On Prisons for Profit

| categories: politics, economics | View Comments

I've said to friends that the problem people have with capitalism is that it gives people what they want, and most people don't like knowing what that is.

It's a facetious jab at the people moaning about "alienation" (whatever the hell they mean by that) that completely ignores a lot of real problems, but it does get at the one most important property of markets: everyone gets what they pay for.

The application of this to privatization seems to continually elude the state. It should be simple: "when privatizing, make sure the provider makes money when, only when, and exactly when, your ultimate goals are met." Like most simple-but-effective rules, there's a lot of emergent complexity to the execution, and unsurprisingly, our leadership rarely gets it right.

So it is with private prisons, which the ACLU says produce poor conditions and are more expensive and which Facebook says conspire with the government to drive up incarceration rates (I can find nothing reputable on either side of that issue, though there's quite a few paid search results to the contrary on Google).

From what I can gather government went for the obvious "tenancy" pricing model: they pay $X per inmate per time. That's a fine way to get a place to imprison all these people you're imprisoning, but not so fine a way to ensure that the social goals prison ostensibly exists for are accomplished.

I'm in to goofy thought experiments on this blog, let's try a complete justice system reform with a private penal system at the center. I'm going to put emphasis on the "experiment" here, we'll make this as weird as possible:

  • No sentence lengths. You get out of the penal system when you're reformed. You'll see in a moment why we don't need them.
  • Private penal companies are not paid to keep you. They keep you at their own expense, then discharge you. They are not obligated to remove any of your freedom, but are liable for any further social damage you cause during your sentence.
  • Upon discharge, the company is paid a sum for reforming you.
  • If you commit a crime again, the penal company is fined an amount greater than they were paid and a different penal company is put in charge of your next sentence.

Not perfect, but let's look at the perks:

  • Penal companies are paid strictly for turning prisoners into reformed productive citizens. They don't get paid unless prisoners get out and stay out.
  • There's limitless creativity allowed for fixing social ills. If the right thing to do with criminals is to get them in a vocational program and get them jobs, that's what penal companies will do. If we don't need prisons we don't have any.
  • Sentence length adjusts to appropriate dimensions. Pressure on the penal companies is for smaller sentences.
  • Completely dispenses with foolish activities like retribution.

Downsides?

  • It's not impossible to imagine a scenario where just sitting on a prisoner forever is the least expensive strategy. A clerical error preventing release might also be harder to redress legally.
  • A multiple repeat offender, if one still exists in this system (and at scale, there's always one) could eventually exhaust the list of penal providers.
  • More expensive to punish "difficult case" prisoners.
  • Retribution is politically popular.

There's some extreme ideas here, but the thought of something this different should at least get a few out of the "privatization is always bad" rut. The effectiveness of privatization is a function of how well you structure the incentives, not of some innate property of privatization itself.

Read and Post Comments

Why I'm a Capitalist (and What Does That Mean)?

| categories: politics, economics | View Comments

RE: Post interval: It has been eight months and I feel shame.

Awhile back I was contemplating giving a presentation to a local group of progressive types about capitalism, since they seemed to be making a lot of offhanded complaints about it which nobody seemed to feel required substantiation. As I sat down to start compiling my thoughts, an interesting problem presented itself: did I know what capitalism was?

Certainly the way my prospective audience had used the term indicated that they didn't seem to think it meant what I thought it meant, but language is descriptive, and if I was going to tell them their definition was wrong I'd better have some substantial proof that the "right" definition was going to result in more effective communication. I was, after all, considered a socialist by most of the Republicans in my acquaintance (by virtue of not completely and exactly agreeing with every single word Nozick ever said), so maybe I would find I agreed with them if only I understood what they meant.

So I contacted my economist friend and asked, and... he had no idea.

I'd noticed at the time that the more economics-minded folks in my life seemed not to use the word much, and the answer I got back was basically "something Marx was obsessed about." Vague as that was, it did match what my progressive friends were saying. I could drop the subject there, but I felt like I hadn't yet engaged with the ideas I was in conflict with, so I kept going.

I decided I would define the idea myself, and go from there. Surely I'd always meant something in particular by it. The best I could do was explain myself and hope to find common ground.

So, in short:

Capitalism is the use of markets as the primary method of resource
allocation within a society.

It is important, here, to realize that capitalism, to me, means nothing more than this. Nobody need work jobs or engage in any particular form of "consumerism" (whatever that means). All we need here are property rights that protect (to a large degree, not absolutely) sovreignty over ones posessions, and the largely unrestricted right to transfer those posessions. As long as we have that, and the majority of goods worth acquiring are posessions of one entity or another, capitalism is in effect.

This should pretty much clear up my also identifying as a socialist earlier; while many damn or praise the various "socialist" countries in Europe, I would wager that by this definition there isn't a single advanced nation on earth that isn't, pound for pound, more capitalist than not. The United States spends about 19% of its GDP on social spending, with some, but not all of the "socialist" western states reaching up in to the 30s.1 Keep in mind that as GDP per capita rises, it is in theory possible to provide the same level of social benefits while spending less as a percentage of GDP providing them. I've made the bolder conjecture that the US could guarantee a high standard of living for all if it were willing to replace most or all of its social infrastructure with a guaranteed basic income at the same cost, but I'm not prepared to substantiate that now.

Capitalism is, so far as we've seen, the best mechanism on earth for making an economy create wealth. It has no particular provisions for fairness, but that's a moot point. The old conservative proverb about "unequally shared wealth" versus "equally shared misery" holds up surprisingly well under economic scrutiny. Oddly, only the most extremist socialist thinkers I talk to seem to grasp this perfectly; I take a lot of issue with the anarcho-communists who want to see the entire world return to subsistance farming on small plots of land, but at least when they say they want to destroy capitalism, they understand the result.

But, from the other side, capitalism is also more resilient than the right gives it credit for. There's a paranoia among conservatives that that not-so-utopia of quiet subsistence farming will suddenly spring in to existence if one more dollar is spent on social programs. Granted I'd like us to get much, much more value out of the money we are spending, but the reality is it's a sliding scale. At 100% taxation we get our hippie farming not-really-paradise, and at 0% we get massive wealth and fatal poverty. All points in between are available to us. And, yes, the ideal point is probably pretty far to the right of the curve, assuming you can decide what constitutes a center.

And so, I'm a capitalist. One who supports modest wealth redistribution carried out by means of direct payment systems which can be implemented by a small, weak government. Not so scary, huh?

Read and Post Comments

Wherein The Internet Once Again Fails its Economics Course

| categories: politics, economics | View Comments

This shit needs to stop. For my health if no other reason. Learning about economics has thus far served me about like learning about kerning. My education is merely serving to render me acutely sensitive to a new and shockingly pervasive kind of ignorance.

It's somewhat my fault this time, since nothing but morbid curiosity could keep you going past the first few sentences. "What is the difference between selling and sharing?" the article offers up. I think it's playing devil's advocate or something, but the stage has been set: we're debating a pile of crunchy-granola distinctions between some nebulously-distinct forms of exchange.

Let's take it bit by bit:

For the past few years, the “sharing economy” has characterized itself
as a revolution.

Yes it has, and, to get right to what's being begged: no, it isn't. Social media has increased information exchange. More information means better-informed purchases, which reduces arbitrage, and faster, finer resource allocation, which may increase arbitrage if someone is in the right place to add a bit of friction.

But we're being set up for the big reveal, so try to act surprised.

While other cities fight back, California has attempted to codify new
“sharing” business models with new regulations. While San Francisco has
recently cracked down on some particularly high-volume Airbnb
renter-hosts, Chiu and other “sharing” advocates are trying to pass
legislation to make the practice legal.

So the entrenched business models have been less-than-successful in regulatory capture? Am I supposed to be upset? Still waiting for that big reveal...

Across the U.S., high costs of living are driving more of the employed
toward “side hustles,” i.e. unprotected freelance work, the kind
fostered by the sharing economy. Where workers don’t have the start-up
investments necessary to participate — the cars, homes, kitchens to
rent — then they can just rent those too.

So in a tough U.S economy, a system has arisen where people strapped for cash can find more work than they otherwise would, and have access to housing, vehicles, et cetera?

Still looking for a punch line...

But sharing businesses aren’t just creating new income streams from
nothing. In “disrupting” even troubled markets — the taxi industry has
had this coming for a long time — the glory of the peer economy comes
at the expense of other workers’ livelihoods.

Oh the humanity! New business models compete with old business models! And it's all because those mean venture capitalists are giving them money. Of course the west coast startup scene devours far more companies than survive, but we can't possibly take that as a sign that this change of guard represents a meaningful improvement in the market.

And besides, these new workers are unprotected! Clearly we can't let a new business model disrupt our sacred right to buy and sell labor under contracts structured exactly the way our fathers' and mothers' were. A cab company can change its business model, but that we the labor provider should also be required to update our business model? Scandalous! Surely the purpose of a market is to ensure the livelihood of its sellers, not to efficiently reallocate the resource exchanged upon it. The market is a tool to ensure social welfare, and if it isn't, I don't like it and it should go away!

But our society is not returning to a past utopia of collective social
confidence and equality because this utopia never existed. The sharing
economy doesn’t build trust — it trades on cultural homogeneity and
established social networks both online and in real life. Where it
builds new connections, it often replicates old patterns of privileged
access for some, and denial for others.

It's as if the author has never heard the words "efficient exchange." What do the poor have to gain by us preventing them from engaging in these new economic opportunities? You want the poor fed, and someone has offered them a means to get fed. Lives are getting better. Where's your complaint?

Interestingly we've made them rentiers over their few blessings; their income is now arbitrage based just like the very rich. I'd not be surprised if there was an equalizing effect to that, though I'm out of my depth now.

The best performers in Airbnb are white women, and the worst performers
are black men.

Awesome. Let's let corporations vote for us too! Then there will be no racism in the economy or the government!

Read and Post Comments

Tax Structure vs. Minimum Wage

| categories: economics | View Comments

My Facebook has been flooded lately with pleas to raise the minimum wage, usually delivered in the typical content-free info-graphic format. This is a question I've settled already with more than one friend with actual credentials in economics, so it's kind of an exhausting argument to be having again.

The opinion seems to be:

  • Wages are too low
  • Employers have a responsibility to pay a living wage.
  • We should codify such in law.

Where the second item comes from I have no idea; as far as I knew employer responsibility ended at "honor the fucking employment contract," but this is what's presented.

My counterargument has been as follows:

  • Minimum wages act as a tariff on labor and reduce the performance of the labor market.
  • Society is the one complaining about a living wage, so they're the better candidate to pay for it anyway.
  • Therefore increasing the EITC, or instituting a negative income tax, and allowing the "under-payed" to take advantage of such a social safety net, correctly separates the problem and doesn't deprive us of as many of the market's production benefits.

The central complaint I've dealt with has been with the second point again. The best argument I've heard is that the market is distorted in favor of employers because the politics that define it are distorted by money in politics. This starts off okay, but then it continues into the assertion that "unchecked capitalism" (whatever that means) is necessarily going to produce such a situation, so my offered solution of "fix it" isn't a valid avenue.

Let's leave both of those aside, though, and come at this another way. The minimum wage and social benefits seem at first to be very different. I believe that any two arguments can be better compared if you can state them in the most similar possible terms. In this case we'd want to make the EITC or negative income tax look like a wage restriction, or we'd want to make the minimum wage look like a tax system or credit. I believe I can make the minimum wage look like a system of tax deductions and credits. I believe I can do so to the satisfaction of minimum wage proponents, such that they would feel comfortable framing the debate around this construction of the minimum wage, and I believe that comparing that tax system to a negative income tax and other tax policy makes the debate clearer and more concise.

Let's begin assuming the negative income tax, and look at one crucial moment in either of these systems: the arrival of the low-wage employee's paycheck. Customarily, employers withhold income tax from employees and relay it to the government directly, with corrections made at the year-end W2. It follows, then, that if income tax went negative, employers would cut a larger check and seek reimbursement.

So far, so good. This transaction looks identical to the minimum wage: employers cut larger checks and employees take home more money, so from an employee perspective the two are identical. Either way it's a bigger paycheck. Of course for this to be structurally identical to the minimum wage, said negative income tax would have to be structured to flatten wages below a certain line. You might not want to do that, for a few reasons, but I'll concede it for now.

But we've involved another transaction where the negative income tax is still different: the employer usually takes withheld income tax and relays it to the government. In the case of negative income tax it would seek reimbursement, or take a credit toward how much of those withholding it had to submit. The correction is obvious: we impose an additional tax on corporations, proportional to the number of low-wage employees it has, scaled by how low their wages are, such as to negate said reimbursement. Now we've imposed the minimum wage, with the same flow of cache and a surprisingly similar amount of bureaucratic overhead, by simple manipulation of tax law.

So now we can re-frame the minimum wage position more simply:

  • The negative income tax is only rendered fair by a complementary tax on employers in exact proportion to the amount of benefits their employees receive.

That's a much smaller set of points. This argument now feels clearer. I'm inferring that I haven't stepped on any minimum-wage-proponents' toes, but if everyone's on-board, this debate is simpler.

And the question that remains is how married are you to that only and exact? I never said we couldn't raise corporate taxes per se to fund the new negative end of the tax curve, so the question becomes why is this exact tax structure the only fair way to do it? A general corporate profit tax would give a break to small business owners who aren't necessarily making much more than their low wage employees and still hit the "big evil corporations" you're blaming for the whole mess. You could actually fund part of it with a high-bracket income tax hike and get a similar effect yet again. I'm sure you could hit them hard enough to be satisfied (and I won't even suggest a limit for corporate profit or high income tax here at all!) without connecting it to any sort of job-creating activity, which should keep the market healthy.

Thoughts?

Read and Post Comments

Wealth Distribution

| categories: economics | View Comments

There's a video going around about wealth distribution. It's mostly weaving its way through Facebook, which at this point is pretty much the rational discourse Seal of Fail™, but I saw it enough that I decided to organize my opinions and run it by my economist-on-call, Jeff. Jeff's co-contributor discussed the video, but didn't quite get at all I wanted to say, so let's get some things written down.

Go ahead and watch the video if you haven't. It basically states some numbers on how income is distributed in the U.S., none of which I've checked up on because they're about in line with what I've heard of before. It mostly dramatizes the size of the numbers, and punches with the perfunctory "wake up" plea, in the same tone as every undergrad who discovers radical ideology the way a preteen discovers his penis.

What is fair, exactly?

Appealing to "fairness" depends on an actual definition of fair, which is the first place this video falls down. The best they offer is a survey on what a sample of people (Democrats and Republicans!) "think" is fair. For a country that so prominently prides itself on not caring what other people think it's kind of a wonder how often we see rhetoric like this. You can make an argument for complete centralized wealth redistribution without having to suggest that one person has any business worrying how much money anyone else has. Marx wrote "to each according to his need," and Joe Capitalist's theoretical inversion would be "to each according to his ability." Neither one quite approaches "to each according to what his neighbors are comfortable with." Moreover, the video kind of undoes itself by explaining what people think the actual distribution of wealth is. If a group is that wrong about where the money is, should they really be in charge of deciding where it should be and how it gets there?

But fairness is always a slippery concept. Let's talk about it more constructively. There's a thought experiment called the veil of ignorance that is supposed to take care of this sort of thing. It relies on an impossible hypothetical, but considering the results it would generate is helpful. Basically it goes like this: if we asked everyone to vote on the rules (capitalism, socialism, minimum wage, etc) after some how deleting from their memory any knowledge of where their position was in society how would they set things up?

Unattainable as that scenario is, it removes the inherent problem of asking these questions as society is in progress (poor people want more money? Rich people want to keep their money? So basically people want money? The deuce you say!). On the one hand you have incentive to help the poor, because, hey, you might be poor, you don't know. On the other hand, decimating GDP in the name of equality hurts your average case, and every rich person you allow to exist under your system is like giving yourself a lottery ticket: you might just be that guy! It basically boils down to our common-sense understading of competition: you agree on the rules, and then you play the game.

There's been a lot of theorys about how it would turn out. Rawles, who was one of the first to employ the experiment, argued that pure socialism would result, mostly due to assumptions on human risk aversion that I and others don't entirely agree with. One thing that is agreed upon, though, is that any state that ultimately results from those rules is fair, and that people will complain after having set the rules, despite them being fair.

Of course it's perfectly admissable that no sane batch of people would ever arrive at the current U.S. system, but if you're going to make anything resembling an argument out of these speculations, you'll need some sophisticated evidence. At any rate, this video doesn't go there at all.

What's all that money doing anyway?

There's an urban legend about The Black Card. This mystical credit card comes with untold purchasing power, upscale perks, and mandatory requirements that owners spend outrageous amounts of money to retain it.

The legend happens to be true.

You can speculate a lot on why The Black Card exists; it's a glamorous display of wealth, it symbolizes membership in a social elite, it's lighter than carrying a million in cash, etc. I'd like to offer you another reason the rich need a high-limit credit card: they don't have any money.

Don't get me wrong, rich people have stocks, and mutual funds, and sorghum futures and oil futures and securities and really just about anything but actual money. And why would they? Relative chump change will buy you an accountant who can easily earn you better returns than a savings account with some good investing. Actual cash is just dead weight. Why keep money around when you can put it to work?

So then, what is this video measuring? Certainly not anyone's checking account, unless there's a lot of one-percenters that are really bad at being rich. It's also not measuring the effects of all that invested money, which produces a whole bunch of activity that makes all of our lives better (until the bubble bursts or someone cooks the books too hard and a bunch of hipsters have to go campin in lower Manhattan).

Is it worth it? Does that activity do anything to offset the trials of the less fortunate? The video doesn't say. Again, there's an admissible argument here, but you have to answer a question the video doesn't ask.

Thinking about the measurement question, video actually begins to look kind of silly. The wealthiest one percent have forty percent of what exactly? You might as well have committed the cardinal data sin and left off the units.

Wealth, or distribution?

A parting thought, based on something Jeff brought up: if that graph looked exactly like it did, but all the people on the left side were eating chateau briand anyway; if we just multiplied all the money on the chart (or, if you prefer, just deflated the value of the dollar) such that the poor were well-fed and well-off and the rich were just doing that much better, would you still care about how the money was distributed?

Economics is discussing the competition over scarce resources, but that's not to say wealth is a zero-sum game. It's possible for us all to do better without the one-percenters doing worse. In fact everything short of absolutely pure socialism inevitably results in a pareto income distribution (new vocabulary word!). I don't think we're dealing with that entirely here; I'm pretty sure as we deal with the problems in our economic system we're going to see that curve wiggle, but income distribution isn't inherently important. Knowing that, we have to make sure we scrub our arguments very hard to make them clean of envy.

There's a lot about our economic system that warrants re-thinking right now. I just hope the myth that a scrap of video on your friend's feed can put you in touch with that conversation dies quickly.

Read and Post Comments