License to Kill

There has been a theme coalescing in what I read about how people approach rationalizing their actions.  Essentially, people keep running tallies of their “good” and “bad” deeds and try to balance the books so to speak.  I use quotes here because I don’t necessarily mean good and bad in a moral or ethical sense.  This system is used by people for far more innocuous things.  The behavioral economics term for this behavior is self-licensing or the licensing effect.

You are witnessing the licensing effect whenever you hear someone justify their racist actions by responding with a variation of “I have a black friend!” as if one example of tolerance somehow excuses an expression of intolerance.  Scientists have demonstrated this effect in a diverse array of environments.  For instance, research showed that publicly endorsing Barack Obama cause his followers to express more racially biased views.  It’s been suggested as a reason that energy use increases after one purchases energy efficient appliances.  One that I routinely see and hear (and succumb to myself) is when people reward themselves with dessert after having a salad or engaging in a strenuous day of walking.

Perhaps the most intriguing element of this research is how little one must do in order to invoke the licensing effect.  All it takes is voicing the intention to do something good (like the Obama example above) and the effect is triggered.  In one case scientists elicited self-licensing by merely having the participants imagine doing something charitable.  It’s amazing how effortlessly we appropriate evidence that we are good and wholesome to puff up our self-image.  It doesn’t take more than just imagining we are compassionate and caring!

Now the ease with which we accrue moral capital might no be so terrible if we didn’t readily spend it on misdeeds grossly out of proportion to our supposed good deeds.  That is, human beings seem very bad at this moral tallying system.  We chalk up points in the positive column with abandon for the slightest thing and then heavily discount the value of our sins.  In fact, my theory, and this shows up in many other domains of human behavior, are that human beings are more enumerators than scales.  We don’t typically store the value of our deeds as much as count the number of good deeds and the number of bad deeds and try to keep the sum above zero to maintain our fragile egos.  It would explain how CEOs embezzling money can justify their actions by giving a tiny fraction of that money to a charity.

I am also puzzled where this system originated and whether it has become worse in our modern age.  I say this because the major religions of the world do not, to my knowledge, endorse this theory of morality.  Sure, a numerical scoring that determines who gets in to heaven, ala the TV show The Good Place, is a popular conception, but I don’t recall Jesus actually proposing that you balance your sins and virtue so delicately.  Instead he continually called people to not judge (a key component of self-licensing) and always show kindness.  As a counterpoint, Catholic practices like indulgences would suggest that entry to heaven is determined by balancing your misdeeds against your donations to the church.  So maybe we can once again leave some blame at the feet of the religious institutions that spring up around the core precepts and texts.  I remain unconvinced though.

Has this gotten worse?  I think the modern segmentation of society into cloistered groups with similar views would likely make this worse.  Who is going to challenge your moral accounting if everyone you interact with thinks just like you do?  It’s OK to make that racist joke at a party, you all voted for Obama.  It doesn’t even require drawing down your moral bank account.

It might not be readily apparent, but the judginess of liberals and even conservatives on social media platforms is symptomatic of rampant self-licensing.  I say this because, as I mentioned earlier, self-licensing requires a strong, almost unassailable, confidence in your judgement.  If you doubted your ability to tally points in the appropriate column then I think you would at least have a harder time accruing and spending your moral income.  The irony of the internet liberal is that tolerance is one of the core precepts of liberalism that they seem continually unable to express and that the self-licensing allowed by their loud pronouncements of virtue on the internet likely enables all kinds of poor behavior in other settings.

In conclusion, I think one should be aware of this poor mode of thinking and avoid it at all costs.  The appropriate view is to do good always and do evil never.  You can’t go wrong with that.


Is there a solution to the decline of rural America?

I want to take a step back and recognize that there is a very real economic problem going on in broad swathes of rural and suburban America.  Manufacturing and unions died and it left these areas bereft of jobs and opportunity.  I may have previously blithely dismissed the economic hardship visited upon these areas.  It is very easy to say retrain and relocate but this is a large burden, particularly for older people.  I do think there is a nontrivial amount of entitlement among this population, that the solution to their woes must allow them to maintain their provincial lifestyles.  But as a believer in utilitarianism we cannot just ignore their preferences entirely.

Identifying a problem does not mean we have a solution.  This applies to both parties.  I know Republicans don’t have a solution or at least their proposed solutions are not going to do more good than harm.  Democratic policies are definitely more focused on a macro perspective that is more palliative than cure.  As I said before, these towns were mostly built on the backs of manufacturing.  They were company or industry towns through and through.  This is not coming back.  Any reshoring of manufacturing is unlikely to return to the Rust Belt and more likely to head to the South.  In the medium-long term, robotization is going to eliminate these jobs entirely.  So what is the new engine of economic growth for low skilled labor outside cities?  I don’t think anyone has any idea what that looks like which is why even Democrats focus on treating symptoms rather than causes.

It is important to recognize that this issue is really not fundamentally different than that facing the entire nation and at some level the entire developed world.  That is, income/wealth inequality and the hollowing out of the middle class.  Manufacturing is just the first victim of automation, but it will not be the last.  Self-driving cars are going to replace millions of workers to give a salient example.  We can expect an economy with demand for high skilled labor and the capital of the rich and a smattering of service jobs that cannot be automated or where most people prefer human interaction.  Nobody has a model for how to “fix” this outcome.  I am not even sure we want to fix it.  A “post-labor” economy sounds like the zenith of human civilization.  That is if, and this is a huge if, we shepherd it in responsibly such that nobody is left behind.  Sadly, the bulk of science fiction argues that we will fail, but let us hope that is more fiction than science.  Democratic redistributive policies are a good first attempt at trying to make this happen, so it is quite depressing that they are effectively locked out of power by a party that appears intent on recreating the most dire prediction of science fiction.

Lastly, I want to point out that all of this talk about the economic plight of rural Americans ignores a very relevant fact.  Namely that minorities and women, often concentrated in cities, are in even worse straits.  They are grappling with the same macroeconomic trends while still facing discrimination and the crippling legacy of prejudice.  For instance, the black unemployment rate is always at least several points higher than that of whites AND they are working in lower wage jobs.  Rural whites are neither unique nor the most egregiously hurt by the modern economy.  So lets spend a little less time talking about them and their problems.


Racism is a Tool of the Oligarchs

As many have pointed out, this election and recent political events in Europe highlight just how strong a force racism and xenophobia still are in the modern developed world.  What seems to go unremarked upon is how this is a distraction from the actually important struggle between the moneyed elites and the rest of us.  It’s not the Mexicans stealing our jobs, it’s the bankers and CEOs sucking up all the productivity gains from the last thirty years.  Class warfare is the decisive struggle of our time and whenever we take our eye of the ball we are succumbing to the oligarch’s feint.

The elites harnessing racism to divert attention from their looting and pillaging of the economy is, literally, the oldest trick in the book.  The key is to play on humanities natural prejudices to present an ideal cause for all the things wrong with your life.  How convenient that you already harbor a natural animus towards that group and now you learn that all along they were sabotaging your life.  I don’t like to bring up Hitler, but in this case it is a salient and well-known extreme example of relieving mass economic distress via unleashing racial animosity that culminated in genocide.

Now it should be obvious that apart from being morally wrong, tapping into racism almost never produces the results promised.  Many studies have shown that immigration is at worst neutral for the existing population and in many cases bolstered the wages of natural citizens.  Furthermore from a logical standpoint, racism (and sexism) are obviously inefficient.  I wrote about this before, but the best everything are not all white males.  By putting up barriers you are limiting the talent pool you can draw from and reducing the efficiencies of comparative advantage.

So playing on racism is a classic red herring employed by the elite to distract people from the true cause of their distress, the elites.  They have a disproportionate amount of power, even in a democracy, over the apparatus of government.  Upon acquiring this power, they bend the rules in their favor even further to amass more power and wealth.  The trend toward heightened wealth and income inequality in developed countries suggest a vicious feedback cycle where wealth begets social power which begets more wealth.

Thus, the central skirmish of modern (and often ancient) civilization is that of the weak and numerous versus the few and wealthy.  The oligarchs know that they are in fact quite vulnerable and the 19th and early 20th centuries bear this out as the working class realized that their institutions were merely the tools of the already powerful and revolted.  Even when revolutions did not succeed, they reduce the precious wealth of the elite.  As such the oligarchs employ a divide and conquer strategy to divert the masses.  As long as the lower classes fight among themselves they can’t turn on the ruling class.

Now so far I have talked in generalities, but this is exactly what we expect a Trump administration to be.  He gets elected on racial anxiety and may make a few attempts at some of the more insane proposals meant to ameliorate that anxiety, but more than likely the morass of the U.S. government will stop him.  He will likely have far more success implementing the tax cuts for the rich, deregulation and the gutting of aid to the poor that have also been planks of his campaign and that of the now dominant Republican party. So he throws a few sops to the masses and gets on with his real agenda, enriching himself and his friends at the expense of everyone else.

So good job America.  You elected a terrible man and you aren’t going to get any of the things you wanted while the real enemies gorge themselves.


The Ends Justify the Means on Weekends and Holidays and… Always…

I was reading my favorite socialist blogger when I came across an article that I pretty fervently disagree with.  It is on the “theory of second best” and its application outside of economics and policy.  The idea is that because we do not live in an ideal world we may have to engage in acts that are ethically or morally wrong in order to arrive at an improved state of the world.  However, the author, Chris Dillow, points out, rightly, that “There is, though, a massive problem with such second-best thinking – it can justify pretty much anything.”

This is just “ends justify the means” morality in a different form and as everyone knows, this is the inherent weakness of the philosophy.  Anyone can rationalize their actions under the auspices that their ultimate goal warrants the (literal or figurative) blood on their hands.  In fact when people decry this philosophy this is the implicit argument that they are making.  However, the only possible way to make any decision is to employ this strategy.  I give up much of my free time to go to work and make money because I believe the ends (money) justifies the means (working).  Similarly we take money from people (a violation of private property) to fund programs that we believe enhance the welfare of all citizens more than the cost of seizing private property.  This is always the moral calculus we engage in.

I guess the only time you don’t need to justify your ends are situations that are in a sense “no-brainers.”  If I have a bunch of leftovers I wasn’t going to eat anyway and I give them to a homeless person, it really entailed no sacrifice on my part to give them to him.  It was a non-decision.  At the same time this also washes away any goodness associated with the act.  To pick up a strain of thought in Dillow’s piece, engagement with an imperfect world does not sully us.  I would argue that it is in fact through this interaction that our moral worth is assayed.  A perfect world would not require sacrifice (nor would it allows harm) so how would we ascertain the morality of an act?

However, I digress.  My point is that despite the fact that you must always justify your means by your ends only under the most extreme moral relativism does that mean that if a person believes that the consequences of his actions will outweigh the costs of the action itself that the action is morally permissible.  This is why we form societies and governments and democratically elect leader so that people can come to an agreement on which actions are justified.  This should be obvious, but instead I suspect many people would disagree that “ends should justify means” after numerous media portrayals of heroes and villains that ostensibly deny or manipulate this doctrine.  Of course as my earlier post on macro morality discusses, they are often in the wrong.

Consequences of the Relativity of Happiness

A recent blog post from one of my favorites, Stumbling and Mumbling, ponders the question of whether improving happiness could be reflected in GDP growth.  I have no issues with his argument, but a particular quote caught my eye.

“workplaces with rising employee job satisfaction also experience improvements in workplace performance.”

What is interesting about this is that rising employee satisfaction is required.  This suggests that the level of employee satisfaction is really not that important.  This mirrors the observation that satisfaction with politicians correlates with GDP growth rates and not the level of GDP.

The lesson I am drawing here is that in most arenas of life people do not use absolute metrics but compare against a somewhat arbitrary benchmark.  This fact shows up even in our physiological responses:  loudness is perceived based on average levels of noise and warmth is based on the energy flux, a function of the relative temperature difference between the body and the environment as well as other thermal properties.

Furthermore, they have very short memory.  You presided over a recession a couple years ago?  All is forgiven if GDP growth has come back.  However, benchmarking against the status quo provides a hard limit on the effect documented in the above quote.  The research only supports improved performance in the face of rising satisfaction.  It’s impossible to increase satisfaction always and forever.  Will people recalibrate and wash away the effects of the improved satisfaction?

This is a problem with all happiness maximizing philosophies.  Human beings seem to be utterly immune to permanent satisfaction and quite vulnerable to peer comparisons. The evidence is plain; despite hugely improved conditions do you think modern man is orders of magnitude happier than medieval man?  No, they see the man over there with a bigger TV or more prestigious job or prettier wife and a gaping pit of resentment and anger enters their heart.  He does not compare himself to his great great grandfather.

Interestingly, one strategy developed for happiness is to recognize things for which you are grateful.  I believe this is related to taking a broader view of your life not rooted in the narrow relativity that afflicts us.

This does not suggest we abandon such strategies that focus on happiness, but that we have to be very careful in how we define happiness and measure it.  Because we might implement some great idea that makes everyone happier and then two years later the satisfaction bump may have worn off as they ask “What have you done for me lately?”

The Economics of Power

Krugman recently had an editorial in the NYT talking about the decision by Walmart to raise wages above the legislatively mandated minimum wage.  He took this as a signal that raising the minimum wage is not as devastating or intractable as many would have you believe.  His arguments are roughly that the literature for the most part shows no disemployment effects from raising the minimum wage, that there are efficiency benefits from raising wages (Walmart actually claims this as the reason for the wage hike) and finally that Walmart’s move shows that forces beyond typical supply and demand from market competition are determining wages.  That is, Walmart could obviously pay their workers more and did not do so for numerous reasons, mostly due to a choice open to them due their enormous economic power.  He claims that though the labor market is tight, it doesn’t appear to be tight enough to force Walmart’s hand.

Many conservative economists are mocking this piece, though in my mind it feels more like schoolyard jeering; “There goes Kruggie again boys, with his wild theories” rather than careful rebuttals.  Some claim the literature does show disemployment effects, which may be true though doesn’t square with my readings.  Some go as far as to quote Krugman’s own textbook that talks about the minimum wage reducing employment as if there is no difference between an intro textbook, a NYT editorial for mass consumption and economic reality.  Finally others are like “herp derp if you did that for everyone then there would be no effect except inflation” nevermind that most people are not earning minimum wage.  Furthermore, while classical analysis obviously shows that it reduces employment, on a macro level in a liquidity trap things might be different.  One person’s wages are demands for another person’s labor after all.

Now, when Krugman talks about supply and demand I believe he means the naive view that supply and demand are somehow exogenous variables and together they set an inviolate price.  You could take a more encompassing view, that I believe Krugman actually holds based on his writing, that supply and demand include social and political factors.  However, once you admit that you have to start dealing with all these social and political factors and can’t justify the market price as some divine price not to be questioned.  Walmart is so large that it can shift the demand curve for labor in its favor and many workers are so close to poverty that they supply more labor than they might otherwise do at some wage level.  Economic power is a real thing that affects supply and demand and ignoring it makes your analysis irrelevant.

The fact that corporations have any profits is explicit evidence that something other than pure competitive market forces is at play, that somehow economic power is allowing companies to extract rents.  Pharmaceutical companies make money off the ability to convince governments to enforce patents for them.  Defense companies do the same by making sure congresspeople feel the need to purchase the latest and greatest military technology.  Capitalism is crony capitalism and that is pretty much impossible to escape from because most markets wouldn’t exist without the government and regulation and cronyism is an immediate byproduct of such things. Maybe the problem is government.  However, the Silk Road story suggests that libertarian utopias are impossible and markets require some kind of social contract/government to function.

On an individual level, CEO pay is not, as classical economics assumes, equal to marginal product, just as it isn’t for the assembly line worker.  CEOs get paid more because they have convinced people that managerial talent is rare and worth a lot.  The worker’s wages might be depressed by technological change or a government biased against unions (the workers attempt at accruing economic power to counterbalance that of businesses’).  Are we really going to argue that Dan Brown or Kim Kardashian or Honey Boo Boo are exceptionally talented people whose output is of superior quality justifying making so much more than other “artists?”  Or is it because they are Adler Superstars, their value determined by social forces?  Experimental evidence suggest profound sociological effects on prices.  This feeds into the myth that education can save all of us from inequality.  Education inequality is not correlated with income inequality  and there are many stories of important inventors and artists that never manage to capture the value of their product.

As I pointed out in my post on Rawlsian social justice, marginal product as determining wages is an idea that seems to be around merely to justify draining all economic power from workers while allowing those lucky enough to be on top to rationalize their good fortune.  We need to accept luck and economic power and myriad other social and political forces as important variables in supply and demand and stop treating market prices as anything but a convenient indicator of all the complex processes that determine it.


The Value of Financial Advice

One of the consistent conclusions drawn from the recent recession and financial crisis is that finance has gotten too large.  Consider that the economic role for finance is shuttling capital into useful projects.  Finance in itself doesn’t create value, it merely allocates capital more efficiently and it’s hard to believe that it does so at a rate justifying 8% of GDP.  I have heard grumbling from businesses that dealings with banks were increasingly expensive, but I haven’t seen any studies on that side and it’s hard to separate that from businesses grumbling about anything that costs them money.  But on the individual side we have lots of evidence that financial advice is at best useless and at worst harmful.

If you don’t know this already, you should be investing in an index fund and the lower the management fees the better.  Other considerations are far less important.  Sadly, most people and pension funds and other institutions don’t know this.  Unless you are managing unimaginable amounts of money (like Harvard, say) you can’t afford the expertise needed to beat the market consistently.  Even most professionals can’t beat the market and they spend their entire working lives on the problem of how to beat the market.  Paying someone to manage your money just means that they have to beat the market by even more for you to make more money.  Many studies show that this pretty much never happens.  If you are actively trading it is almost guaranteed you are doing it wrong.  It is much better to lock in the near guaranteed and often higher returns of an index fund than to trade yourself or pay higher management fees.

Even rich people who have a lot more at stake and can afford better financial advice often fall victim to this.  Studies have shown that they mostly want an adviser that confirms their already chosen strategy.  Furthermore, it’s really easy to see the illusion of skill in fund managers.  There is a lot of variability in fund performance so that a manager might get a few years of great returns, accruing an aura of mastery, before falling below average.  This is the typical human failing of apophenia, seeing patterns in random chance.  In actuality they will fail to beat the market for you in the long run, especially after he takes his management fee.  In reality, picking a good manager has the same or worse odds than picking a good stock.

Finally, money managers have different incentives than you.  They often get paid well whether they beat the market or not.  One study found that insurance brokers matched their clients to insurance policies worse than if the client had purchased their own policy directly.  I have seen similar studies on real estate brokers.  Maybe that suggests aligning incentives better, but if that were easy I don’t think the underperformance of brokers would persist.  The bottomline is that they are making money for themselves, not for you.  It may make sense for them to assuage your ego with bad advice than actually provide good advice if it keeps you as a client.

In conclusion, I reiterate the benefits of an index fund: low management fees, low risk due to diversification, known exposures and higher returns in many cases.