to go ask Mike Woodford what New Keynesian theory says. You don't have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own.

MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT's policy recommendations. But that's different than having a formal model of the economy. In a criticism of MMT, Thomas Palley writes:
The critical economic policy question is what does the power to money finance deficit spending mean for government’s ability to promote full employment with price stability? This question can only be answered by placing that power within a theoretical model and exploring its implications...Proponents of MMT have a professional obligation to provide [a simple mathematical] model to help understand and assess the logic and originality of their claims. Yet, [MMT proponents Eric Tymoigne and L. Randall Wray] again fail to produce a model...If MMT-ers did produce a model, I am convinced the issues would become transparent, but readers would also see there is “no there there”.
Now, a lot of people like to criticize mathematical models in economics. And they do have their drawbacks. Economists can sometimes become so entranced by the precision of math that they ignore the need to connect that math with the real world. And the difficulty of hacking through math can lead economists to make the models too simple.

Furthermore, Palley is being a bit too strict in demanding math; formal models can be stated in English or in graphs, rather than in equations.

But formal models have important advantages. For one thing, a good formal model can be compared with quantitative data, to see whether it works or whether it fails. Formal models can make testable predictions.

A second advantage of formal models is that you can figure them out for yourself, without having to ask any gurus. If you have to run to the gurus to ask them what the theory says any time you think you've found a flaw, it becomes almost impossible to skeptics or outsiders to evaluate the theory objectively.

This latter issue comes up a lot when dealing with MMT. In a recent post, Brad DeLong expresses his frustration with the theory's apparent slipperiness:
"Functional finance" is a doctrine originated and set out by Abba Lerner...When I said that "functional finance" is at the core of MMT, I got immediately smacked down by one of the gurus...Perhaps the key to the eagerness of [L. Randall] Wray to dismiss me (and James Montier) for saying that MMT is Lerner+ is sociological. Perhaps MMT is not model-based ("IS-LM with a near-vertical IS curve") and not idea-based ("Functional Finance") so that it can be guru-based. (emphasis mine)
It wasn't just DeLong and Montier who conflated MMT with Functional Finance. Aryun Jayadev and J.W. Mason did something similar in their attempted write-up of MMT, leading Josh Barro to do the same thing in his own criticism of MMT. Mason, Jayadev, and Barro criticized MMT on the grounds that raising taxes to control inflation - something you have to do in Functional Finance, and which some MMT advocates agree is necessary - is politically very difficult.

But in response to these critiques, Mason, Jayadev, Barro, Montier, and DeLong were told: No, MMT's approach to fiscal policy is not just Functional Finance. It is very very different. On Twitter, MMT insider Rohan Grey declared that MMT has other tools besides fiscal policy for fighting inflation. On his blog, MMT insider L. Randall Wray said that MMT's main tool for maintaining price stability is the federal Job Guarantee:
Yes, MMT does have another tool to maintain price stability. It is the JG approach to full employment. It has always been a core element of MMT. We have never relied the simplistic version of Functional Finance that was presented by Mason. It would take about five minutes of actual research to demonstrate this.
Now that's a perfectly fine rebuttal. People get theories wrong all the time. It's perfectly possible that Mason, Jayadev, Barro, Montier, and DeLong were all very wrong to conflate MMT with Functional Finance, and that five minutes of actual research would have demonstrated this.

But which five minutes? If you want to know how MMT's price stabilization policy differs from Functional Finance, where do you look? Do you trust Wray's blog? Or Grey's tweets? Or an online explainer? Or a video explainer? Or in one of the many papers written by MMT proponents? Which one?

Because MMT doesn't often include formal models, the question of how MMT thinks inflation works is very difficult to answer for yourself. The same is true of a number of other questions, such as how MMT's Job Guarantee would create full employment with price stability. You have to go ask the MMT People themselves.

But "few formal models" doesn't mean "no formal models". Occasionally, MMT people do write down a formal description of how they think the economy works (or might work). One example is "Monopoly Money: The State as a Price Setter", by Pavlina R. Tcherneva.


Examining an MMT Model (or, "Pavlina Tcherneva and the EMPL of Doom")

"Monopoly Money: The State as a Price Setter" explains the idea of how a Job Guarantee would work. The formal model begins on p.130 (page 7 of the PDF).

Here is the model's "conceptual framework":


The government demands that people pay taxes in dollars, which you can only get by working for the government. So people work for the government because that's the only way they can pay their taxes.

Now let's look at exactly how people work for the government and pay their taxes:


Already I can see one potential problem with this model, which is that everyone in the entire economy dies.

Note the part that I've marked with a red arrow. This economy produces only one service, which is firefighting. But you can't eat firefighting. So if that's literally the only thing anyone does in this economy, everyone will starve to death.

LOL OK, so that's probably too harsh. Maybe the people in this economy are doing other stuff on the side that's not in the model - farming, manufacturing, etc. After all, Tcherneva does mention that T could be "a property tax", and the model doesn't include property. So let's assume there's other stuff outside the model too, so that people don't starve, or freeze, etc.

But that still leaves the question of why the government needs firefighting services in the first place. What if there aren't any fires? If the government hires more firefighters than it needs to actually fight fires, then it's just wasting resources - making people labor in useless toil, taking them away from subsistence farming, or whatever. The more useless firefighters it hires, the poorer each person is. (In the limit, if every person has to spend all their time and effort doing unproductive work for the government, they actually do starve to death!)

Anyway, let's go on. 


So the government can hire 1 firefighter for $10 or 10 firefighters for $1 each, etc. (cents apparently don't exist in this world, so you can't hire 4 firefighters for $2.50 each, which is weird but OK).

Another question arises: Why is anyone willing to work as a firefighter in this model? According to Tcherneva, they need dollars to pay their taxes. But who pays the taxes? Tcherneva specifies that the tax bill "for the entire community" is $10. But how is this tax bill paid? Does the entire community file taxes jointly?

Suppose the government chooses to hire only one firefighter - call her Susan. She gets $10 for firefighting, and everyone else gets $0. Does the government tax Susan $10 and tax everyone else $0? Apparently so. Because Susan has $10 and everyone else has $0, so the only way the government can get its $10 is to tax Susan $10.

So why does Susan go fight fires in the first place? Firefighting takes work. If instead she decides to be one of the 9 people who don't work as firefighters, she can relax and watch Netflix, or farm food, or go do whatever it is that people in this model do when they're not firefighting. Someone else will get the dollars, someone else will pay the taxes. Because if you don't work as a firefighter your tax bill is zero, because you don't have any dollars to tax!

So taxation in this model doesn't make a lot of sense, because the model doesn't explain who actually pays the taxes. Without knowing that, it's hard to know why people would accept the government's prices for their firefighting services.

But OK, there must be some reason they work. Maybe the government makes people work at the price it offers. In this case, people are effectively doing slave labor for the government.

That sounds bad...right? It sounds a bit like colonialism, when European governments would send their armies to Africa or Latin America or India and make the locals labor for their overseas masters. 

At this point you may be saying "Noah, you jerk, why are you slandering the MMT people by equating their ideas with colonialism? That's not fair!" But I have a good reason for drawing this comparison: Tcherneva makes it herself, earlier in the paper! European colonialism in Africa is explicitly held up as a successful example of a "tax-driven currency":


On p.135 (page 12 of the PDF), Tcherneva explicitly states that the case where the government sets prices for firefighters "is the African example." So yes, it's explicit that in the model where the government sets prices, it also sets quantities - i.e., it forces people to work. 

I don't want to editorialize too much here, but "the African example" seems bad. Forced labor, potentially to the point of genocide, does not sound like the kind of "job guarantee" I would want. 

Does Tcherneva offer any alternative? Yes. In her "case 2b" on p.134 (page 11 of the PDF), she relaxes the assumption of forced labor, and allows the price (and therefore also the quantity) of workers to be set by the market. She also allows for the possibility that labor unions might organize to reduce the amount of labor they do in exchange for their tax dollars:



In this model, the government can't determine how much labor it gets or how much each laborer gets paid; it can only determine the total number of dollars it pays for labor. In fact, as Tcherneva suggests, labor unions might even allow workers to get all the government's dollars for a very small amount of labor - good for workers, but bad news if there really is a fire!

Anyway, this new model sounds much less horrifying, but it still doesn't answer the fundamental questions of "why do we need all these firefighters" or "who exactly pays the taxes". But at least it does allow for the possibility that either market forces or organized labor could minimize the amount of potentially-useless labor people were compelled to perform for the government in exchange for the money they need to pay their taxes. Colonial Africa, but with labor unions.

(Tcherneva also develops some further cases, including one where the government purchases park benches and another in which desired net saving is nonzero. But none of these cases answer the basic questions either. But don't take my word for it; check the paper.)

Anyway, this formal model is very useful, because it allows careful, precise, explicit analysis of MMT ideas. It allows us to identify potential problems with the theory, such as the question of whether a job guarantee would represent unproductive toil, and whether that's something we would want as a society. 


Further Questions for MMT

There is much I do not yet understand about MMT, that I would like to understand. 

For example, suppose the government implements a job guarantee and sets deficits, credit policies, etc. at the appropriate level to ensure price stability, but we still have more inequality of income and wealth than we would like? What policies should then be used to reduce inequality, without interfering with the goals of price stability and full employment?

Also, I would like to know how to test MMT empirically. What concrete predictions - about macroeconomic aggregates or other quantities - does MMT make that would allow us to determine whether it describes the economy better than, say, Old Keynesian IS-LM models, or New Keynesian models with financial frictions?

Also, how does MMT model productivity in the economy? It seems like hiring a bunch of firefighters in the absence of fires would negatively impact productivity and reduce living standards. Does MMT assume that productivity is exogenous, does it assume that productivity reductions will always be of secondary concern relative to the importance of full employment, or does it have some other way of dealing with potential hits to productivity?

I'm not confident in my ability to answer these and other important questions by reading L. Randall Wray blog posts, or long online explainers, or wordy MMT papers. I want to be able to read a concrete, formal, well-specified model like the Tcherneva model above, and answer these questions myself. And the rest of the non-MMT econ deserves this as well.

Saturday, March 30, 2019

Where should Americans live if they live abroad?


I'm a huge fan of living abroad, and I think many more Americans should do it. Living in a big, rich country with relatively few other countries nearby, Americans don't tend to travel overseas much. And of course, a great many don't have the economic opportunity to do so. I think there should be government programs that help young Americans travel and live abroad, and I think more charities, religious organizations, and other nonprofits should focus on helping people go overseas.

In a recent Twitter thread, I explained how I think living abroad changes one's perspective. In addition to the obvious benefits of cosmopolitanism - helping people realize that people around the world aren't so different after all, etc. etc. - I think it conveys a healthy appreciation for how hard institutions are to get right. Living in Japan for a few years, I got to observe institutions that work better there (cities, primary education), but also institutions that in many ways don't work as well - like the media, universities, corporate culture, the justice system. In fact, the institutions that Japan struggles with the most tend to be things that Americans complain about a lot.

Thus, living abroad taught me that institutions are very hard to get right, that tradeoffs and path dependence are very real, and that even the smartest people (in this case, Japan's vaunted elite bureaucracy) can often get things wrong for a very long time. I think I returned to the U.S. with a deeper appreciation of how hard it is to make a society work the way you want it to, and how precious functional institutions are. It made me both less satisfied with the things America does wrong - for example, urban density and transportation - and more wary of tearing up the things that actually work halfway decently. I can see the same sort of perspective in the writing of some of my favorite writers, including James Fallows and Terrell Starr.

OK, so if you're young-ish and looking to live overseas and gain some perspective, where do you go? Or if you're a nonprofit looking to give young Americans some perspective by sending them overseas, where do you send them? Japan's not a bad choice, but I imagine that there are even better places in terms of comparing/contrasting local institutions and culture with the U.S. Here are some ideas:


1. China


China has got to be the obvious choice, because the country is just so important to the world economy and to geopolitics. This is the Chinese Century, so might as well try living where the action is! Making connections to China could be very useful in life, in addition to any perspective gained.

Furthermore, China's one-party rule, development-oriented state, and close cooperation between government and companies make for an important and interesting institutional contrast. Chinese politics, ethnic divisions, and sense of history are also probably all very interesting and different. Some of these differences are very scary, but scary things can also be instructive. James Fallows is one of my favorite writers, and his time in China shaped him deeply.

The big problem here is that unless they speak Chinese (which, due to the large # of characters and the tonality, is not the easiest language to learn), an American's ability to really get to know people in China might be limited. Being trapped in the expat community is an easy way to avoid getting the full experience of a country. Though notably, some Americans who have actually lived in China claim that Chinese ability isn't as necessary as you might think.

I hear through the grapevine that the best city to live in is Shenzhen, though of course Shanghai and Beijing will always be popular (and Sichuan in general has my favorite food!). There are tons of other places to choose from, too.

Alternative: For those who want to see an up-and-coming superpower with more democratic governance and more English usage, try India.


2. Germany



When choosing a foreign country to live in, there's a balance between choosing one that's too similar (in which case you might overlook the important differences) and one that's too different (in which case you might assume there are no relevant lessons to be learned). Germany might be in the sweet spot. It's a rich Western country, which contributed more immigrants to America than any other nation except possibly Mexico. But it also has a very different economy and set of institutions -- worker councils and co-determination, strong vocational education, export- and manufacturing-oriented industrial policy, and dense urbanism with good public transit.

Germany might therefore be the best country if you want to see different ways to run an advanced economy. Also, lots of people can speak good English, and the country is safe, wealthy, beautiful, and fun. It might also give good perspective on issues of ethnonationalism, what with its WW2 history and its recent acceptance of large numbers of Middle Eastern refugees.

Berlin is the most famous place to live - it's very cheap, and is a legendary party town, with lots of history. But Munich is my personal favorite.

Alternative: France is a country with similar points of interest, though its economic model is a bit different and its English usage is a bit less.


3. Brazil


Brazil is, in many ways, America's "sister country". It's a large, populous post-colonial Western Hemisphere nation with a history of slavery (abolished 1888), a history of immigration, and a very diverse population. For those who are intent on living somewhere nice, it's also famous for its natural beauty and fun culture (though with a murder rate 6 times as high as that of the U.S., it's also a bit dangerous).

Brazil could offer some broad perspective on how to make a very diverse young society with a checkered past work for all its people. Economically, it's middle-income (slightly poorer than China), with some advanced industries but low productivity growth. It may therefore be a good example of the "middle income trap" - a country that is no longer mired in poverty but is struggling to make it into the ranks of wealthy nations.

Alternative: For those who would rather stick closer to the U.S., Mexico shares some of these points of interest.


4. Ethiopia


My Bloomberg Opinion colleague Tyler Cowen strongly recommends Ethiopia. If you want to see a developing country just on the cusp of industrialization, Ethiopia might be your best bet. Thanks to a recent improvement in political stability and a torrent of foreign investment (much of it Chinese), Ethiopia looks like it's hopping aboard the train to industrialization. That could mean useful commercial advantages to living there, if you want to invest and get in on the ground floor! And because Ethiopia is the first African country to start out on this manufacturing-based growth path, you'd be there for a historic moment.

The country is still desperately poor -- its income per capita is less than 1/30 that of the United States. But living in a desperately poor country is a good way to see what life is like without industrialization, and why countries rush to embrace it despite all the pollution, safety issues, and other drawbacks.

Alternatives: Other countries going through similar rapid industrialization, but slightly farther along, include Bangladesh and Vietnam.


5. Ukraine


It might feel a bit voyeuristic to go live in a country that is mired in troubles. But it could also be very instructive. Despite a history of industrialization as the center of Soviet heavy industry, and despite some of the world's most fertile agricultural land, Ukraine remains poor. It's mired in economic stagnation, political dysfunction, and a seemingly never-ending war with a small Russian-backed breakaway region in the east. If you want to see how a country with lots of advantages and close connections to the West can still struggle in this day and age, Ukraine is probably your best bet.

Of course, Ukraine also no doubt has much charm. Terrell Starr lived there and liked it. Nor is he the only one. It's cheap, and if you decide you'd rather return to the comfort of the developed world, other European countries are very close by!

Alternative: You could always take the full leap and go live in Russia.


So there are some suggestions of where to live if you're looking for some international perspective (with a bit of adventure thrown in). Of course, I haven't lived in any of these places, so this post is highly speculative. In the end, you won't know until you go!

Thursday, March 28, 2019

Guest post: Roy Bahat on Uber, Lyft, and the future of work

Roy Bahat is the head of Bloomberg Beta, a venture capital firm focused on the future of work. In this guest post, he explains what he thinks is wrong with the way the "ride sharing" companies treat their workers.

____________________________________________________________________

AS GOES UBER, SO GOES THE NATION

HOW MIGHT IT LOOK TO NEGOTIATE A “TREATY OF SILICON VALLEY?”


Lyft could go public as soon as this week, with Uber tailgating. For either to succeed, they have to stop the rot at the core of their business: their drivers are suffering. Like a factory worker in a 1950 auto plant, Uber and Lyft drivers epitomize the struggles of many Americans today. To solve their drivers’ challenges, Uber and Lyft might need to strike a new bargain for all of American work, a new “Treaty of Detroit.”

The Treaty of Detroit, just after World War II, established employers as the providers of benefits. Then, the big three automakers rang up outsized profits, which depended on working people welding, painting, and assembling. Those people suffered unacceptable conditions, like many gig workers today, so they organized.

United Auto Workers chief Walter Reuther pressed General Motors to create the standard for a full-time job in America: health insurance, vacation, enough of a wage to provide for a family, regular raises, and money for retirement. He negotiated, in one word, security.

--

Our economy and society are different today. Family lives come in many forms, and our workforce is more diverse. In a family headed by a single parent or by two working parents, all work, not just full-time jobs at profitable companies, must provide for stability.

Lyft and Uber, like many companies in the new economy, have been unable to provide their workers with a stable and complete livelihood. Still, with their bully pulpit and their relationship with millions of Americans, they might be our best hope for provoking change.

That change starts with something unfamiliar to Uber and Lyft: partnering with government. Instead of using their muscle to whine to cities about taxi regulations, Uber and Lyft should call on government to lift the floor for working people. They could ask the federal government to pay for healthcare, joining the conversation about Medicare for All (as they did during the discussions about the Affordable Care Act). Government could set a minimum wage for drivers, as New York just did, so we riders pay our fare share.

Lyft and Uber could enable drivers to choose their own paths, in what’s now called “lifelong learning.” Uber offers online college classes for free at Arizona State. Driver centers could offer GED-equivalent classes, or help drivers build their network and then learn how to network. Imagine if drivers, who Lyft and Uber chose to brand as “independent entrepreneurs” at the height of the employee-or-contractor game, actually received support to become genuine entrepreneurs -- like financing, or access to mentors to help them with business plans? Or better: Uber and Lyft could buy services from companies owned by their own workers, to create the spark of demand that gets them going.

This company-supported learning might extend to developing drivers’ careers at Uber and Lyft. Unlike a retail store, where the cashier sees the manager every day and gets a shot to build a relationship and prove they can do that job, the app-is-my-boss experience gives drivers only the thinnest exposure to management. So Uber and Lyft need to invent ways to get drivers into corporate headquarters, or risk permanent castes dividing their workforce.

Maybe workers conceded too much in the Treaty of Detroit, and drivers should organize to have a representative on Uber and Lyft’s boards? Uber’s CEO, Dara Khosrowshahi, talks about his family coming from struggle. What if the Dara Khosrowshahi of 2030 is someone driving for Uber right now?

Despite the avalanche of investor money that blanketed Uber and Lyft, they barely earn enough revenue to pay their costs. It’s hard to imagine them paying more for driver healthcare. They’re also locked in a do-si-do where if one raised prices to pay drivers more, we riders would probably just pick the other one -- you know you would. So a “Treaty of Silicon Valley” would need government to both level and raise the playing field.

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After the Treaty of Detroit, the President of General Motors said “what was good for the country was good for General Motors, and vice versa.” Uber or Lyft might say the same today. The technology companies driving changes in work need to call on government and workers to strike a new bargain, and then do their part to invest in those workers’ futures. Big corporates, who have long shifted work from employees to contractors, might follow -- and we might all agree to a new treaty that will hold for another 70 years.