Human Economics
Cognitive development economics: Understanding the mind in order to feed the world
HomePosts tagged 'basic income'
Will robots take our jobs? Not "if" but "when".
2020-01-05 2020-01-01 pnrj current events, futurism	automation, basic income, blue collar, employment, Isaac Asimov, pink collar, robots, skill-biased technological change, technological unemployment, trucking, unemployment, white collar
Jan 5 JDN 2458853
The prospect of technological unemployment—in short, robots taking our jobs—is a very controversial one among economists.
For most of human history, technological advances have destroyed some jobs and created others, causing change, instability, conflict—but ultimately, not unemployment. Many economists believe that this trend will continue well into the 21st century.
Yet I am not so sure, ever since I read this chilling paragraph by Gregory Clark, which I first encountered in The Atlantic:
<quote>
There was a type of employee at the beginning of the Industrial Revolution whose job and livelihood largely vanished in the early twentieth century. This was the horse. The population of working horses actually peaked in England long after the Industrial Revolution, in 1901, when 3.25 million were at work. Though they had been replaced by rail for long-distance haulage and by steam engines for driving machinery, they still plowed fields, hauled wagons and carriages short distances, pulled boats on the canals, toiled in the pits, and carried armies into battle. But the arrival of the internal combustion engine in the late nineteenth century rapidly displaced these workers, so that by 1924 there were fewer than two million. There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.
Based on the statistics, what actually seems to be happening right now is that automation is bifurcating the workforce: It's allowing some people with advanced high-tech skills to make mind-boggling amounts of money in engineering and software development, while those who lack such skills get pushed ever further into the margins, forced to take whatever jobs they can get. This skill-biased technical change is far from a complete explanation for our rising inequality, but it's clearly a contributing factor, and I expect it will become more important over time.
Indeed, in some sense I think the replacement of most human labor with robots is inevitable. It's not a question of "if", but only a question of "when". In a thousand years—if we survive at all, and if we remain recognizable as human—we're not going to have employment in the same sense we do today. In the best-case scenario, we'll live in the Culture, all playing games, making art, singing songs, and writing stories while the robots do all the hard labor.
But a thousand years is a very long time; we'll be dead, and so will our children and our grandchildren. Most of us are thus understandably a lot more concerned about what happens in say 20 or 50 years.
I'm quite certain that not all human work will be replaced within the next 20 years. In fact, I am skeptical even of the estimates that half of all work will be automated within the next 40 years, though some very qualified experts are making such estimates. A lot of jobs are safe for now.
Indeed, my job is probably pretty safe: While there has been a disturbing trend in universities toward adjunct faculty, people are definitely still going to need economists for the foreseeable future. (Indeed, if Asimov is right, behavioral economists will one day rule the galaxy.)
Creative jobs are also quite safe; it's going to be at least a century, maybe more, before robots can seriously compete with artists, authors, or musicians. (Robot Beethoven is a publicity stunt, not a serious business plan.) Indeed, by the time robots reach that level, I think we'll have to start treating them as people—so in that sense, people will still be doing those jobs.
Even construction work is also relatively safe—actually projected to grow faster than employment in general for the next decade. This is probably because increased construction productivity tends to lead to more construction, rather than less employment. We can pretty much always use more or bigger houses, as long as we can afford them. Really, we should be hoping for technological advances in construction, which might finally bring down our astronomical housing prices, especially here in California.
But a lot of jobs are clearly going to disappear, sooner than most people seem to grasp.
The one that worries me the most is truck drivers. Truck drivers are a huge number of people. Trucking employs over 1.5 million Americans, accounting for about 1% of all US workers. It's one of the few remaining jobs that pays a middle-class salary with entry-level skills and doesn't require an advanced education. It's also culturally coded as highly masculine, which is advantageous in a world where a large number of men suffer so deeply from fragile masculinity (a major correlate of support for Donald Trump, by the way, as well as a source of a never-ending array of cringeworthy marketing) that they can't bear to take even the most promising "pink collar" jobs.
And yet, long-haul trucking is probably not going to exist in 20 years. Short-haul and delivery trucking will probably last a bit longer, since it's helpful to have a human being to drive around complicated city streets and carry deliveries. Automated trucks are already here, and they are just… better. While human drivers need rest, sleep, food, and bathroom breaks, rarely exceeding 11 hours of actual driving per day (which still sounds exhausting!), an automated long-haul truck can stay on the road for over 22 hours per day, even including fuel and maintenance. The capital cost of an automated truck is currently much higher than an ordinary truck, but when that changes, trucking companies aren't going to keep around a human driver when their robots can deliver twice as fast and don't expect to be paid wages. Automated vehicles are also safer than human drivers, which will save several thousand lives per year. For this to happen, we don't even need truly full automation; we just need to get past our current level 3 automation and reach level 4. Prototypes of this level of automation are already under development; in about 10 years they'll start hitting the road. The shift won't be instantaneous; once a company has already invested in a truck and a driver, they'll keep them around for several years. But in 20 years from now, I don't expect to see a lot of human-driven trucks left.
I'm pleased to see that the government is taking this matter seriously, already trying to develop plans for what to do when long-haul trucks become fully robotic. I hope they can come up with a good plan in time.
Some jobs that will be automated away deserve to be automated away. I can't shed very many tears for the loss of fast-food workers and grocery cashiers (which we can already see happening around us—been to a Taco Bell lately?); those are terrible jobs that no human being should have to do. And my only concern about automated telemarketing is that it makes telemarketing cheaper and therefore more common; I certainly am not worried about the fact that people won't be working as telemarketers anymore.
But a lot of good jobs, even white-collar jobs, are at risk of automation. Algorithms are already performing at about the same level as human radiologists, contract reviewers, and insurance underwriters, and once they get substantially better, companies are going to have trouble justifying why they would hire a human who costs more and performs worse. Indeed, the very first job to be automated by information technology was a white-collar job: computer used to be a profession, not a machine.
Technological advancement is inherently difficult to predict: If we knew how future technology will work, we'd make it now. So any such prediction should contain large error bars: "20 years away" could mean we make a breakthrough next year, or it could stay "20 years away" for the next 50 years.
If we had a robust social safety net—a basic income, perhaps?—this would be fine. But our culture decided somewhere along the way that people only deserve to live well if they are currently performing paid services for a corporation, and as robots get better, corporations will find they don't need so many people performing services. We could face up to this fact and use it as an opportunity for deeper reforms; but I fear that instead we'll wait to act until the crisis is already upon us.
"Robots can't take your job if you're already retired."
2019-07-07 2019-06-30 pnrj futurism, inequality	automation, basic income, inequality, Jeff Bezos, redistribution, robots, wealth
July 7 JDN 2458672
There is a billboard on I-405 near where I live, put up by some financial advisor company, with that slogan on it: "Robots can't take your job if you're already retired."
First, let me say this: Don't hire a financial advisor firm; you really don't need one. 90% of actively-managed funds perform worse than simple index funds. Buy all the stocks and let them sit. You won't be able to retire sooner because you paid someone else to do the same thing you could have done yourself.
Yet, there is some wisdom in this statement: The best answer to technological unemployment is to make it so people don't need to be employed. As an individual, all you could really do there is try to save up and retire early. But as a society, there is a lot more we could do.
The goal should essentially to make everyone retired, or if not everyone, then whatever portion of the population has been displaced by automation. A pension for everyone sounds a lot like a basic income.
People are strangely averse to redistribution of wealth as such (perhaps because they don't know, or don't want to think about, how much of our existing wealth was gained by force?), so we may not want to call our basic income a basic income.
Instead, we will call it capital income. People seem astonishingly comfortable with Jeff Bezos making more income in a minute than his median employee makes in a year, as long as it's capital income instead of "welfare" or "redistribution of wealth".
The basic income will instead be called something like the Perpetual Dividend of the United States, the dividends each US citizen receives for being a shareholder in the United States of America. I know this kind of terminology works, because the Permanent Fund Dividend in Alaska is a successful and enormously popular basic income. Even conservatives in Alaska dare not suggest eliminating the PFD.
And in fact it could literally be capital income: While public ownership of factories generally does not go well (see: the entire history of socialism and communism), the most sensible way to raise revenue for this program would be to tax income gained by owners of robotic factories, which, even if on the books as salary or stock options or whatever, is at its core capital income. If we wanted to make that connection even more transparent, we could tax in the form of non-voting shares in corporations, so that instead of paying a conventional corporate tax, corporations simply had to pay a portion of their profits directly to the public fund.
I'm not quite sure why people are so much more uncomfortable with redistribution of wealth than they are with the staggering levels of wealth inequality that make it so obviously necessary. Maybe it's the feeling of "robbing Peter to pay Paul", or "running out of other people's money"? But obviously a basic income won't just be free money from nowhere. We would be collecting it in taxes, the same way we fund all other government spending. Even printing money would mean paying in the form of inflation (and we definitely should not print enough money to cover a whole basic income!)
I think it may simply be that people aren't cognizant enough of the magnitude of wealth inequality. I'm hoping that my posts on the extremes of wealth and poverty might help a bit with that. The richest people on Earth make about $10 billion per year—that's $10,000,000,000—simply for owning things. The poorest people on Earth struggle to survive on less than $500 per year—often working constantly throughout their waking hours. Even if we believe that billionaires work harder (obviously false) or contribute more to society (certainly debatable) than other people, do we really believe that some people deserve to make 20 million times as much as others? It's one thing to think that being a successful entrepreneur should make you rich. It's another to believe that it should make you so rich you could buy a house for every homeless person in America.
Automation is already making this inequality worse, and there is reason to think it will continue to do so. In our current system, when the owner of a corporation automates production, he then gets to claim all the output from the robots, where previously he had to pay wages to the workers—and that's why he does the automation, because it makes him more profit. Even if overall productivity increases, the fruits of that new production always get concentrated at the top. Unless we can find a way to change that system, we're going to need to redistribute some of that wealth.
But if we have to call it something else, so be it. Let's all be shareholders in America.
Green New Deal Part 4: Guaranteeing employment and housing is very hard—but we should still try (public policy)
2019-04-28 2019-04-21 pnrj ethics, public policy	basic income, homeless, housing, job guarantee, poverty, unemployment
Apr 28 JDN 2458602
In previous posts I have talked about the "easy parts" of the Green New Deal (infrastructure, healthcare and education), as well as one of the "hard parts" (net-zero carbon emissions). But today it's time for the "very hard parts": guaranteed employment and housing.
"Guaranteeing a job with a family-sustaining wage, adequate family and medical leave, paid vacations, and retirement security to all people of the United States."
"Providing all people of the United States with – […] (ii) affordable, safe, and adequate housing; (iii) economic security; […].
Let me start by giving you a sense of how difficult this is: No country on Earth has ever successfully guaranteed employment and housing. Even Scandinavia's extensive social safety nets and active labor market programs are not sufficient to eliminate homelessness or unemployment (though they do dramatically reduce them).
The Soviet Union came close to guaranteed employment, but only as part of a labor system that was extremely inefficient and unproductive. Effectively, they guaranteed everyone a job by not even firing people who didn't actually do the jobs they were given. This is clearly not a sustainable solution.
There are serious proposals on the table for a job guarantee program, but they are extremely ambitious.
The Center on Budget and Policy Priorities has a proposal that would add 9.7 million people to the federal workforce and cost over $500 billion per year to operate. For comparison, the current non-postal federal workforce is only 2.1 million. The postal service has about another 600,000. So we are talking about quintupling the federal workforce, at a cost comparable to the entire (bloated) military budget. That's a huge number of people and a lot of money.
The basic idea of such a program is that we can (hopefully) find various forms of public service that need to be done, and pay people to do that public service at a certain minimum level of pay and benefits. These jobs would be available to anyone who wanted them, and any time you lost a private-sector job you could always take the guaranteed job. This would effectively create a floor on wages and benefits; any job that offered a worse deal than the government job would be competed out of existence.
I've written before about why I'm skeptical of such programs. If there is all this work that needs done, why aren't we already doing it? If people have the skills they need to do this work, why is no one currently employing them?
Maybe there is a way to solve these problems. Maybe I'm underestimating the public goods that could be produced by people with low levels of skill. But at the very least we need to face up to the fact that it is a problem. We need to actually find work that it makes sense to guarantee—we can't just wave our hands and say that "obviously" there is plenty of valuable work to be done that will happen to line up exactly with the skills of the people who are currently unemployed.
And then we need to think about the fact that we can't really guarantee it, not the way the Soviet Union did. We do need to be able to fire people. We need to be able to fire them for not showing up to work, for being drunk at work, for sexually harassing co-workers, or simply for being incompetent. We need to be have some sort of policy in place for what happens to people who get fired: How long before they can get another guaranteed job? And being fired should hurt: It's supposed to be an incentive to do your job correctly. We don't need to punish laziness or incompetence with homelessness—but we do need to punish it with something.
Ultimately what I would like to see is not guaranteed jobs but guaranteed income: A basic income that everyone gets, no questions asked. And then I would hope that our norms about work would change, and people would stop defining themselves by their paid employment and start defining themselves by other things, like creating art, supporting their family, or contributing to their community.
What about guaranteed housing? On that front I am more optimistic.
Housing is quite expensive, particularly in major cities. But homelessness is also very expensive from a societal perspective. In the long run, free housing might actually pay for itself.
One of the most successful programs at reducing homelessness is called Housing First. Rather than going through the usual machinations of shelters and transitional housing, the program just takes people off the streets and gives them homes. Like a basic income, it sounds ludicrously simple; it's the sort of thing a five-year-old would suggest. Surely it can't be that easy?
Well, the results speak for themselves. Implementation of Housing First programs in several major US cities has resulted in reductions in homeless of over 30% and reductions in the social cost of homelessness of over 50%.
The current population of about 80,000 chronically homeless Americans each cost taxpayers about $40,000 per year in social costs, via emergency room visits, shelter maintenance, crime, court costs, and so on. This is about $3 billion per year. For that same amount of money—or potentially even less—we could have put all those people into homes.
There is an additional population of about 500,000 transient homeless—people who are homeless for a short period after an adverse life event (such as losing a job, having a divorce, or getting their mortgage foreclosed) but will find housing within a few weeks or months. Their situation is not as dire, and the costs they impose on society are not as large. But standard estimates are still generally over $10,000 per person per year—which, if given to them in cash, would probably be enough to get most of these people into homes.
So this is not a question of affordability: We are already paying these costs, but doing so in a way that doesn't actually solve homelessness.
The real challenge is subtler than that: How do we make this fair and politically feasible?
When we're talking about chronically homelessness, I think we can make a pretty strong case: These people are in a really bad way and they need our help. Since we're already spending all this money anyway, we may as well spend it in a way that would actually help them.
But transient homelessness gets a bit more complicated. Many people who are transiently homeless are not all that poor. They may be college students, or recent divorcees, or failed entrepreneurs, or people who could afford a home but not the expensive home they actually tried to buy. Once they get back on their feet, they will probably go on to maintain a middle-class standard of living. So it really does seem unfair to just hand these people free homes that other people would not get.
And making housing in general completely free is simply a pipe dream. No country has ever even gotten close to that. Housing is such a huge part of a country's expenditures that even a country like Denmark where the government is half the economy still can't afford to put everyone in public housing.
I think what I would do instead is provide guaranteed subsidized loans—much as we do for student loans. These loans could be used to pay rent, to pay a mortgage, or even to make a down payment. They would be available to any adult US citizen, regardless of credit history, in relatively large amounts (the average down payment in the US is about $14,000, but as high as $50,000 is not unusual), at very low interest rates (I'd say aim for 0% real interest, so target the nominal interest rate to inflation) and very generous repayment terms (like student loans, you would never be required to pay more than a certain percentage of your adjusted gross income on the loan). If someone did try to avoid paying, their wages could be garnished or their taxes could be increased—this would make the default rates very low.
This policy would allow people who are temporarily homeless to get back into a home immediately, rather than having to wait until they can get more income—which can become a paradox as most employers will require a permanent address. But it wouldn't be a free home; this policy would cost taxpayers next to nothing. The only costs would come from subsidizing interest rates and bearing defaults, which wouldn't be more than about 5% of the outstanding balance—even if we loaned out as much as $100 billion, that still wouldn't be more than what we're currently losing in social costs of homelessness.
Had this policy been in place during the 2008 crash, people who lost their homes to foreclosure would have been able to immediately re-borrow and buy new homes. This would have blunted the financial crisis and maybe even done as much as the far more expensive stimulus package and quantitative easing programs.
These policies would not, unfortunately, eliminate unemployment and homelessness. Maybe that's not even possible. But they would at least greatly reduce the harm caused by unemployment and homelessness, and that alone makes them worth doing.
The best thing we can do to help them is let them in
2018-12-23 2018-12-16 pnrj core principles, current events, development economics, ethics, inequality, public policy, tribal paradigm	basic income, border, Bush, Christmas, Donald Trump, Guatemala, human rights, immigration, Jakelin Maquin, Obama, poverty
Dec 23 JDN 2458476
This is a Christmas post, but not like most of my other Christmas posts. It's not going to be an upbeat post about the effects of holidays on the economy, or the psychology of gift-giving, or the game theory that underlies the whole concept of a "holiday".
No, today is about an urgent moral crisis. This post isn't about Christmas as a weird but delightful syncretic solstice celebration. This post is about the so-called "spirit of Christmas", a spirit of compassion and generosity that our country is clearly not living up to.
At the time of writing, the story had just come out: Jakelin Maquin, a 7-year-old girl from Guatemala died in the custody of US border agents.
Even if it's true that the Border Patrol did everything they could to help her once they found out she was dying (and the reports coming out suggest that this is in fact the case), this death was still entirely preventable.
The first question we should ask is very basic: Why are there little girls in custody of border agents?
The next question is even more fundamental than that: Why are there border agents?
There are now 15,000 children being held by US Border Patrol. There should not be even one. The very concept of imprisoning children for crossing the border, under any circumstances, is a human rights violation. And yes, this is new, and it is specific to Donald Trump: Bush and Obama never separated children from their families this way. And while two-thirds of Americans oppose this policy, a majority of Republicans support it—this child's blood is on their hands too.
Yet despite the gulf between the two major parties, the majority of Americans do support the idea of restricting immigration in general. And what I want to know is: Why? What gives us that right?
Let's be absolutely clear about what "restricting immigration" means. It means that when someone decides they want to come to our country, either to escape oppression, work toward a better life, or simply to live with their family who came here before, men with guns come and lock them up.
We don't politely ask them to leave. We don't even fine them or tax them for entering. We lock them in detention camps, or force them to return to the country they came from which may be ruled by a dictator or a drug cartel.
Honestly, even the level of border security US citizens are subjected to is appalling: We've somehow come to think of it as normal that whenever you get on an airplane, you are first run through a body scanner, while all your belongings are inspected and scanned, and if you are found carrying any contraband—or if you even say the wrong thing—you can be summarily detained. This is literally Orwellian. "Papers, please" is the refrain of a tyrannical regime, not a liberal democracy.
If we truly believe in the spirit of compassion and generosity, we must let these people in. We don't even have to do anything; we just need to stop violently resisting them. Stop pointing guns at them, stop locking them away. How is "Stop pointing guns at children" controversial?
I could write an entire post about the benefits for Americans of more open immigration. But honestly, we shouldn't even care. It doesn't matter whether immigration creates jobs, or destroys jobs, or decreases crime, or increases crime. We should not be locking up children in camps.
If we really believe in the spirit of compassion and generosity, the only thing we should care about is whether immigration is good for the immigrants. And it obviously is, or they wouldn't be willing to go to such lengths to accomplish it. But I don't think most people realize just how large the benefits of immigration are.
I'm going to focus on Guatemala, because that's where Jakelin Maqin was from.
Guatemala's life expectancy at birth is 73 years. The life expectancy for recent Hispanic immigrants to the US is 82 years. Crossing that border can give you nine years of life.
And what about income? GDP per capita PPP in the US is almost $60,000 per year. In Guatemala? Just over $8,000. Of course, that's not accounting for the fact that Guatemalans are less educated; but even the exact same worker emigrating from there to here can greatly increase their income. The minimum wage in Guatemala is 90 GTQ per day, which is about $11.64. For a typical 8-hour workday, the US minimum wage of $7.25 per hour comes to $58 per day. That same exact worker can quintuple their income just by getting a job on the other side of the border.
Almost 60 percent of Guatemalans live in poverty. Over 20% live below the UN extreme poverty line. A full 11% of Guatemala's GDP is remittances: Money that immigrants pay to help their families back home. A further 7% is exports to the US. This means that almost a fifth of Guatemala's economy is dependent on the United States.
For comparison, less than 0.5% of Americans live in extreme poverty. (The UN recently claimed almost 6%; the Trump administration has claimed only 0.1% which is even more dubious. Both methodologies are deeply flawed; in particular, the UN report looks at income, not consumption—and consumption is what matters.) The overall poverty rate in the US is about 12%.
These figures are still appallingly high for a country as rich as the US; our extreme poverty rate should be strictly zero, a policy decision which could be implemented immediately and permanently in the form of a basic income of $700 per person per year, at a total expenditure of only $224 billion per year—about a third of the military budget. The net cost would in fact be far smaller than that, because we'd immediately turn around and spend that money. In fact, had this been done at the trough of the Great Recession, it would almost certainly have saved the government money.
Making our overall poverty rate strictly zero would be more challenging, but not obviously infeasible; since the poverty line is about $12,000 per person per year, it would take a basic income of that much to eliminate poverty, which would cost about $3.8 trillion per year. This is a huge expenditure, comparable as a proportion of GDP to the First World War (though still less than the Second). On the other hand, it would end poverty in America immediately and forever.
But even as things currently stand, the contrast between Guatemala and the US could hardly be starker: Immigrants are moving from a country with 60% poverty and 20% extreme poverty to one with 12% poverty and 0.5% extreme poverty.
Guatemala is a particularly extreme example; things are not as bad in Mexico or Cuba, for example. But the general pattern is a very consistent one: Immigrants come to the United States because things are very bad where they come from and their chances of living a better life here are much higher.
The best way to help these people, at Christmas and all year round, literally couldn't be easier:
Let them in.
Is a job guarantee better than a basic income?
2018-08-05 2018-08-12 pnrj ethics, futurism, inequality, macroeconomics, market failure, public policy	basic income, income effect, inequality, inflation, job guarantee, John Danaher, meaning, Milton Friedman, poverty, public goods, retirement, unemployment, William Aberhart
Aug 5 JDN 2458336
In previous posts I've written about both the possibilities and challenges involved in creating a universal basic income. Today I'd like to address what I consider the most serious counter-argument against a basic income, an alternative proposal known as a job guarantee.
Whereas a basic income is literally just giving everyone free money, a job guarantee entails offering everyone who wants to work a job paid by the government. They're not necessarily contradictory, but I've noticed a clear pattern: While basic income proponents are generally open to the idea of a job guarantee on the side, job guarantee proponents are often vociferously opposed to a basic income—even calling it "sinister". I think the reason for this is that we see jobs as irrelevant, so we're okay with throwing them in if you feel you must, while they see jobs as essential, so they meet any attempt to remove them with overwhelming resistance.
Where a basic income is extremely simple and could be implemented by a single act of the legislature, a job guarantee is considerably more complicated. The usual proposal for a job guarantee involves federal funding but local implementation, which is how most of our social welfare system is implemented—and why social welfare programs are so much better in liberal states like California than in conservative states like Mississippi, because California actually believes in what it's implementing and Mississippi doesn't. Anyone who wants a job guarantee needs to take that aspect seriously: In the places where poverty is worst, you're offering control over the policy to the very governments that made poverty worst—and whether it is by malice or incompetence, what makes you think that won't continue?
Another argument that I think job guarantee proponents don't take seriously enough is the concern about "make-work". They insist that a job guarantee is not "make-work", but real work that's just somehow not being done. They seem to think that there are a huge number of jobs that we could just create at the snap of a finger, which would be both necessary and useful on the one hand, and a perfect match for the existing skills of the unemployed population on the other hand. If that were the case, we would already be creating those jobs. It doesn't even require a particularly strong faith in capitalism to understand this: If there is a profit to be made at hiring people to do something, there is probably already a business hiring people to do that. I don't think of myself as someone with an overriding faith in capitalism, but a lot of the socialist arguments for job guarantees make me feel that way by comparison: They seem to think that there's this huge untapped reserve of necessary work that the market is somehow failing to provide, and I'm just not seeing it.
There are public goods projects which aren't profitable but would still be socially beneficial, like building rail lines and cleaning up rivers. But proponents of a job guarantee don't seem to understand that these are almost all highly specialized jobs at our level of technology. We don't need a bunch of people with shovels. We need engineers and welders and ecologists.
If you propose using people with shovels where engineers would be more efficient, that is make-work, whether you admit it or not. If you're making people work in a less-efficient way in order to create jobs, then the jobs you are creating are fake jobs that aren't worth creating. The line is often credited to Milton Friedman, but actually said first by William Aberhart in 1935:
Taking up the policy of a public works program as a solution for unemployment, it was criticized as a plan that took no account of the part that machinery played in modern construction, with a road-making machine instanced as an example. He saw, said Mr. Aberhart, work in progress at an airport and was told that the men were given picks and shovels in order to lengthen the work, to which he replied why not give them spoons and forks instead of picks and shovels if the object was to lengthen out the task.
I'm all for spending more on building rail lines and cleaning up rivers, but that's not an anti-poverty program. The people who need the most help are precisely the ones who are least qualified to work on these projects: Children, old people, people with severe disabilities. Job guarantee proponents either don't understand this fact or intentionally ignore it. If you aren't finding jobs for 7-year-olds with autism and 70-year-olds with Parkinson's disease, this program will not end poverty. And if you are, I find it really hard to believe that these are real, productive jobs and not useless "make-work". A basic income would let the 7-year-olds stay in school and the 70-year-olds live in retirement homes—and keep them both out of poverty.
Another really baffling argument for a job guarantee over basic income is that a basic income would act as a wage subsidy, encouraging employers to reduce wages. That's not how a basic income works. Not at all. A basic income would provide a pure income effect, necessarily increasing wage demands. People would not be as desperate for work, so they'd be more comfortable turning down unreasonable wage offers. A basic income would also incentivize some people to leave the labor force by retiring or going back to school; the reduction in labor supply would further increase wages. The Earned Income Tax Credit is in many respects similar to a wage subsidy. While superficially it might seem similar, a basic income would have the exact opposite effect.
One reasonable argument against a basic income is the possibility that it could cause inflation. This is something that can't really be tested with small-scale experiments, so we really won't know for sure until we try it. But there is reason to think that the inflation would be small, as the people removed from the labor force will largely be the ones who are least-productive to begin with. There is a growing body of empirical evidence suggesting that inflationary effects of a basic income would be small. For example, data on cash transfer programs in Mexico show only a small inflationary effect despite large reductions in poverty. The whole reason a basic income looks attractive is that automation technology is now so advanced is that we really don't need everyone to be working anymore. Productivity is so high now that a policy of universal 40-hour work weeks just doesn't make sense in the 21st century.
Probably the best argument for a job guarantee over a basic income concerns cost. A basic income is very expensive, there's no doubt about that; and a job guarantee could be much cheaper. That is something I take very seriously: Saving $1.5 trillion a year is absolutely a good reason. Indeed, I don't really object to this argument; the calculations are correct. I merely think that a basic income is enough better that its higher cost is justifiable. A job guarantee can eliminate unemployment, but not poverty.
But the argument for a job guarantee that most people seem to be find most compelling concerns meaning. The philosopher John Danaher expressed this one most cogently. Unemployment is an extremely painful experience for most people, far beyond what could be explained simply by their financial circumstances. Most people who win large sums of money in the lottery cut back their hours, but continue working—so work itself seems to have some value. What seems to happen is that when people lose the chance to work, they feel that they have lost a vital source of meaning in their lives.
Yet this raises two more questions:
First, would a job guarantee actually solve that problem?
Second, are there ways we could solve it under a basic income?
With regard to the first question, I want to re-emphasize the fact that a large proportion of these guaranteed jobs necessarily cannot be genuinely efficient production. If efficient production would have created these jobs, we would most likely already have created them. Our society does not suffer from an enormous quantity of necessary work that could be done with the skills already possessed by the unemployed population, which is somehow not getting done—indeed, it is essentially impossible for a capitalist economy with a highly-liquid financial system to suffer such a malady. If the work is so valuable, someone will probably take out a loan to hire someone to do it. If that's not happening, either the unemployed people don't have the necessary skills, or the work really can't be all that productive. There are some public goods projects that would be beneficial but aren't being done, but that's a different problem, and the match between the public goods projects that need done and the skills of the unemployed population is extremely poor. Displaced coal miners aren't useful for maintaining automated photovoltaic factories. Truckers who get replaced by robot trucks won't be much good for building maglev rails.
With this in mind, it's not clear to me that people would really be able to find much meaning in a guaranteed job. You can't be fired, so the fact that you have the job doesn't mean anyone is impressed by the quality of your work. Your work wasn't actually necessary, or the private sector would already have hired someone to do it. The government went out of its way to find a job that precisely matched what you happen to be good at, regardless of whether that job was actually accomplishing anything to benefit society. How is that any better than not working at all? You are spending hours of drudgery to accomplish… what, exactly? If our goal was simply to occupy people's time, we could do that with Netflix or video games.
With regard to the second question, note that a basic income is quite different from other social welfare programs in that everyone gets it. So it's very difficult to attach a social stigma to receiving basic income payments—it would require attaching the stigma to literally everyone. Much of the lost meaning, I suspect, from being unemployed comes from the social stigma attached.
Now, it's still possible to attach social stigma to people who only get the basic income—there isn't much we can do to prevent that. But in the worst-case scenario, this means unemployed people get the same stigma as before but more money. Moreover, it's much harder to detect a basic income recipient than, say, someone who eats at a soup kitchen or buys food using EBT; since it goes in your checking account, all everyone else sees is you spending money from your debit card, just like everyone else. People who know you personally would probably know; but people who know you personally are also less likely to destroy your well-being by imposing a high stigma. Maybe they'll pressure you to get off the couch and get a job, but they'll do so because they genuinely want to help you, not because they think you are "one of those lazy freeloaders".
And, as BIEN points out, think about retired people: They don't seem to be so unhappy. Being on basic income is more like being retired than like being unemployed. It's something everyone gets, not some special handout for "those people". It's permanent, so it's not like you need to scramble to get a job before it goes away. You just get money automatically, so you don't have to navigate a complex bureaucracy to get it. Controlling for income, retired people don't seem to be any less happy than working people—so maybe work doesn't actually provide all that much meaning after all.
I guess I can't rule out the possibility that people need jobs to find meaning in their lives, but I both hope and believe that this is not generally the case. You can find meaning in your family, your friends, your community, your hobbies. You can still work even if you don't need to work for a living: Build a shed, mow your lawn, tune up your car, upgrade your computer, write a story, learn a musical instrument, or try your hand at painting.
If you need to be taking orders from a corporation five days a week in order to have meaning in your life, you have bigger problems. I think what has happened to many people is that employment has so drained their lives of the real sources of meaning that they cling to it as the only thing they have left. But in fact work is not the cure to your ennui—it is the cause of it. Finally being free of the endless toil that has plagued humanity since the dawn of our species will give you the chance to reconnect with what really matters in life. Show your children that you love them in person, to their faces, instead of in this painfully indirect way of "providing for" them by going to work every day. Find ways to apply your skills in volunteering or creating works of art, instead of in endless drudgery for the profit of some faceless corporation.
Tax plan possibilities
2017-03-26 2017-03-26 pnrj core principles, current events, public policy	Barack Obama, basic income, budget, deduction, Donald Trump, healthcare, income, income tax, Laffer Curve, logtax, Medicaid, Medicare, metarate, military budget, Ronald Reagan, single-payer, tax code, tax reform, taxation, taxes
Mar 26, JDN 2457839
Recently President Trump (that phrase may never quite feel right) began presenting his new tax plan. To be honest, it's not as ridiculous as I had imagined it might be. I mean, it's still not very good, but it's probably better than Reagan's tax plan his last year in office, and it's not nearly as absurd as the half-baked plan Trump originally proposed during the campaign.
But it got me thinking about the incredible untapped potential of our tax system—the things we could achieve as a nation, if we were willing to really commit to them and raise taxes accordingly.
A few years back I proposed a progressive tax system based upon logarithmic utility. I now have a catchy name for that tax proposal; I call it the logtax. It depends on two parameters—a poverty level, at which the tax rate goes to zero; and what I like to call a metarate—the fundamental rate that sets all the actual tax rates by the formula.
For the poverty level, I suggest we use the highest 2-household poverty level set by the Department of Health and Human Services: Because of Alaska's high prices, that's the Alaska poverty level, and the resulting figure is $20,290—let's round to $20,000.
I would actually prefer to calculate taxes on an individual basis—I see no reason to incentivize particular household arrangements—but as current taxes are calculated on a household basis, I'm going to use that for now.
The metarate can be varied, and in the plans below I will compare different options for the metarate.
I will compare six different tax plans:
Our existing tax plan, set under the Obama administration
Trump's proposed tax plan
A flat rate of 30% with a basic income of $12,000, replacing welfare programs and Medicaid
A logtax with a metarate of 20%, all spending intact
A logtax with a metarate of 25% and a basic income of $12,000, replacing welfare programs and Medicaid
A logtax with a metarate of 35% and a basic income of $15,000, cutting military spending by 50% and expanding Medicare to the entire population while eliminating Medicare payroll taxes
To do a proper comparison, I need estimates of the income distribution in the United States, in order to properly estimate the revenue from each type of tax. For that I used US Census data for most of the income data, supplementing with the World Top Incomes database for the very highest income brackets. The household data is broken up into brackets of $5,000 and only goes up to $250,000, so it's a rough approximation to use the average household income for each bracket, but it's all I've got.
The current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These are actually marginal rates, not average rates, which makes the calculation a lot more complicated. I did it properly though; for example, when you start paying the marginal rate of 28%, your average rate is really only 20.4%.
Worst of all, I used static scoring—that is, I ignored the Laffer Effect by which increasing taxes changes incentives and can change pre-tax incomes. To really do this analysis properly, one should use dynamic scoring, taking these effects into account—but proper dynamic scoring is an enormous undertaking, and this is a blog post, not my dissertation.
Still, I was able to get pretty close to the true figures. The actual federal budget shows total revenue net of payroll taxes to be $2.397 trillion, whereas I estimated $2.326 trillion; the true deficit is $608 billion and I estimated $682 billion.
Under Trump's tax plan, almost all rates are cut. He also plans to remove some deductions, but all reports I could find on the plan were vague as to which ones, and with data this coarse it's very hard to get any good figures on deduction amounts anyway. I also want to give him credit where it's due: It was a lot easier to calculate the tax rates under Trump's plan (but still harder than under mine…). But in general what I found was the following:
Almost everyone pays less income tax under Trump's plan, by generally about 4-5% of their income. The poor benefit less or are slightly harmed; the rich benefit a bit more.
For example, a household in poverty making $12,300 would pay $1,384 currently, but $1,478 under Trump's plan, losing $94 or 0.8% of their income. An average household making $52,000 would pay $8,768 currently but only $6,238 under Trump's plan, saving $2,530 or about 4.8% of their income. A household making $152,000 would pay $35,580 currently but only $28,235 under Trump's plan, saving $7,345 or again about 4.8%. A top 1% household making $781,000 would pay $265,625 currently, but only $230,158 under Trump's plan, saving $35,467 or about 4.5%. A top 0.1% household making $2,037,000 would pay $762,656 currently, but only $644,350 under Trump's plan, saving $118,306 or 5.8% of their income. A top 0.01% household making $9,936,000 would pay $3,890,736 currently, but only $3,251,083 under Trump's plan, saving $639,653 or 6.4% of their income.
Because taxes are cut across the board, Trump's plan would raise less revenue. My static scoring will exaggerate this effect, but only moderately; my estimate says we would lose over $470 billion in annual revenue, while the true figure might be $300 billion. In any case, Trump will definitely increase the deficit substantially unless he finds a way to cut an awful lot of spending elsewhere—and his pet $54 billion increase to the military isn't helping in that regard. My estimate of the new deficit under Trump's plan is $1.155 trillion—definitely not the sort of deficit you should be running during a peacetime economic expansion.
Let's see what we might have done instead.
If we value simplicity and ease of calculation, it's hard to beat a flat tax plus basic income. With a flat tax of 30% and a basic income of $12,000 per household, the poor do much better off because of the basic income, while the rich do a little better because of the flat tax, and the middle class feels about the same because the two effects largely cancel. Calculating your tax liability now couldn't be easier; multiply your income by 3, remove a zero—that's what you owe in taxes. And how much do you get in basic income? The same as everyone else, $12,000.
Using the same comparison households: The poor household making $12,300 would now receive $8,305—increasing their income by $9,689 or 78.8% relative to the current system. The middle-class household making $52,000 would pay $3,596, saving $5,172 or 10% of their income. The upper-middle-class household making $152,000 would now pay $33,582, saving only $1998 or 1.3% of their income. The top 1% household making $782,000 would pay $234,461, saving $31,164 or 4.0%. The top 0.1% household making $2,037,000 would pay $611,000, saving $151,656 or 7.4%. Finally, the top 0.01% household making $9,936,000 would pay $2,980,757, saving $910,000 or 9.1%.
Thus, like Trump's plan, the tax cut almost across the board results in less revenue. However, because of the basic income, we can now justify cutting a lot of spending on social welfare programs. I estimated we could reasonably save about $630 billion by cutting Medicaid and other social welfare programs, while still not making poor people worse off because of the basic income. The resulting estimated deficit comes in at $1.085 trillion, which is still too large—but less than what Trump is proposing.
If I raise the flat rate to 40%—just as easy to calculate—I can bring that deficit down, even if I raise the basic income to $15,000 to compensate. The poverty household now receives $10,073, and the other representative households pay $5,974; $45,776; $297,615; $799,666; and $3,959,343 respectively. This means that the poor are again much better off, the middle class are about the same, and the rich are now substantially worse off. But what's our deficit now? $180 billion—that's about 1% of GDP, the sort of thing you can maintain indefinitely with a strong currency.
Can we do better than this? I think we can, with my logtax.
I confess that the logtax is not quite as easy to calculate as the flat tax. It does require taking exponents, and you can't do it in your head. But it's actually still easier than the current system, because there are no brackets to keep track of, no discontinuous shifts in the marginal rate. It is continuously progressive for all incomes, and the same formula can be used for all incomes from zero to infinity.
The simplest plan just replaces the income tax with a logtax of 20%. The poor household now receives $1,254, just from the automatic calculation of the tax—no basic income was added. The middle-class household pays $9,041, slightly more than what they are currently paying. Above that, people start paying more for sure: $50,655; $406,076; $1,228,795; and $7,065,274 respectively.
This system is obviously more progressive, but does it raise sufficient revenue? Why, as a matter of fact it removes the deficit entirely. The model estimates that the budget would now be at surplus of $110 billion. This is probably too optimistic; under dynamic scoring the distortions are probably going to cut the revenue a little. But it would almost certainly reduce the deficit, and very likely eliminate it altogether—without any changes in spending.
The next logtax plan adds a basic income of $12,000. To cover this, I raised the metarate to 25%. Now the poor household is receiving $11,413, the middle-class household is paying a mere $1,115, and the other households are paying $50,144; $458,140; $1,384,475; and $7,819,932 respectively. That top 0.01% household isn't going to be happy, as they are now paying 78% of their income where in our current system they would pay only 39%. But their after-tax income is still over $2 million.
How does the budget look now? As with the flat tax plan, we can save about $630 billion by cutting redundant social welfare programs. So we are once again looking at a surplus, this time of about $63 billion. Again, the dynamic scoring might show some deficit, but definitely not a large one.
Finally, what if I raise the basic income to $15,000 and raise the metarate to 35%? The poor household now receives $14,186, while the median household pays $2,383. The richer households of course foot the bill, paying $64,180; $551,031; $1,618,703; and $8,790,124 respectively. Oh no, the top 0.01% household will have to make do with only $1.2 million; how will they survive!?
This raises enough revenue that it allows me to do some even more exciting things. With a $15,000 basic income, I can eliminate social welfare programs for sure. But then I can also cut military spending, say in half—still leaving us the largest military in the world. I can move funds around to give Medicare to every single American, an additional cost of about twice what we currently pay for Medicare. Then Medicaid doesn't just get cut; it can be eliminated entirely, folded into Medicare. Assuming that the net effect on total spending is zero, the resulting deficit is estimated at only $168 billion, well within the range of what can be sustained indefinitely.
And really, that's only the start. Once you consider all the savings on healthcare spending—an average of $4000 per person per year, if switching to single-payer brings us down to the average of other highly-developed countries. This is more than what the majority of the population would be paying in taxes under this plan—meaning that once you include the healthcare benefits, the majority of Americans would net receive money from the government. Compared to our current system, everyone making under about $80,000 would be better off. That is what we could be doing right now—free healthcare for everyone, a balanced budget (or close enough), and the majority of Americans receiving more from the government than they pay in taxes.
These results are summarized in the table below. (I also added several more rows of representative households—though still not all the brackets I used!) I've color-coded who would be paying less in tax in green and who would be more in tax in red under each plan, compared to our current system. This color-coding is overly generous to Trump's plan and the 30% flat tax plan, because it doesn't account for the increased government deficit (though I did color-code those as well, again relative to the current system). And yet, over 50% of households make less than $51,986, putting the poorest half of Americans in the green zone for every plan except Trump's. For the last plan, I also color-coded those between $52,000 and $82,000 who would pay additional taxes, but less than they save on healthcare, thus net saving money in blue. Including those folks, we're benefiting over 69% of Americans.
pre-tax income Current tax system Trump's tax plan Flat 30% tax with $12k basic income Flat 40% tax with $15k basic income Logtax 20% Logtax 25% with $12k basic income Logtax 35% with $15k basic income, single-payer healthcare
$1,080 $108 $130 -$11,676 -$14,568 -$856 -$12,121 -$15,173
$12,317 $1,384 $1,478 -$8,305 -$10,073 -$1,254 -$11,413 -$14,186
$22,162 $2,861 $2,659 -$5,351 -$6,135 $450 -$9,224 -$11,213
$32,058 $4,345 $3,847 -$2,383 -$2,177 $2,887 -$6,256 -$7,258
$51,986 $8,768 $6,238 $3,596 $5,794 $9,041 $1,115 $2,383
$77,023 $15,027 $9,506 $11,107 $15,809 $18,206 $11,995 $16,350
$101,921 $21,575 $15,730 $18,576 $27,875 $30,571 $23,947 $31,482
$781,538 $265,625 $230,158 $222,461 $297,615 $406,076 $458,140 $551,031
$2,036,666 $762,656 $644,350 $599,000 $799,666 $1,228,795 $1,384,475 $1,618,703
$9,935,858 $3,890,736 $3,251,083 $2,968,757 $3,959,343 $7,065,274 $7,819,932 $8,790,124
Change in federal spending $0 $0 -$630 billion -$630 billion $0 -$630 billion $0
Estimated federal surplus -$682 billion -$1,155 billion -$822 billion -$180 billion $110 billion $63 billion -$168 billion
Toward an economics of social norms
2016-09-17 2016-09-10 pnrj critique of neoclassical economics, heuristics and biases	basic income, CEO pay, Chick-Fil-A, discrimination, DSGE, George Monblot, heuristic, job guarantee, jobs, Martin Shkreli, Rawls, redistribution, repugnance, repugnant market, sin good, social behavior, social norms, tribal paradigm, usury, wages
Sep 17, JDN 2457649
It is typical in economics to assume that prices are set by perfect competition in markets with perfect information. This is obviously ridiculous, so many economists do go further and start looking into possible distortions of the market, such as externalities and monopolies. But almost always the assumption is still that human beings are neoclassical rational agents, what I call "infinite identical psychopaths", selfish profit-maximizers with endless intelligence and zero empathy.
What happens when we recognize that human beings are not like this, but in fact are empathetic, social creatures, who care about one another and work toward the interests of (what they perceive to be) their tribe? How are prices really set? What actually decides what is made and sold? What does economics become once you understand sociology? (The good news is that experiments are now being done to find out.)
Presumably some degree of market competition is involved, and no small amount of externalities and monopolies. But one of the very strongest forces involved in setting prices in the real world is almost completely ignored, and that is social norms.
Social norms are tremendously powerful. They will drive us to bear torture, fight and die on battlefields, even detonate ourselves as suicide bombs. When we talk about "religion" or "ideology" motivating people to do things, really what we are talking about is social norms. While some weaker norms can be overridden, no amount of economic incentive can ever override a social norm at its full power. Moreover, most of our behavior in daily life is driven by social norms: How to dress, what to eat, where to live. Even the fundamental structure of our lives is written by social norms: Go to school, get a job, get married, raise a family.
Even academic economists, who imagine themselves one part purveyor of ultimate wisdom and one part perfectly rational agent, are clearly strongly driven by social norms—what problems are "interesting", which researchers are "renowned", what approaches are "sensible", what statistical methods are "appropriate". If economists were perfectly rational, dynamic stochastic general equilibrium models would be in the dustbin of history (because, like string theory, they have yet to lead to a single useful empirical prediction), research journals would not be filled with endless streams of irrelevant but impressive equations (I recently read one that basically spent half a page of calculus re-deriving the concept of GDP—and computer-generated gibberish has been published, because its math looked so impressive), and instead of frequentist p-values (and often misinterpreted at that), all the statistics would be written in the form of Bayesian logodds.
Indeed, in light of all this, I often like to say that to a first approximation, all human behavior is social norms.
How does this affect buying and selling? Well, first of all, there are some things we refuse to buy and sell, or at least that most of us refuse to buy and sell, and who use social pressure, public humilitation, or even the force of law to prevent. You're not supposed to sell children. You're not supposed to sell your vote. You're not even supposed to sell sexual favors (though every society has always had a large segment of people who do, and more recently people are becoming more open to the idea of at least decriminalizing it). If we were neoclassical rational agents, we would have no such qualms; if we want something and someone is willing to sell it to us, we'll buy it. But as actual human beings with emotions and social norms, we recognize that there is something fundamentally different about selling your vote as opposed to selling a shirt or a television. It's not always immediately obvious where to draw the line, which is why sex work can be such a complicated issue (You can't get paid to have sex… unless someone is filming it?). Different societies may do it differently: Part of the challenge of fighting corruption in Third World countries is that much of what we call corruption—and which actually is harmful to long-run economic development—isn't perceived as "corruption" by the people involved in it, just as social custom ("Of course I'd hire my cousin! What kind of cousin would I be if I didn't?"). Yet despite all that, almost everyone agrees that there is a line to be drawn. So there are whole markets that theoretically could exist, but don't, or only exist as tiny black markets most people never participate in, because we consider selling those things morally wrong. Recently a whole subfield of cognitive economics has emerged studying these repugnant markets.
Even if a transaction is not considered so repugnant as to be unacceptable, there are also other classes of goods that are in some sense unsavory; something you really shouldn't buy, but you're not a monster for doing so. These are often called sin goods, and they have always included drugs, alcohol, and gambling—and I do mean always, as every human civilization has had these things—they include prostitution where it is legal, and as social norms change they are now beginning to include oil and coal as well (which can only be good for the future of Earth's climate). Sin goods are systematically more expensive than they should be for their marginal cost, because most people are unwilling to participate in selling them. As a result, the financial returns for producing sin goods are systematically higher. Actually, this could partially explain why Wall Street banks are so profitable; when the banking system is corrupt as it is—and you're not imagining that; laundering money for terrorists—then banking becomes a sin good, and good people don't want to participate in it. Or perhaps the effect runs the other way around: Banking has been viewed as sinful for centuries (in Medieval times, usury was punished much the same way as witchcraft), and as a result only the sort of person who doesn't care about social and moral norms becomes a banker—and so the banking system becomes horrifically corrupt. Is this a reason for good people to force ourselves to become bankers? Or is there another way—perhaps credit unions?
There are other ways that social norms drive prices as well. We have a concept ofa "fair wage", which is quite distinct from the economic concept of a "market-clearing wage". When people ask whether someone's wage is fair, they don't look at supply and demand and try to determine whether there are too many or too few people offering that service. They ask themselves what the labor is worth—what value has it added—and how hard that person has worked to do it—what cost it bore. Now, these aren't totally unrelated to supply and demand (people are less likely to supply harder work, people are more likely to demand higher value), so it's conceivable that these heuristics could lead us to more or less achieve the market-clearing wage most of the time. But there are also some systematic distortions to consider.
Perhaps the most important way fairness matters in economics is necessities: Basic requirements for human life such as food, housing, and medicine. The structure of our society also makes transportation, education, and Internet access increasingly necessary for basic functioning. From the perspective of an economist, it is a bit paradoxical how angry people get when the price of something important (such as healthcare) is increased: If it's extremely valuable, shouldn't you be willing to pay more? Why does it bother you less when something like a Lamborghini or a Rolex rises in price, something that almost certainly wasn't even worth its previous price? You're going to buy the necessities anyway, right? Well, as far as most economists are concerned, that's all that matters—what gets bought and sold. But of course as a human being I do understand why people get angry about these things, and it is because they have to buy them anyway. When someone like Martin Shkreli raises the prices on basic goods, we feel exploited. There's even a way to make this economically formal: When demand is highly inelastic, we are rightly very sensitive to the possibility of a monopoly, because monopolies under inelastic demand can extract huge profits and cause similarly huge amounts of damage to the welfare of their customers. That isn't quite how most people would put it, but I think that has something to do with the ultimate reason we evolved that heuristic: It's dangerous to let someone else control your basic necessities, because that gives them enormous power to exploit you. If they control things that aren't as important to you, that doesn't matter so much, because you can always do without if you must. So a norm that keeps businesses from overcharging on necessities is very important—and probably not as strong anymore as it should be.
Another very important way that fairness and markets can be misaligned is talent: What if something is just easier for one person than another? If you achieve the same goal with half the work, should you be rewarded more for being more efficient, or less because you bore less cost? Neoclassical economics doesn't concern itself with such questions, asking only if supply and demand reached equilibrium. But we as human beings do care about such things; we want to know what wage a person deserves, not just what wage they would receive in a competitive market.
Could we be wrong to do that? Might it be better if we just let the market do its work? In some cases I think that may actually be true. Part of why CEO pay is rising so fast despite being uncorrelated with corporate profitability or even negatively correlated is that CEOs have convinced us (or convinced their boards of directors) that this is fair, that they deserve more stock options. They even convince them that their pay is based on performance, by using highly distorted measures of performance. If boards thought more like economic rational agents, when a CEO asked for more pay they'd ask: "What other company gave you a higher offer?" and if the CEO didn't have an answer, they'd laugh and refuse the raise. Because in purely economic terms, that is all a salary does: it keeps you from quitting to work somewhere else. The competitive mechanism of the market is supposed to then ensure that your wage aligns with your marginal cost and marginal productivity purely due to that.
On the other hand, there are many groups of people who simply aren't doing very well in the market: Women, racial minorities, people with disabilities. There are a lot of reasons for this, some of which might go away if markets were made more competitive—the classic argument that competitive markets reward companies that don't discriminate—but many clearly wouldn't. Indeed, that argument was never as strong as it at first appears; in a society where social norms are strongly in favor of bigotry, it can be completely economically rational to participate in bigotry to avoid being penalized. When Chick-Fil-A was revealed to have donated to anti-LGBT political groups, many people tried to boycott—but their sales actually increased from the publicity. Honestly it's a bit baffling that they promised not to donate to such causes anymore; it was apparently a profitable business decision to be revealed as supporters of bigotry. And even when discrimination does hurt economic performance, companies are run by human beings, and they are still quite capable of discriminating regardless. Indeed, the best evidence we have that discrimination is inefficient comes from… businesses that persist in discriminating despite the fact that it is inefficient.
But okay, suppose we actually did manage to make everyone compensated according to their marginal productivity. (Or rather, what Rawls derided: "From each according to his marginal productivity, to each according to his threat advantage.") The market would then clear and be highly efficient. Would that actually be a good thing? I'm not so sure.
A lot of people are highly unproductive through no fault of their own—particularly children and people with disabilities. Much of this is not discrimination; it's just that they aren't as good at providing services. Should we simply leave them to fend for themselves? Then there's the key point about what marginal means in this case—it means "given what everyone else is doing". But that means that you can be made obsolete by someone else's actions, and in this era of rapid technological advancement, jobs become obsolete faster than ever. Unlike a lot of people, I recognize that it makes no sense to keep people working at jobs that can be automated—the machines are better. But still, what do we do with the people whose jobs have been eliminated? Do we treat them as worthless? When automated buses become affordable—and they will; I give it 20 years—do we throw the human bus drivers under them?
One way out is of course a basic income: Let the market wage be what it will, and then use the basic income to provide for what human beings deserve irrespective of their market productivity. I definitely support a basic income, of course, and this does solve the most serious problems like children and quadriplegics starving in the streets.
But as I read more of the arguments by people who favor a job guarantee instead of a basic income, I begin to understand better why they are uncomfortable with the idea: It doesn't seem fair. A basic income breaks once and for all the link between "a fair day's work" and "a fair day's wage". It runs counter to this very deep-seated intuition most people have that money is what you earn—and thereby deserve—by working, and only by working. That is an extremely powerful social norm, and breaking it will be very difficult; so it's worth asking: Should we even try to break it? Is there a way to achieve a system where markets are both efficient and fair?
I'm honestly not sure; but I do know that we could make substantial progress from where we currently stand. Most billionaire wealth is pure rent in the economic sense: It's received by corruption and market distortion, not by efficient market competition. Most poverty is due to failures of institutions, not lack of productivity of workers. As George Monblot famously wrote, "If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire." Most of the income disparity between White men and others is due to discrimination, not actual skill—and what skill differences there are are largely the result of differences in education and upbringing anyway. So if we do in fact correct these huge inefficiencies, we will also be moving toward fairness at the same time. But still that nagging thought remains: When all that is done, will there come a day where we must decide whether we would rather have an efficient economy or a just society? And if it does, will we decide the right way?
Human Economics on Patreon Appreciate what you see here? Support me on Patreon so I can continue to make it happen!
Reflections on Past and Future
Darkest Before the Dawn: Bayesian Impostor Syndrome
On compromise: The kind of politics that can be bipartisan—and the kind that can't
Tithing makes quite a lot of sense
pnrj on Will robots take our jobs? Not…
jenszorn on Will robots take our jobs? Not…
On compromise: The k… on False equivalence is not …
Tithing makes quite… on In defense of slacktivism
M Felsen on The Expanse gets the science r…
critique of neoclassical economics
science and academia
Top 10 things to know about economics
tribal paradigm
Follow Human Economics on WordPress.com
An Economic View of the Environment
Black Econ Girl
EconLife
Economists Do It With Models
Equitable Growth
Everyday Sociology
FiveThirtyEight Economics
Idiot Free Zone
MIles Kimball: Confessions of a Supply-Side Liberal
Punditburo
Quantitative Ease
Social Democracy for the 21st Century
The Dangerous Economist
The Reality-Based Community
True Economics