Looking to buy cheap land? Here is the cheapest in the USA.

Check out this map of land values across the USA.

The wealthy landowners with the most acreage tend to buy in areas with cheap land. Almost half of the cheap land in northern Maine is owned by just a few families!

Some of the oddities on the private land map are due to the history of how private railroad construction was subsidized by the US government. The government gave a corridor of land to railroad companies that they could sell to make money to pay for construction along certain routes:

Today, you can still see strips of private ownership along these routes such as the strip through Nevada where the Central Pacific railroad runs and through Arizona that is a legacy of the Atlantic & Pacific route.

The main thing that makes land valuable is having more neighbors because higher population density means more customers, more jobs, and higher productivity per acre as shown in this map:

If we switched our tax system more towards a land-value tax, it would increase population density and also make land cheaper.

Looking for more data about real estate prices? Numbeo has some interesting numbers although they seem to be crowdsourced which can be inaccurate. According to them, the USA has some of the most affordable cities in the world when adjusted for earning power. Of course, for travelers, other things are more important than real estate for determining cost of living.

Posted in Public Finance, Real Estate

Why being a minority sucks: Power in numbers.

Suppose that there is a population of eleven people on an island and they are all equally racist.  There are ten whites who hate blacks and one black who hates whites.  If they all express their racism by hurling stones at the other race, the whites are each going to suffer 1% as much as the black.  If they each hurl ten stones, the black guy will get hit 100 times whereas the whites will only get hit once each on average.

Fortunately our society isn’t that racist, but we all know there are a few bad apples out there who are horribly racist.  Suppose that one percent of all people, black and white, are horribly racist and everyone else is colorblind.  If there are ten times more whites than blacks (which has been fairly close to the racial mix in the US for most of US history), then racist whites are likely to have 100 times more impact upon every black person than the racist blacks would have upon white people.  Even though in this scenario the blacks and the whites have an equal tendency to be rabid racists, blacks will feel under constant siege from racism whereas whites will rarely see a problem.

This is why racism is harder for a minority.  Blacks would have to have 100 times greater propensity for racism to make the hurt equal between blacks and whites.  For example, suppose there are 100 white people and only one is racist (only 1%) and there are ten black people who are all racist (100% which is 100 times the percent of whites that are racist), then each person in the community would feel the same amount of racism from the other race! That would merely equal out the amount of harm that each person feels from the other race!  

I live in Bluffton Ohio where there are about 4,000 residents. I’m not sure how many residents are black, but it is a small minority and let’s suppose 40 residents are black. Even if there are only 1% hard-core anti-black racists in Bluffton, that means there would be almost 40 racists in town. The 40 black residents are going to know exactly who a lot of those guys are! I wouldn’t know because I’m not black, but minorities could easily feel like Bluffton has a major problem when they are almost outnumbered by hard-core racists who go out of their way to be mean.

This is why racism is a much bigger problem for minorities than for a majority even if only 1% of the population is racist.  And 1% of the population being racist seems like a minimal guess.  In 2008 when Obama was elected, Stephens-Davidowitz found that “one in every hundred Google searches that included the word ‘Obama’ also included ‘KKK’” or the n-word” and 1% dramatically understates the true percentage of racist people searching on Google because most racists undoubtedly used some other racist search term.

Racists are likely to move to areas where there are fewer blacks which will exacerbate the problem for blacks living in those areas where they are a small minority. Even if only 1% of Americans are hard-core racists, few of the whites who choose to live in highly integrated neighborhoods are going to be extreme racists because the hard-core white supremacists are going to choose to move to mostly white areas.

That is also probably true of police officers. White-supremacist cops are more likely to want to work in police departments that are mostly white and those kinds of police departments are mostly located in majority white districts. And even if only 1% of cops are racist in total, because there are about ten times more white cops than black cops, blacks are going to feel under siege by racist cops whereas the whites are probably never going to experience a problem because black individuals will experience 100 times more problems from racist cops than white individuals even when there is the same incidence of out-group racism across all races.

Ian Gent gives another example showing a thought experiment with similar dynamics for a minority gender in a field like computer science:

Let’s say that we have 20% women and 80% men in Tech.  And that 20% of people make inappropriate remarks or other sexist moves towards people of the opposite gender.  So 20% of men make sexist remarks to women, and 20% of women make sexist remarks to men… The mean number of sexist remarks per man is 0.35, while for women it is 5.6.  There’s a gender disparity of 4:1 but the disparity in experience is 16:1. Men are no more sexist than women in this thought experiment, but women’s experience is sixteen times worse than the men’s.

The maths that explains this is simple. With 20% women the gender ratio is 1:4.  So there are 4 times as many men to make sexist remarks, so 4 times as many sexist remarks are made to women as to men. But there are 4 times fewer women to receive sexist remarks, so each individual woman is four times as likely to receive a given remark than an individual man is.  These effects multiply, so in this example the mean number of sexist remarks per woman is 16 times the number per man.  This holds in general, so with a gender ratio of 1:r, women will receive r2 times as many sexist remarks as men.

In this scenario, most men receive zero sexist remarks whereas nearly all women receive multiple sexist remarks and some women an overwhelming number as shown in Ian Gent’s illustration of the scenario where arrows represent attacks.  (If you reload the page you can see this picture animated.):

petrie600x1

White racism is a greater problem than black racism because whites are a majority and that creates power.  A democracy is effectively a dictatorship of the majority and whites have been a majority in both political parties for most of American history and will continue to have a plurality for the foreseeable future. On top of majority power, whites have greater average economic power (wealth and education) too.  As a minority that must inevitably have more experiences of racism, blacks should be more resentful about racism even if whites are no more racist than blacks on average.  Although everyone has some power over other people, being part of a larger social group brings extra power over minority groups, ceteris paribus and with power comes responsibility.

This is the same model as Lanchester’s square law of combat in which the power of a combat force is proportional to the square of the number of individuals. So, if instead of merely hurling sexist remarks, as in the example above, men and women were shooting at one another and there is a ratio of 4 men to every 1 woman (20% women), then there would be 42=16 times more shots coming in at the women than at the men!

This law generally describes the maximum theoretical disadvantage of different sized forces, and at the other theoretical extreme there is still a linear power advantage of having a bigger army in which a ratio of 4 to 1 would only have four times the power. Empirically, the numerical advantage of combat force size tends to be somewhere in between the two extremes with an exponent of about 1.5, so a ratio of 4 to 1 individuals would yield a real power difference of about 41.5 = 8 to 1, ceteris paribus.

In the realm of racist or sexist acts, I wouldn’t be surprised if the actual power difference is more than squared because of the way norms can reinforce behavior. For example, in Nazi Germany, it was nearly impossible for Jews to treat Nazis badly because they would be severely punished if caught whereas all Germans were encouraged to treat Jews badly and antisemitic actions rapidly spread amongst formerly tolerant Germans after the Nazis rose to power.

Similarly, the KKK had hundreds of thousands of members and held annual public rallies and marches in cities across the country in order to promote racism. Black people couldn’t have gotten away with anything like that. In 1915 KKK supporters created a Hollywood movie called Birth of a Nation which promoted the KKK. It was the first movie to be shown in the White House and it was the the most popular movie in history until Gone with the Wind overtook it in 1939. (Ironically, although it was a lot less overtly racist, the KKK loved that movie too.) Black people were hardly even able to get any roles in movies in those days. The KKK and other white-supremacist groups were able to achieve economies of scale that African-American groups were incapable of achieving because white-dominated law enforcement prevented African-Americans from organizing. the FBI was even trying to shut down purely pacifist African-American civil-rights organizations and activists like Martin Luther King.

Below is a photo of a KKK march in Washington D.C. down Pennsylvania Avenue from the Capital to the White House in 1927.

So the racist majority was able to achieve organizational economies of scale that levered their numerical superiority even more than Lanchester’s square law would imply.

Because majorities inherently have more power than minorities, majorities have more responsibility to use their power with noblesse oblige.

Would it be racist if black murderers killed twice as many whites as blacks?

Black murderers DO NOT kill twice as many whites as blacks, but even if they did, that would NOT be a sign of racism.

The mental experiments above described a world where there are two teams that are deliberately attacking one another. But even in a world without any bias, minorities might still feel persecuted.

Again suppose that there is a population of eleven people on an island and there are ten whites and one black and nobody has any racist animus.  If they all hurling stones randomly, the whites are each going to suffer the same as the black, but the black guy will get hit by whites and if he is thinking about race, he might logically wonder if white people are out to get him. Meanwhile all of his victims are going to be whites, so a casual observer might suspect that the black guy is racist as well. But nobody is racist in this example–they are all just throwing rocks randomly.

If there were 1 million whites and 100,000 blacks, the numbers would be similar. Each black person would be hitting about ten times more whites than blacks and each black person would be hitting ten times more white people than black people.

This explains why minority groups like to cluster in places where they are not a small minority as in Schelling’s segregation model.  Schelling demonstrated that people will become highly segregated even if they are not racist at all, but merely if they do not want to live in a neighborhood where their ethnic group is less than 1/3 of the population. Not only are minorities more likely to feel persecuted when they live in a place with a low ethnic density, but they will also have a harder time finding ethnic foods and people to share cultural practices.

Minorities who live in places where their ethnic density is low suffer higher rates of paranoia. Perhaps it is partly because those minority individuals are singled out a lot more than in places where their ethnic group isn’t a small minority due to higher ethnic density. Even if there is no racism at all, there is always going to be random interactions with jerks and inevitable misunderstandings and hard feelings. When one is in a minority, those negative interactions will mostly be with individuals from the majority group and so it might be hard not avoid wondering whether the negativity is due to racism rather than randomness because humans brains are hardwired to infer causation from correlation.

My sister believes that there is rampant anti-white racism among blacks because blacks are more likely to kill whites than whites are to kill blacks, but the actual evidence shows just the opposite. Blacks were 12.4% of the population in 2020, so if blacks were colorblind, then they should be killing seven times more non-blacks than blacks. That would be race-neutral. In order to be racist, blacks would have to kill more than seven times more non-blacks than blacks. But the reverse is actually happening.

Black people mostly kill black people and white people mostly kill white people This is because:

You are the most likely to be shot by the people you know.  The more time you spend with someone, the more likely they are to shoot you.  The biggest danger is that you will shoot yourself. There are more than twice as many suicides as homicides just about everywhere in the world.  The next highest danger is being shot in the home either by accident or by a temporarily homicidal family member. The next most dangerous people are your friends.  Strangers are the least likely to try to kill you.  Of course, there are a lot more strangers out there than acquaintances, so family members only account for about 25% of all known murder victims and known murderers who kill their acquaintances only account for about 54% of the total.  (Caveat: 44% of murder victims have an unknown relationship with their murderer mostly because the murders are unsolved.)

Suppose there is an island with 10 white guys and one black guy but they are all blind and every person throws rocks randomly at every other person without any racial discrimination.  Now, the black guy ‘s attacks will still appear to be racially motivated because he is only attacking whites whereas only 10% of the white attacks will appear to be racially motivated in attacking the black guy.  We should expect similar statistics in the US if we had a colorblind society.  Because about 12% of the population is black and 63% is white, there are over five times more whites than blacks.  Therefore, in a colorblind society, both races should be murdering five times more whites than blacks.  In reality, in 2014 the FBI data for the murders in which the race of the victims and perpetrator is known shows that whites killed 13 times more whites than blacks and blacks killed 5 times more blacks than whites.  So neither race is colorblind.  Whites prefer to murder white people and blacks prefer to murder black people.  If whites were colorblind and didn’t prefer to murder other whites, then they would be killing twice as many blacks as they have been.  Even more strikingly, blacks would need to kill 26 times more whites (holding black-on-black homicide constant) to be colorblind in their homicidal tendencies!

So don’t believe Fox News’ race baiting about anti-white racism. Instead, you should be more worried about your friends and family!

Posted in Medianism

TIPS for investing and predicting inflation

A lot of people are worried about inflation because of hysteria at the Wall Street Journal and other media reports that sensationalize the issue.  I’m not worried because I trust the bond market which predicts inflation better than anyone.  To understand how, you have to understand TIPS. 

“TIPS” are Treasury Inflation-Protected Securities. They are government bonds that pay a real interest rate (r) plus the actual inflation rate (π). Regular government bonds pay a nominal interest rate (i). These three variables are inherently related to each other by a simple equation:

r=i – π

To see how this equation works, suppose you have an ordinary government bond that is paying 8% nominal interest (i) and the inflation rate (π) is 3%, then your real return on investment isn’t 8% because the real value is decreasing by 3% per year. The real return on investment is 8% – 3% – 5%.

Now if inflation were always a constant rate, then regular Treasury bonds would be identical to TIPS because TIPS pay (r+π) which is equal to i. (Because if we rearrange the above formula, you also see that i=r+π). The difference between TIPS and regular Treasury bonds is that nobody knows what the future inflation rate will be when they buy bonds and so

  • if you buy TIPS, you know what your real interest rate (r) will be but you don’t know what your nominal payout will be (i).
  • if you buy regular Treasury bonds, you know what your nominal payout will be (i), but you don’t know what your real payout (r) will be.

If you are investing in government bonds and you are sure that the inflation rate will be 2%, then you will be indifferent between a TIPS that pays 3% (plus inflation which you expect to be 2%) and an otherwise identical Treasury bond that pays a nominal 5%. This fact makes it possible to see what the multitudes of bond traders thinks the inflation rate will be in the future. The US Treasury bond market is the deepest security market in the world with over $20 trillion in 2020 and every bond trader will lose a lot of money if they estimate future inflation wrong, so they have immense incentives to get it right because if ordinary bonds are paying i=5% and TIPS are paying r=4%, but you think inflation will be 2%, then you can make 1% higher real return on investment by buying TIPS (r=4%) than the 3% you would earn by buying ordinary bonds (r=i – π = 5% –2%= 3%).

To estimate the bond market’s expectations of future inflation, just look up the interest rate that ordinary treasury bonds pay (i) and subtract the interest rate that TIPS pay (r) because i-r= πexpected. The St. Louis Fed posts a graph of the bond market’s inflation predictions which are called the “breakeven inflation rate” because it is the inflation rate that makes the real return break even on both kinds of bonds:

The vertical orange line shows when the inflation predictions inverted in January 2021. Before then, the bond market was predicting that inflation would be higher in the long-term (over 20 and 30 years) than in the short term (5 years). Since the beginning of 2021, the market has been predicting that inflation will be higher in the short term than in the long term. Unfortunately, the US Treasury doesn’t have 1-year TIPS, so we cannot easily show a graph of the market’s inflation predictions for the coming year.

Technically, there should be some slight differences between the breakeven inflation rate shown here and the real inflation expectations mainly because ordinary Treasury bonds should have a higher return because they have inflation risk whereas TIPS do not, so investors should be compensated with a higher reward on Treasury bonds, but this is a very minor factor that is counterbalanced by the fact that investors also need to be compensated for the lower liquidity of TIPS which drives up the interest rate on TIPS and counterbalances the other forces.  Most analysts ignore this kind of complexity and simply subtract the two interest rates to find expected inflation:

πexpected=i–r

The most useful estimate of future inflation is the 5-year breakeven rate because it is the shortest prediction we can easily infer from the markets. Short-range projections are the most useful because they are more accurate than long-range predictions and humans find short-range forecasts more useful because we naturally discount the future more as time gets more distant.

Currently, the bond market predicts that the 5-year inflation rate will be higher than the 30-year inflation rate:

Picture1

Unfortunately, FRED doesn’t show bond-market data for the most recent couple weeks, but it is easy to find more up-to-date graphs elsewhere:

As shown here, the markets’ inflation worries have subsided considerably in the past two weeks. Remember that this is a prediction of the average inflation rate over the next five years, so a half percentage point decrease as shown here is really a pretty dramatic movement in such a long change in inflation over the next five years

Should I invest in TIPS?

If you are going to invest in government bonds then you should invest at least part of your portfolio in TIPS because

  1. Diversification: TIPS are very similar to ordinary government bonds, but their returns are uncorrelated when inflation swings, so they help reduce risk.
  2. Lower risk: TIPS are also inherently less risky than ordinary government bonds because there is zero risk of an unexpected rise in inflation eating up your real return on investment. There is no other investment that can guarantee you what your real return on investment will be like that. The main advantage of government bonds is that they have lower risk than any other investment (at maturity) and TIPS are the safest kind.
  3. Higher average real payoff than regular bonds so far!  Because the bond market has underestimated future inflation, TIPS have actually paid a slightly higher average ROI than regular bonds according to the Treasury’s analysis!  This also means that the bond market is a slightly biased estimator of future inflation as mentioned above, but it isn’t a large amount, and nobody predicts future inflation better than the bond market so I’m not going to get too critical that it isn’t perfect.

In theory, the main drawback TIPS should be that they should have slightly lower average real return than ordinary bonds because of their lower risk, but so far they haven’t!  You can actually get lower risk AND slightly higher return with TIPS.  If you are investing in government bonds, then you are obviously wanting low risk, so you should be also thinking about TIPS then too.

The weird thing about TIPS right now is that they pay a negative real interest rate (plus inflation) and unsophisticated investors might prefer ordinary bonds that pay a positive nominal interest rate because it feels weird to lock in a guaranteed real loss in value as shown by the blue line in the graph below:

TIPS currently pay a negative interest rate of almost -2% (plus inflation) whereas ordinary treasuries pay a positive nominal interest rate of over 1%. The gap between the two lines in the above graph is i-r= πexpected which is the 5-year average expected inflation rate. If the bond market is correct about future inflation, then both kinds of bonds will pay the same ROI, but only TIPS guarantees a real ROI.

Posted in Macro

Zero-reserve banking: Another historic revolution.

The Fed eliminated all reserve requirements for banks on March 16, 2020 for the first time in history and I didn’t even know about it until today because it got very little press. Also, it was the beginning of the Covid crisis and I was paying more attention to the residents of my mother’s nursing home unit which was one of the first that Covid hit and over half of the dozen residents died during that first month. But there was surprisingly little attention to this revolutionary change in policy given it means that banks can, in theory, lend infinite amounts of money! That in turn would create massive instability because a bank with infinite loans would soon eliminate reserves and have zero ability to pay depositors who want to write checks or make withdrawals. Here is a Forbes report:

The Federal Reserve just did enough to rate a “very happy” by …President Trump. That alone tells you they fired a big gun…

Reserve requirements cut to zero. THIS IS THE BOMB!

Going back in all of history, banks have been required to hold reserves against their assets – which are loans and securities. It’s simple – banks set aside a percentage of their assets as reserve and kept it in gold (for most of recorded history) or as cash at the Federal Reserve. This is a fundamental pillar of fractional reserve banking. Conceptually, the reserve gives depositors confidence that when they show up to take their money back, there will be cash to give them. It hasn’t always been nearly enough and if depositors get wary, they “run” to the bank to withdraw their money. Please re-watch “It’s a wonderful Life’ to see what happens during a bank run. It’s not pretty. It hasn’t just happened in black and white either. There were runs in 2007 and 2008 as depositors feared for their funds at several banks.

During the over 100+ years of Fed history, they have mandated the bank reserve ratio. Manipulation of the reserve requirement ratio has been one of their most powerful tools. That ratio was north of 20% through most of the first fifty years of the Fed (including the great depression). It had made its way down to 10% – that was before today. Until further clarification or notice, banks need not hold any reserve against their assets. This means that banks could theoretically continue making loans to infinity.

This is a shift to what the Fed is calling an “ample reserves regime.” Another reason it didn’t get much attention is because it didn’t cause bank reserves to drop at all. Bank reserves actually doubled between the month before the announcement and the month afterwards!

The real revolution in central banking that made this possible had already happened in 2008 when bank reserves first soared. Before that, bank reserves had always been as small as possible which means that the banks only held the minimum that they were required to hold. Since 2008, banks have had orders of magnitude more reserves than they were required to hold, so the reserve requirement hasn’t mattered since then. The big change was mainly due to the Fed deciding to pay interest to the banks on their reserves for the first time in history. That was a perverse action that delayed the recovery and blunted the effects of the massive monetary stimulus (“quantitative easing”), but now that the Fed is paying the banks to hold reserves, it doesn’t have to require them to hold reserves anymore.

The Fed argues that it is better to pay interest on required reserves because:

If reserves are not remunerated, then forcing a bank to fulfill reserve requirements is similar to imposing a kind of “reserve tax.” Banks would be willing to hold a certain amount of reserves for self-interested reasons. Beyond that level, banks will take action to avoid [it]…

They do have an valid argument that most banks had already figured out how to avoid the reserve requirement, so there was no point in having a reserve requirement that they were dodging. The Fed could have changed the rules to make dodging more difficult, but instead they started bribing the banks to keep reserves. The timing was perverse because it was during the 2008 economic crisis when banks started hoarding massive excess reserves and the problem was too much bank reserves rather than too little. The Fed claims that paying the banks to hoard excess reserves makes them more efficient, but it makes no sense. Excess reserves aren’t being used by definition. It is just being hoarded in the bank vaults where it does no good.

But paying the banks to hoard money that they don’t need IS a way to subsidize the banks and I’m sure the bank lobby is thrilled.

Eliminating reserve requirements is not “THE BOMB” because it had zero impact on the world. The real bomb actually dropped back in 2008 when the Fed started subsidizing bank reserves for the first time in history. Almost nobody noticed except the banks and economics geeks, but it caused an explosion of bank reserves.

What the Fed should have done to stimulate the economy was to lower the interest rate on bank reserves to get the banks to hoard less money. That would have had a much bigger effect than eliminating the reserve requirements that everyone was ignoring.

Paying interest rates on bank reserves is touted by the Fed as a new tool of monetary policy, but the Fed hasn’t been using it well. It should have reduced this interest rate in order to get the banks to lend out the reserves rather than hoarding excessive money, but the minimum interest rate the Fed pays on reserves is basically determined by the federal funds rate because it has to be more than that or else the banks will borrow even more money to hoard in reserves!

Posted in Macro

Race Vs. Class At College

David Leonhard found that elite colleges have very little economic diversity.  At elite schools, only a little over 10% of the student body comes from families below the median income.

William Bowen, …was a co-author of a study several years ago that found that elite colleges gave zero credit in the applications process to students from low-income families. All else equal, a poor student who scored, say, 650 on a standardized test had no better chance of being admitted than an affluent student who also scored 650 — despite all the obvious advantages that the affluent student had.

Currently there is race-based affirmative action to benefit disadvantaged races, but not class-based affirmative action to benefit disadvantaged economic classes.  This is likely to change soon because the Supreme Court has been moving towards eliminating race-based affirmative action as it again signaled last month in the University of Texas case.  Kevin Drum notes that class-based affirmative action will probably be the replacement and it achieves very similar goals:

 In a study of elite universities, Anthony Carnevale and Stephen Rose concluded that class-based affirmative action would probably produce student bodies that were about 10 percent black and Latino, compared to 12 percent with purely race-based affirmative action. Taking wealth into consideration might boost that a bit more, as would policies that take account of whether a student lives in concentrated poverty, a partial proxy for racial housing discrimination.

Still, there’s no question that in practice, even well-designed class-based policies would probably represent a net loss for minority representation. But it’s a fairly modest loss, and class-based policies also have some advantages.

Even without the fact that racial affirmative action will likely soon be illegal, class-based affirmative action have some important advantages.  They help poor people who are not getting much help and they deserve more help.  One of the biggest problems of racial discrimination is that it results in poverty.  The reason class-based affirmative action creates results that are so similar to race-based affirmative action is that racism creates adverse economic consequences.  But some individuals are able to transcend the difficulties of race by ‘passing as white’ or by focusing on economic niches where their particular race is not a handicap.

One of the huge problems of racism is that it is impossible to measure precisely.  Do the Obama children face more discrimination and prejudice than poor redneck whites in Appalachia?  Obama’s children may face more racism, but poor rednecks also face discrimination and prejudice, and it is impossible to really know who faces worse.  There is prejudice about class and accent and education (which is the most socially accepted prejudice in America today) and there is no reason to valorize racism over other forms of prejudice.   Obama himself said, “My daughters should probably be treated by any [college] admissions officer as folks who are pretty advantaged”.

Did Barack face less discrimination than Michelle Obama because he is male and his mother was white?  Would have have faced even less discrimination if three of his grandparents had been white and only one black?  It is impossible to know.  We cannot even concretely define race because it is an artificial construct whereas we can measure class relativley precisely.  Some people whose parents are both black insist that they are white and some people who 99% of Americans would think look white identify as black (photos here).  The main way that we measure racism in societies is by measuring its economic consequences and the economic consequences of race vary a lot across individuals depending on their circumstances. Why not just measure the economic consequences directly instead of trying to measure race?

I have lived and worked in places where I was in the minority and I have been discriminated against, but I have also had economic advantages and that greatly cushioned the microaggressions and other difficulties that I faced (including getting demoted at work explicitly because I was the wrong race). I don’t mind being called racial epithets as much if I my economic situation gives me many more choices and comforts than the name callers can afford.  Similarly, there is discrimination against Jews, but discrimination against wealthy Jews doesn’t seem to be as onerous as it is for poor minorities in the US today since wealth cushions a lot of other problems.  Since Jews are already one of the wealthiest ethnic groups in the nation, most people don’t think there is need to give them race-based affirmative action just because a lot of people are prejudiced against them. 

One of the effects of race-based affirmative action is that it disproportionately benefits individuals who are already pretty well off because they are much more likely to go to college anyhow.  Nearly three-quarters of Black and Latino students at Harvard came from very wealthy families in 2018 because the real injustice at Harvard is strong affirmative action for the children of wealthy donors and affirmative action for student athletes who play expensive sports like golf, rowing, sailing, and fencing. Race-based affirmative action has a relatively minor effect.  Does it really advance social justice when Harvard admissions formula greatly prefers the Obama girls over equally talented inner-city white girls who grew up in a single-parent home on welfare?

One of my college friends got a scholarship for Native Americans even though her family was rich and nobody who knew her would have guessed that she had any Native American ancestry because only one of her grandparents (at most) had any Native American ancestry.  I never saw any sign that she had ever experienced racial discrimination and she seemed embarrassed about her race-based scholarship. I don’t see how her scholarship advanced social justice, but I can’t blame her.  If someone offered me money because of the identity of one of my ancestors, I’d probably take it too.

Kevin Drum  (op. cit.) argues that class-based affirmative action helps under-served races almost as well as race-based affirmative action in the short run and may have even greater benefits in the long run:

As Richard Kahlenberg, a tireless one-man advocate for class-based policies, points out, race-based admission policies are supported by only about a quarter of the population. Conversely, class and income-based policies are supported by upwards of two-thirds of the population. That represents a far stronger foundation for keeping diversity policies thriving over the next few decades.

And there’s more. Carnevale and Rose concluded that class-based policies produce higher graduation rates than either a pure merit-based system (test scores and high school GPAs) or a traditional affirmative action program. And eliminating race-based policies would also put an end to the suspicion that continues to dog black and Latino college graduates from employers who wonder if their degrees were really fairly earned.

One of the main advantages of race-based policies is that they help create social awareness of racism and demonstrate that it is a priority.  The ongoing problem of racism is denied by a significant segment of the US population.  But they are hard-core racism deniers and most of them are probably going to just get even more resentful about race-based policies. They are much more tolerant of the kind of class-based policies that happen to achieve very similar ends.

Historically, race has always served as means of social control that works by dividing lower-class groups.  Dividing the majority of people into racial tribes makes them easier for the elites to control.  Focusing on race may serve to breed resentment and maintain class divisions which could be more counterproductive at helping minorities than helpful at this point in history.  Anti-racists should support class-based affirmative action because it might actually do more to reduce the problems of racism than race-based affirmative action because class-based programs help a super-majority unite over common concerns rather than split over divisive tribal issues.  Racism is real and a huge problem, but affirmative action that benefits relatively wealthy minorities is a recipe for breeding resentment in the majority that earns below the median. That is one reason why Martin Luther King’s 1964 book, “Why We Can’t Wait” advocated for helping the disadvantaged of all races rather than just focusing on helping African Americans.

A focus dividing privileges based on race is more likely to turn people towards zero-sum thinking where if someone else gets something I lose something.  Assigning privileges based on class is more universal because everyone has some chance of needing class-based help because of the potential for class mobility (which should be encouraged!!) whereas racial mobility is stagnant.  But economists largely agree that reducing racism and increasing the equality of opportunity is a positive sum game that increases the size of the pie and can make everyone better off.  It is easier to for most people to see how class-based policies can get us there.  Only minorities favor race-based policies and there is a lot of rivalry about how to divide the spoils between the various racial groups.  Also rich elites have self-interest in preferring race-based policies because

  • race-based polices are much less popular which makes them less likely to get enacted and if they are enacted, they are more likely to be underfunded and get repealed sooner.
  • In the off-chance that a race-based redistribution policy gets enacted, it often cheaper to just help a minority group than to help all needy Americans.  Rich people care about keeping the price tag low because they pay a lot of taxes and fees and they are the only group that sees little chance of personally benefiting from class-based programs.
  • race-based polices make the masses more politically divided which makes them easier to control.
  • race-based polices directly benefit those wealthy elites who are themselves racial minorities (as in the Harvard admissions example).

One under-reported transformation of America is that, “Hispanic high school graduates surpassed whites in the rate of college enrollment!”  If that trend continues, affirmative action for Hispanics will need to be curtailed at some point and proponents of race-based affirmative action do not have a formula for how to do that just like they have gotten into trouble by discriminating against Jews and Asians because they are already “over-represented” in college enrollment.  Switching to class-based affirmative action would be one way to make the adjustment automatic as the relative status of different races changes over time.

One of the best ways to combat racism is to try to treat every individual as an individual first and not as a part of some monolithic race or tribe.  Chloé Valdary argues that anti-racism has to be done with sensitivity and love to be successful and if it isn’t done well, it can be counterproductive and just increase racial resentment and division.  One of the crazy things I have been seeing locally lately is a lot of concern among my neighbors about critical race theory being taught in our local schools.  I guarantee that nobody in our conservative schools are teaching anything that white people need fear, but political strategists are again using race as a tool to divide the nation and further their political control.  It is a nationwide phenomena according to the NYT:

… Little more than a year ago, Scarlett Johnson was a stay-at-home mother, devoted to chauffeuring her children to school and supervising their homework.

That was before the school system in her affluent Milwaukee suburb posted a video about privilege and race that “jarred me to my core,” she said. “There was this pyramid — where are you on the scale of being a racist,” Ms. Johnson said. “I couldn’t understand why this was recommended to parents and stakeholders.”

The video solidified Ms. Johnson’s concerns, she said, that the district, Mequon-Thiensville, was “prioritizing race and identity” and introducing critical race theory…

Since then, Ms. Johnson’s life has taken a dramatic turn — a “180,” she calls it. She became an activist, orchestrating a recall of her local school board. Then, she became a board candidate herself.

Republicans in Wisconsin have embraced her… Ms. Johnson’s rapid transformation into a sought-after activist illustrates how Republicans are using fears of critical race theory to drive school board recalls and energize conservatives, hoping to lay groundwork for the 2022 midterm elections…

“Midterm elections everywhere, but particularly in Wisconsin, are pretty dependent on voter turnout as opposed to persuasion,” said Sachin Chheda, a Democratic political consultant based in Milwaukee. “This is one of the issues that could do it.”… Spurred partly by the video, Ms. Johnson began leading an effort, Recall MTSD.com, to recall four of seven board members…

While the recall group insists theirs is a grass-roots effort, representatives of two [well funded] conservative nonprofit organizations turned up to help. One of them, the Wisconsin Institute for Law & Liberty, is funded by the Bradley Foundation, known for promoting school choice and challenging election rules across the country… Another… was Matt Batzel, executive director of American Majority, a national group that trains political candidates. Mr. Batzel’s organization once published a primer on how to “flip” your school board, citing its role overturning a liberal board in Kenosha, Wis.

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Posted in Discrimination, Labor

Guns don’t kill people. Alcohol kills people.

Updated.

Ok, so my title is goofy sloganeering, but it isn’t any goofier than the common slogan it is based upon. Although the US could certainly save lives by copying some of the gun restrictions that all other industrialized nations use, I don’t care that America’s gun culture is more extremist than anywhere else on earth because other issues are more important than gun violence in America and guns are politically untouchable due to the gun lobby and the passionate minority of American voters who want us to have more guns and gun freedoms, not less.

Guns simply aren’t as important as lots of other public health issues. For example,  Tyler Cowen makes the case that alcohol policy is much more important.

We take [the free availability of alcohol] for granted, but so many lives are lost each year, so many careers ruined, so much productivity lost. One of my personal crusades is, we should all be more critical of alcohol. People will pull out a drink and drink in front of their children. The same people would not dream of pulling out a submachine gun and playing with it on the table in front of their kids, but I think it’s more or less the same thing. To a lot of liberals, the drink is okay and the submachine gun is not. I think, if anything, it’s the other way around, and I encourage people to just completely, voluntarily abstain from alcohol and make it a social norm.

Alcohol control would do more for Americans than gun control because, as German Lopez says, alcohol is much more dangerous than guns:

As of 2010, the Centers for Disease Control and Prevention (CDC) estimated that excessive drinking causes 88,000 deaths each year in the US… alcohol’s annual death toll is higher than deaths due to guns, cars, drug overdoses, or HIV/AIDS ever have been in a single year in America. There’s a good chance that the CDC’s estimate is an undercount. It’s eight years old at this point, and since then, at least some kinds of alcohol-related deaths have increased too. Some experts have told me that they would not be surprised if the annual death toll linked to alcohol is now above 100,000. And the death toll only captures part of the concern with alcohol. Addiction, domestic violence, sexual assault, and other linked crime and health problems are also significant.

Alcohol use reduces global average life expectancy by 9 months which is far worse than guns.  And the true cost of alcohol is even worse than these statistics imply because drinking alcohol causes a lot of violence too. If you love guns, then you might want to get on the alcohol-restriction bandwagon because restricting alcohol would make America safer for more guns.  That would create a virtuous cycle for guns because slowing our gun-death epidemic would make guns more popular too! German Lopez again:

A new study, by researchers at the Violence Prevention Research Program at the University of California Davis, found that alcohol may be a much better predictor of future crime, including violent acts, than whether you have a criminal record at all. The National Council on Alcoholism and Drug Dependence estimates that alcohol is a factor in 40 percent of violent crimes. Other research has consistently found that alcohol abuse and crime are closely linked… A 2010 study even found a strong relationship between the presence of alcohol stores and gun assaults… while the connection between mental illness and carrying out violent acts is shoddy, the research suggests that alcohol abuse is a very strong predictor of violent crimes.

Whereas Americans irrationally obsess about avoiding people with criminal records when hiring and restricting the freedoms of people with mental illness to prevent violence, alcohol abuse predicts crime better than a record of crime or mental illness. Alcohol is particularly dangerous for youths because people who begin drinking younger are more likely to develop an alcohol problem during their lives and as with any health problem, the later in life that an illness strikes, the less tragic the harm.  Furthermore, young people are far more prone to violence than people over 30.  For example, the peak rate of homicide is committed by Americans in their early 20s.  The incidence of binge drinking has a similar age profile.

homicide_age

Parents may have a big impact on their kids’ alcohol consumption too.  As Lauren Sausser wrote, even moderate parental alcohol use has an impact on their kids:

study published last year by the Institute of Alcohol Studies in the United Kingdom found that children may be distressed, embarrassed or otherwise negatively impacted when parents drink even a “low level” of alcohol.  “That this effect starts at the stage when parents are tipsy, rather than being drunk, is possibly a surprising finding…  However, it suggests that the way in which parents and their children view episodes of ‘tipsy’ drinking is quite different.” Further research shows that parents who exhibit favorable attitudes toward drinking alcohol will more likely raise children who will begin drinking as adolescents.

There are lots of ways to reduce violence without gun control such as better policing methods, and regulating alcohol is  so counter-intuitive that few people think of it.  As German points out at the above links, there are lots of practical ways to reduce alcohol use that would save more lives than the kind of gun control that is politically feasible in the US. There is no need to go all the way to prohibition of alcohol to be effective just like there is no need for gun regulations to go all the way to prohibition. Sensible alcohol regulations may be politically difficult due to opposition from the alcohol lobby (much like gun regulations are opposed by the gun lobby), but hardly any groups are pushing for alcohol restrictions.  Perhaps it is because people aren’t as frightened by alcohol as they are by guns and so alcohol produces a lot less emotional salience than guns.  

Guns are a lot scarier looking and dramatic than alcohol, but you should be more frightened of alcohol.

Of course, if your real goal is to repeal the Second Amendment, then focusing on the dangers of shooters and especially mass shooters has repeatedly proven to be an effective way to get countries to restrict gun access.  The gun industry thinks that fear of gun violence will increase gun sales, but it also provided the impetus for all developed nations (except the US) to restrict gun access by requiring a license to buy or operate a gun.  The same kind of fears of violent deaths in the streets led to mandatory driver’s licenses and numerous other restrictions on driving.

So maybe fear is the real reason why we irrationally focus on guns.  The gun lobby likes to scare people with stories of violence to encourage people to buy guns for self defense because they like the short-term boost in gun sales.  On the other side of the political aisle, the anti-gun movement also likes to focus on scary gun violence because they think the fear of gun violence will create momentum towards restricting guns in the long term.

But most people are scared of strangers and the fear of being shot by a stranger is misplaced because it is exceedingly rare.  You are the most likely to be shot by the people you know.  The more time you spend with someone, the more likely they are to shoot you.  The biggest danger is that you will shoot yourself. There are more than twice as many suicides as homicides just about everywhere in the world.  The next highest danger is being shot in the home either by accident or by a temporarily homicidal family member. The next most dangerous people are your friends.  Strangers are the least likely to try to kill you.  Of course, there are a lot more strangers out there than acquaintances, so family members only account for about 25% of all known murder victims and known murderers who kill their acquaintances only account for about 54% of the total.  (Caveat: 44% of murder victims have an unknown relationship with their murderer mostly because the murders are unsolved.)

The US is an extreme outlier in the suicide rate by guns so there is plenty of room for improvement and there is an intriguing libertarian movement to allow individuals more freedom to restrict guns from themselves and on their property.  Right now, it is effectively illegal for individuals with a history of suicidal episodes to put themselves on a list of people who have a mandatory waiting period before they can buy guns because the gun lobby doesn’t want any restrictions on guns.

Although guns are correlated with suicides in the US, the suicide rate could also be reduced by restricting alcohol. About 30% of US suicides are associated with alcohol use and there is also a correlation between alcohol use and suicide in many countries.

Cars are also more dangerous than guns. People who do not own a gun should really be far more scared of cars than guns because drivers are much more likely than gun owners to kill a stranger. Gun owners are far more likely to kill themselves or family and friends than to kill a stranger whereas drivers are more indiscriminate in who they kill and are particularly deadly for pedestrians. It goes without saying that cars are safer when there is less alcohol flowing through the brains of drivers. Alcohol restrictions have helped a lot, but much more could be done. In some states, it is legal to have drive-through liquor stores where drivers can discretely buy liquor without getting out of their cars! I kid you not. Here is a photo of one in a college town near me:

This scene should be as scary as guns!

My favorite history teacher I’ve ever had was Mr. Andrews of Newton High School. His son was a couple years older than me and was accidentally killed when he and a friend were playing with some guns at his friend’s house. As a result, when I became a parent, I was nervous about my kids playing at friends’ homes if I didn’t know whether they would keep guns in places the kids could access. But swimming pools should be a much bigger worry. About twice as many kids die of drowning than by accidental firearm discharge and alcohol use is involved in 70% of water recreation deaths and at least 20% of other drownings among adolescents and adults.

Posted in Public Finance, Violence & Peace

An unearned wealth tax would help stop rising inequality.

The main source of rising inequality in the US has been the rising incomes of the top 1% richest Americans relative to everyone else. Sure, the top 25% highest-income households have been doing fine, but their incomes haven’t been rising much faster than GDP. Only the richest 1% have really seen their incomes soar. This is partly because they get more of their income from owning stuff than from working and this is also one of the themes of Thomas Piketty’s 2013 book, Capital in the Twenty-First Century. The most famous part of the book was this simple equation:

r>g

r = rental rate on capital = growth rate of the value of capital

g = growth rate of GDP = growth rate of total income.

Generally speaking, when r>g, capital income is growing faster than total income and in this situation inequality will rise because capital, broadly defined, is simply wealth and wealthy people own most wealth by definition. Thus if wealthy people’s incomes are growing faster than workers’ incomes, inequality will rise.

Piketty’s equation would have been clearer if Piketty had included the major part of the economy that he left out of the equation: labor income. GDP = (income from capital) + (income from labor). This is related to Piketty’s equation because the growth of GDP (g) is equal to the weighted average of the growth of capital income and labor income. When capital income is growing faster than labor income, inequality rises. That is what Piketty’s oversimplified equation actually means.

There is disagreement about whether it is really an inevitable long run law of economics that capital income must grow faster than labor income (r>g), but Piketty shows that capital incomes did indeed grow faster than labor income during most of history (for which data is available) except for a half century or so in the middle of the 1900s and during the aftermath of the black death in the late 1300s.

So for most of history when wealthy people got richer and workers got poorer, it wasn’t because the wealthy were being more virtuous or working harder. The wealthy just got lucky. They weren’t saving more of their wages, they were earning more from their wealth without having to lift a finger. This should be clear for most of history because until the industrial revolution, very little capital was created by labor. It was mostly created by God in the form of land or slaves. This graph shows that in 1770 (the left edge of the graph), the bottom two categories of capital was real estate in the north of the United States.

And in the slave states, most of the wealth was in the form of slaves and land.

united_states_with_slavery-0

In 1770 the biggest fraction of the total value of capital was created by God (or nature if you prefer), not by people because it was mostly agricultural land and slaves.  Of course SOME of the value of agricultural land and slaves is due to improvements people made as they cleared the land and trained their slaves.  But much of the value of housing and other domestic capital is also just natural resources like land. For example, Karl E. Case estimated that between about 20% and 30% of the value of real estate in America from 1975-2005 was due to the value of land, and a significant fraction of the rest of the value of each house is the value of the raw natural resources they are composed of too. For example, a stone house is made out of stone from a quarry which has value in large part because it was created by nature.

Very little capital was created by workers at a sacrifice in 1770. That is best measured by the dark grey area at the top of each graph, and part of this portion of domestic capital is the value of natural resources. For example, when the value of capital rises without the owner lifting a finger, there is little reason why the owner should get the increase in value.

For example, when a new school is built, nearby properties soar in value, but the real creation of value was the school, not anything that the nearby property owners did. Why should the nearby property owners reap additional wealth for the luck of being located near the new school? This is particularly galling when the school is created using tax revenues from renters in the neighborhood who will subsequently have to pay higher rents because of the increase in property value.

Rising rents is the fundamental problem of gentrification and it could be ameliorated by taxing the unearned increase in the value of real estate so that the real estate doesn’t appreciate in value. Then that tax revenue could be used to build more amenities that improve other neighborhoods and generate more revenues from the properties becoming more desirable.

This is the idea that made Henry George by the most famous American economist in history in the decades around 1900. He believed that the value of capital that is created at a sacrifice by labor should not be taxed, but that capital that is created by nature should be so highly taxed that its value falls towards zero. One reason for his logic was that unearned wealth was not created by humans and so humans don’t deserve to profit from ownership. Secondly, there is no civilization without tax revenues and the most efficient source of tax revenues is something that is perfectly inelastic with respect to the tax rate. An inelastic supply means that an increase in the tax rate will not cause people to reduce their supply and if owners aren’t actually sacrificing to supply something, then a tax won’t cause them to supply less. For example, if you tax the value of land, it won’t change the quantity of land because land is not created by humans. On the other hand, our government mainly taxes the wages of workers and that kind of taxation can change the amount of work that people do. If the income tax rate on wages is 100%, people will do very little work, but if the income tax rate on land income is 100% of its imputed rental value, there will still be just as much land for people to use. As Noah Smith says:

Unlike income taxes, sales taxes, or corporate taxes, the Henry George Tax has no chance of choking off economic activity; after all, the amount of land is fixed, so you can’t tax it out of existence. Also, unlike the property taxes we have now, a Henry George Tax actually encourages landlords to build useful, valuable stuff on top of the land they own. Conventional property tax pays people not to build things on their land, since doing so will mean having to pay more tax. But the Henry George Tax—which would replace conventional property taxes—makes buildings and other productive structures tax-free, thus encouraging landowners to build more of them. And, as Henry George himself pointed out, the tax redistributes wealth from the rich to the poor without punishing rich people for creating wealth. …It appeals to our principles of fairness.

In addition to taxing the value of land and related natural resources like minerals and fisheries, in order to prevent rising inequality we should increase the taxes on other forms of capital that isn’t created at a sacrifice. Inheritance is another form of wealth that is unearned and it is a surprisingly large portion of total wealth according to Piketty’s data:

Inheritance [now] accounts for ~12% of national income annually (compared to ~20% in 1900) and is projected to stabilize at ~15-25%. Most shocking, inherited wealth as a percentage of wealth was 90% in 1900, 45% in 1970, is already back to 70% and projected to rise to 80-90%.

Inheritance taxes could rise back to where they were in 1970 without hurting growth. Indeed, economic growth was faster in America when inheritance taxes were higher and higher inheritance taxes could help rich children work harder because they wouldn’t count on getting a billion dollar welfare check from their parents’ estate upon death.  Taxing inheritance rather than taxing workers would increase work and increase GDP.

When wealth grows in real value, that capital gain is mostly unearned because most wealth is not created at a sacrifice by saving.  Most wealth was either created by nature or was inherited or has been created by the magic of compounding interest.  Wealth simply tends to grow in value at 5% per year without its owners lifting a finger. We need a tax system that can prevent inequality by helping boost the growth of wages, while reducing the unearned income of wealth.  This is tricky to accomplish without reducing the incentives to create capital which would hurt wages, but two no-brainers that would reduce inequality and boost efficiency would be increasing the taxes on natural resources like land and increasing the inheritance tax.

Radical Markets is a book that explains this idea and ways to tax many other forms of wealth like intellectual property. Anyone who owns a copyright or patent should be required to pay annual fees that rise over time to encourage them to pass the intellectual property on to the public domain. Disney shareholders are still reaping profits from inheriting intellectual property that was created nearly a century ago and there is little difference between century-old intellectual property and land at this point because both were inherited, not created. If copyright owners are allowed to keep others from using ideas, they should pay a tax, and the tax should be especially high on century-old intellectual property because no tax could possibly cause it to be destroyed nor would it cause less to be produced.

Paul Heald researched the effect of copyright upon book availability:

I had one of my students write a computer program that would crawl through Amazon.com and pull 2,500 fiction titles at random. … The findings are absolutely fascinating.

We broke these out by decade. … You would expect that if you can crawl through Amazon looking at only new books and only books sold by Amazon …of course, the biggest number of books is from the decade 2000-2010. That’s what you’d expect; they’re more recent, more popular. Drops off really quickly for books in the 1990s, 1980s, 1970s, ’60, 1950, 1940, 1930 — here’s the point in time where books start falling in the public domain. Suddenly it goes up and up and up. There’s as many books [that] Amazon is selling brand new right now from the 1900s to 1910 as from the 2000s to 2010. You go all the way back to 1850 — there’s twice as many books from the 1850s being sold on Amazon right now as the 1950s.

 

There is a spike for books published before 1922 because copyright ran out for all books published before then. The graph would be even more dramatic if we controlled for the number of books published in each year because there are were far more books published per year after 1922 than before 1922, but most of the more recent books published have been disappeared due to copyright. Although most economists look for problems with the tragedy of the commons, there seems to be a bigger problem with the tragedy of the private in book publishing. Weaker copyright would be better for society and one way to do that would be to increase the tax on copyright owners for every year that they keep it as private property.

Posted in Inequality, Public Finance

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