Tag: Economics

Economic Considerations Don't Always Matter In War

Economic Considerations Don’t Always Matter In War

Posted on by jabittan
In the United States, a huge amount of what we do is driven by economics. The political saying, “it’s the economy stupid,” is a great demonstration of how much economic measures matter in our country. When Americans perceive that the economy is going well, they will support incumbent politicians. When they perceive that the economy is not going well, then the president and their party is in for a tough election cycle. Wealth and economic well-being are central to the American experience and psyche, and when we look beyond our borders we project that same idea onto other countries and peoples who are not always as worried about the economy as we are.
 
 
This seems to be the case with the current war in Ukraine. American’s cannot understand why Putin is waging a costly war and taking on so many sanctions that are hurting Russia and Russian citizens. Our central value is economic, so it seems completely irrational that Putin would wage a war that is as economic costly as the current war in Ukraine. But, as Steven Pinker notes in his book The Better Angels of Our Nature, economics isn’t always the main driver in war time situations. Pinker writes,
 
 
“The economic futility of war is a reason to avoid it only if nations are interested in prosperity in the first place. Many leaders are willing to sacrifice a bit of prosperity (often much more than a bit) to enhance national grandeur, to implement utopian ideologies, or to rectify what they see as historic injustices.”
 
 
This seems to explain the current situation in Ukraine well. American’s are almost singularly focused on prosperity and when we look abroad that is what we expect other people’s to be focused on. Putin, however, seems to be focused on a narrative of a unified Ukraine and Russia. Whether that narrative is historically accurate or not, Putin is obsessed over the idea that Ukraine belongs as part of Russia, not as a separate, sovereign, more European entity. The war that Putin is pursuing is about something other than economic prosperity and Putin is willing to sacrifice lives and economics in his effort to bring his vision to life.
 
 
I think this idea reflects a larger point that I think about and write about frequently. As individuals, even as an individual nation of 330 million people, we have a limited perspective on the world. We have limited experiences and limited factors that influence and shape what we believe to be good or bad. Therefore we have only bounded rationality to guide us. We cannot understand all and know everything. Life has far more ways of living than what we as a single individual or single nation can fully understand. In the case of Putin and Ukraine, our single view of how people should behave, informed by our central economic values, is what has guided us to respond to Putin with economic sanctions that may or may not be effective in the long run. A more informed perspective and understanding of how other people see the world (in this case how Putin and Russian citizens understand the world) might lead us to make different decisions in how we respond to the type of war and crisis we are seeing in Ukraine. This is something we should remember when thinking about our own lives, the decisions we make, and the decisions of other people. We don’t fully understand the factors that lead to other people making their decisions, and we should realize that what makes sense to us may not make sense or may not be as strong of a factor to others.
Where is Capitalism Today?

Where is Capitalism Today

Posted on by jabittan
“Capitalism began as a theory about how the economy functions,” writes Yuval Noah Harari in his book Sapiens, but today, capitalism is more than just an economic theory. “Capitalism gradually became far more than just an economic doctrine,” writes Harari, “it now encompasses an ethic – a set of teachings about how people should behave, educate their children, and even think.”
 
 
Capitalism is the basic framing through which most of us live our lives. If you live in the United States you probably get bombarded with advertisements all day long. Those advertisements are a product of capitalism (a message to get you to purchase more things and use your capital) and also reflect the general nature of the capitalistic system we live within. We praise two parent families with children who purchase the newest things, have the most expensive stuff, and take the most exciting vacations. Everywhere you look you see advertisements featuring parents purchasing things and experiences to enrich the lives of their children. You see messages about the things you could be if you spent your money on a new car, a new outfit, or traveled to a new place.
 
 
Underlying all of these messages is that the true way to exist within society is through purchases. Buy more, spend more, work more, all in service to the economy and our own consumption of materials and experiences. Those who work and produce are good, those who have lots of resources to spend and spend them freely are even better. A hermit, not working, not producing, and not spending money, is the worst thing you can be.
 
 
I think it is important to step back and recognize how many areas of our lives are influenced by something that started as a way to describe a set of economic principals. Major decisions, like where we should live or whether we should have children, are often influenced by ideals found within capitalism. In many ways, capitalism has become the end goal, and not just an economic theory. Many values have taken a back seat to consumption, or the appearance of consumption, and that can leave life feeling empty, cold, and somewhat vain.
Informal Economies

Informal Economies

Posted on by jabittan
My last post was about the high costs of work and how we often fail to fully consider the high costs of work for people in the deepest poverty when we criticize them for relying on government aid for survival. This post looks at what people living in poverty do to make money when they don’t engage in formal economies or work traditional jobs. For the individuals chronicled in Kathryn Edin and H. Luke Shaefer’s book $2.00 A Day, informal work is how most of them make any money, as the costs of formal employment can make working in the formal sector prohibitive.
“The more employment in the formal labor market proves perilous – with low pay, too few hours, and crazy schedules – the more untenable it is for a parent trying to raise kids. And the weaker the government safety net, the more the informal work described here will proliferate.”
Informal work can be dangerous, hazardous, and unpredictable, but often it is one of the only options available to people in poverty who can’t get a foothold in more traditional labor markets. If you can’t afford to live near a job, if that job changes its schedules unpredictably, and if you are generally taken advantage of in a low-wage work situation that doesn’t ensure you won’t go hungry or without water or power, then why risk putting in the effort to find and maintain a job in the formal economy? Why not fall back on what little social support and government aid there is and hope for odd jobs in the informal economy instead? At least those jobs will provide some measure of autonomy, can be done close to home or with reasonable transportation provided, and at least they will pay quick cash.
This is the calculation many living in poverty face each day, but there are long term costs to relying on an informal economy. The authors write, “the replacement of a formal economy with an informal one – unregulated and unpoliced – may have a self-perpetuating effect of pushing the $2-a-day poor further and further out of the American mainstream.” Informal jobs are not enough to help people escape poverty, build skills or a resume for the future, or find stable and solid footing. Informal economies meet the immediate needs of the day sometimes better than formal jobs, but they don’t provide the stability and support necessary to plan for a future and build a road toward success.
However, as my first few paragraphs show, we cannot simply blame the individual for opting out of the formal economy for informal jobs that don’t provide long-term benefits. The formal economy can also be unpredictable, can deliberately schedule too few hours or change hours last minute, and also may not provide many long-term benefits to help someone live with any stability. These are large structural issues with the way our economic system has developed. Forces beyond an individual’s work ethic and self-control are shaping the environment, the cost/benefit calculations, and the opportunities for both formal and informal work. All of this creates a self-perpetuating cycle between informal economies and formal work for the poorest people in our country. Removing the little support that exists for the poor and criticizing them for not having a formal job and for engaging in informal economies will never be enough to improve the situation for more than a minimal percent of those living in deep poverty.
Economic Segregation and Poverty

Segregation & Poverty

Posted on by jabittan
Raj Chetty, a prominent economics professor at Harvard University, has done fantastic research that shows how varied the level of upward mobility is across the United States. According to Chetty, you can see differences in the level of upward mobility and map those differences onto specific factors about areas at the level of zip codes and neighborhoods. This is an important aspect of poverty to consider, because it means that opportunities and success in life are influenced by social factors that are specific to the places where we grow up. It reveals the danger of economic segregation and the importance of finding ways to work together to address problems of poverty.
Kathryn Edin and H. Luke Shaefer address this point in their book $2.00 A Day by writing about the work of sociologist William Julius Wilson. They write, “Wilson argued that the reason poverty had persisted in America even in the face of the War on Poverty declared by President Lyndon Johnson in 1964 was that in the 1970s and 1980s, poor African Americans had become increasingly isolated, relegated to sections of the city where their neighbors were more and more likely to be poor, and less and less likely to find gainful employment.”
Opportunity is somewhat dependent on the people around you. That is the lesson from Chetty and from Wilson as presented in $2.00 A Day. If opportunity, success, and upward mobility were entirely within the control of the individual, then we would expect to see uniform mobility across the country. Instead, we see areas where people are more able to advance economically, and areas where almost no one advances.
When you are in a ghetto you are segregated from opportunity. Everyone you know is also likely in the same economic position that you are in. You don’t know anyone who can inspire you to go to school, work hard, and seek out a meaningful career that is a good fit for you. The failure to advance is not a failure of you personally, or even of your family and the people around you. The failure lies with the larger society which allows pockets of deep inequality and economic segregation to persist.
I am not currently part of the solution. My wife and I have chosen to live in a suburban neighborhood where most people presumably are in pretty similar economic states as we are. We are as economically segregated as anyone else in the nation. It is hard to tell people to not chose to economically segregate themselves, and efforts that bring more low-income (or even just affordable) housing to high price neighborhoods are often voted down and rejected. I don’t have a solution to the economic segregation problem, but the research from Chetty and the lessons from Wilson show that it is clear that economic segregation decreases economic mobility, placing the belief that anyone can succeed as long as they work hard enough on shaky ground.
Framing Costs and Losses - Joe Abittan

Framing Costs and Losses

Posted on by jabittan
“Losses evokes stronger negative feelings than costs. Choices are not reality-bound because System 1 is not reality-bound,” writes Daniel Kahneman in Thinking Fast and Slow.

 

We do not like losses. The idea of a loss, of having the status quo changed in a negative way without it being our deliberate choice, is hard for us to accept or justify. Costs, on the other hand, we can accept much more readily, even if the only difference between a cost and a loss is the way we chose to describe it.

 

Kahneman shares an example in his book where he an Amos Tversky did just that, changing the structure of a gamble so that the contestant faced the possible outcome of a $5 loss or where they paid a $5 cost with a possibility of gaining nothing. The potential outcomes of the two gambles is exactly the same, but people interpret the gambles differently based on how the cost/loss is displayed. People are more likely to take a bet when it is posed as a cost and not as a possible loss. System 1, the quick thinking part of the brain, scans the two gambles and has an immediate emotional reaction to the idea of a loss, and that influences the ultimate decision and feeling regarding the two gambles. System 1 is not rationally calculating the two options to see that they are equivalent, it is just acting on the intuition that it experiences.

 

“People will more readily forgo a discount than pay a surcharge. The two may be economically equivalent, but they are not emotionally equivalent.”

 

Kahneman continues to describe research from Richard Thaler who had studied credit-card lobbying efforts to prevent gas stations from charging different rates for cash versus credit. When you pay with a card, there is a transaction processing fee that the vendor pays to the credit card company. Gas stations charge more for credit card purchases because they have to pay a portion on the back end of the all credit transactions that take place. Credit card companies didn’t want gas stations to charge a credit card surcharge, effectively making it more expensive to buy gas with a card than with cash. Ultimately they couldn’t stop gas stations from charging different rates, but they did succeed in changing the framing around the different prices. Cash prices are listed as discounts, shifting the base rate to the credit price. As Kahneman writes, people will skip the extra effort that would garner the cash discount and pay with their cards. However, if people were directly told that there was a credit surcharge, that they had to pay more for the convenience of using their card, it is possible that more individuals would make the extra effort to pay with cash. How we frame a cost or a loss matters, especially because it can shift the baseline for consideration, making us see things as either costs or losses depending on the context, and potentially altering our behavior.
Markets and Fairness

Markets and Fairness

Posted on by jabittan
Research from Daniel Kahneman’s book Thinking Fast and Slow may help explain some of the anger and anti-capitalism sentiment that has cropped up in the United States in the last several years. Senator Bernie Sanders is incredibly popular among a segment of the population and he is not afraid to categorize himself as anti-capitalist and as a socialist to a degree that would have been unthinkable just a decade ago. From my perspective, many people feel that they have been treated unfairly by markets, and this lack of fairness contributes to the Sanders support, especially among young people.

 

Kahneman’s writes, “a basic rule of fairness, we found, is that the exploitation of market power to impose losses on others in unacceptable.”

 

My experience is that people are feeling the forces of market power in many different areas, and becoming discontent with their own economic standing and with feeling as though they are being treated unfairly by large market players. It may be that most people can still afford to buy more than what they need and to live comfortably, but on a daily basis they are faced with a barrage of unfair market practices. There may not be anything legally wrong with a market practice, and the market practice may be adjusting for real value rather than just collecting rents, but nevertheless, the exploitation of market power still feels unfair.

 

I spend a lot of time thinking about healthcare in the United States, and for many years the costs of healthcare and health insurance has risen much quicker than employee wages. With employees feeling their wages stagnate, unfair exploitation of market power can become a major outrage. This has been seen with drug prices as some individuals and companies have specifically targeted pharmaceutical mergers and acquisitions with the intention of increasing drug prices. Some medications have risen dramatically in price at the same time that many deductibles for health plans have shot up beyond the savings levels of most Americans. Even though a drug may provide an incredible value like saving a life or dramatically improving the quality of a life, an increase in price while wages stagnate feels deeply unfair to people. This could be a basis for our discontent with markets and capitalism (at least on the healthcare front), and a source of support for Bernie Sanders and his socialism lean.

 

When I think about it, I see this type of market exploitation beyond the world of healthcare. Ice cream cartons continually get smaller, the fun-sized candy is a depressingly small size now, good quality razors seem to be unreasonably costly with the cheap alternatives being effectively useless. Outside of smartphones, most markets seem to be providing less value for higher costs, and it is not hard to understand the frustrations that so many people may feel with markets and market solutions, even if they can still afford to live a comfortable lifestyle. For any given firm, exploiting market power is a rational and reasonable thing to do, but for customers, this adds up to an untenable sensation of loss, and a deep feeling that markets are unfair and should not be trusted. In a global market sense, it is as if we face a universal tragedy of the commons problem, but instead of a habitable grazeland being decimated, it is our economic wellbeing that is destabilized as each player in the market flexes more market power to impose marginal losses on each consumer.
Why We Talk About Human Nature

Why We Talk About Human Nature

Posted on by jabittan
I entered a Master’s in Public Administration program at the University of Nevada in 2016. I started the same semester as the 2016 election of President Donald Trump. I was drawn toward public policy because I love science, because I have always wanted to better understand how people come to hold political beliefs, and because I thought that bringing my rational science-based mind to public policy would open doors and avenues for me that were desperately needed in the world of public administration and policy. What I learned, and what we have all learned since President Trump took office, is that politics is not about policy, public administration is not about the high minded ideals we say it is about, and rationality is not and cannot be at the heart of public policy. Instead, politics is about identity, public administration is about systems and structures that benefit those we decide to be deserving and punishing those who are deviant. Public policy isn’t rational, its about self-interest and individual and group preferences. And this connects to the title of this post. We talk about human nature, because how we can define, understand, and perceive human nature can help us rationalize why our self-interest is valuable in public policy, why one group should be favored over another, and why one system that rewards some people is preferable over another system that rewards other people.

 

In Daniel Kahneman’s book Thinking Fast and Slow, he writes, “policy is ultimately about people, what they want and what is best for them. Every policy question involves assumptions about human nature, in particular about the choices that people may make and the consequences of their choices for themselves and society.” The reason why we talk about human nature is because it serves as the foundation upon which all of our social systems and structures are built upon. All of our decisions are based in fundamental assumptions about what we want, what are inherently inclined to do, and how we will behave as individuals and as part of a collective. However, this discussion is complicated because what we consider to be human nature, is subject to bias, to misunderstandings, and motivated reasoning. Politics and public policy are not rational because we all live with narrow understandings of what we want human nature to mean.

 

Personally, I think our conceptions and ideas of human nature are generally too narrow and limiting. I am currently reading Yuval Noah Harari’s book Sapiens, and he makes a substantial effort to show the diversity and seeming randomness in the stories that humans have created over tens of thousands of years, and how humans have lived in incredibly different circumstances, with different beliefs, different cultures, and different lifestyles throughout time. It is a picture of human nature which doesn’t quite make the jump to arguing that there is no human nature, but argues that human nature is a far more broad topic than what we typically focus on. I think Harari is correct, but someone who wants questions to religion to be central to human nature, someone who wants capitalistic competition to be central to human nature, or someone who wants altruism to be a deep facet of human nature might disagree with Harari.

 

Ultimately, we argue over human nature because how we define human nature can influence who is a winner and who is a loser in our society. It can shape who we see as deserving and who we see as deviant. The way we frame human nature can structure the political systems we adopt, the leaders we favor, and the economic systems that will run most of our lives. The discussions about human nature appear to be scientific, but they are often biased and flawed, and in the end what we really care about is our personal self-interest, and in seeing our group advance, even at the expense of others. Politics is not rational, we have all learned in nearly four years of a Donald Trump Presidency, because we have different views of what the people want and what is best for them, and flawed understandings of human nature influence those views and the downstream political decisions that we make.
Capitalism and Externalities

Capitalism and Externalities

Posted on by jabittan
Capitalism has come under fire in the recent years in ways that I would not have predicted as I completed my college degree and entered the workforce. For so many years the idea of capitalism has been central to the American story and to American identity. It may not be perfect, but it has always been held above other economic systems as the best option available. However, recently, people have taken a new look at capitalism to ask if it can be maintained without the plundering of others. Can there be a reasonable sense of equity or equality within a system of capitalism? And in the United States, do we really have a meritorious system of capitalism, or is the American system of capitalism overrun with grift and graft?

 

Allowing people to flourish based on their own talents, allowing people to pursue their own interests, and to accumulate wealth can be a good thing, but it can also be done to excess. Like alcohol, chocolate cake, or Netflix, our pursuit of wealth can essentially be an addiction, and the costs can be born on all of society, not just on ourselves. Our actions and the systems and structures within which we operate have unintended consequences. These consequence, or externalities, can be positive or negative. Within capitalism, positive externalities include new technologies that improve our lives, more efficient markets which minimize waste, and hopefully more goods and wealth for everyone. But negative externalities related to capitalism include pollution, corruption, and extractive processes that harm individuals, communities, and environments.

 

In Letters From a Stoic, Seneca writes to his friend Lucilius, “I myself pray rather that you may despise all those things which your parents wished for you in abundance. Their prayers plunder many another person, simply that you may be enriched.”

 

Seneca is acknowledging that when one person gains resources, often times it is at the expense of another person. The goal of capitalism is for our economic system to be positive sum, meaning that everyone is better off in an exchange – a state known as a Pareto Efficiency. However, this is not always the case. Seneca sees exchanges, or maybe more precisely the accumulation of resources and wealth, as zero sum, meaning that there is a fixed amount of stuff, and that anything that one person accumulates is taken away from another person. This, in my opinion, is where so much of our discontent in the United States and across the globe with capitalism lies.

 

Seneca may not always be correct. There may be Pareto Efficiencies out there and there may be situations in which capitalism builds a positive sum economic system. But it does seem like moderation in our approach to capitalism and wealth accumulation is warranted. At a certain point, for us to have more necessarily mean that we are extracting wealth and resources from other places. Mining, logging, and cattle grazing can have damaging effects on local environments and communities, even if they do help develop industry or increase GDP in the places we take resources from. Beyond a certain level, continuing this trend is likely to make our lives marginally better, while potentially making the lives of others much worse. We should constantly ask ourselves if we are nearing that point, and try to limit our need for more stuff and more wealth when we are at sufficient level where the marginal gain for us is meaningless and effectively just plunders others for our own enrichment. It seems reasonable if we should ask whether limitless growth is really possible, or if capitalism ends in a state of plunder, in which nothing is left for a sustainable existence for everyone.
Hiding the Cost of Healthcare

Hiding the Cost of Healthcare

Posted on by jabittan
In the United States, our current system of healthcare coverage is hiding the cost of healthcare. Anyone who has to go to physical therapy, get an MRI, has a child that needs treatment for a disability, or ends up in an ER knows firsthand that healthcare is expensive, but many of them probably don’t realize just how costly our healthcare system truly is. For the most part, in our country we have a system that pulls a third party into every payment scenario for healthcare, and as a result, the cost of healthcare is not reflective of a true market.

 

Many argue that our current system creates too much of a moral hazard, with people living unhealthy lifestyles because they know they won’t face the full cost of care if they need it. Some argue that the current arrangement leads to unnecessary care or over-treatment because people don’t pay the full cost of care, so they seek more of it. At the same time, groups argue that insurance and healthcare coverage are still prohibitively expensive, and that the stress of possibly having to go to a doctor and spend thousands of dollars (even if one is insured) genuinely harms people’s health.

 

I think all of these are true in their own way, and I think they are relatable because they are things that people have seen first hand or can easily imagine, but there is still a deeper level of healthcare costs in America that we don’t discuss. Our system of taxes is also hiding the cost of healthcare. As Dave Chase writes in The Opioid Crisis Wake-Up Call, “Today, the tax break for employer-paid benefits is estimated at over $600 billion, making it the largest tax break in the tax code, the nation’s second largest entitlement after Medicare, and the primary wage suppression driver.”

 

During World War II, wages to employees were frozen to prevent rapid inflation in the United States during the war. To attract and retain qualified employees, businesses turned to employer-paid benefits, and congress created a law which would allow those benefits to be tax-deductible for employers. This was a way to effectively give employees a bonus without paying them more, keeping inflation down, but still giving them something that economically and socially benefited them. Today of course, you are taxed on anything of value you receive from your employer as if it was straight cash, so your healthcare benefit basically still counts as wages, but that tax break for the employers is still in place for the health benefits they provide.

 

This is where we are hiding the cost of healthcare in America when it comes to private insurance. Most Americans receive healthcare through their employer, and the US government loses out on $600 billion in taxes to allow employers to offer health insurance. So the plan you are on that you might lose if you are fired, the plan you have this year that might not be offered again next year if the insurer changes, the plan that still has a $1,500 deductible and $4,000 out of pocket annual max, costs you and U.S. tax payers $600 billion per year.

 

Because this is a hidden cost, it is not something we discuss very often. We are afraid of the cost of a nationwide healthcare system, but we don’t discuss how much money is not being collected in taxes and being sheltered by a tax break that maintains a system that very few people are actually happy about. We face high costs ourselves, even if we are covered by a plan that fits within this $600 billion tax break system, and the system has warped the way that care is payed for and provided to the point where we don’t even know what knobs and levers to try to pull to get the who thing to be more transparent, provide real value, and to be less costly. We need to be honest about the ways that our current system is hiding the cost of healthcare in America, or we will never be able to make real changes to improve the system.
Jobs and Addiction

More Than The Chemical: Jobs and Addiction

Posted on by jabittan
A simple view of addiction is that people become hooked on a powerful chemical and their entire life becomes focused on nothing but the drug. The chemical sinks into the brain of the addicted person, and their desire for the neurological high from the chemical drives them beyond everything else. If only we could stop the person from ever being exposed to the chemical, even once, we would prevent them from ever developing their drug addiction and chemical dependence.

 

This view, however, is incomplete. A lot of what I try to do with this blog is show that the world is more complex than we often realize. It is easy to sit at home, listen to a news story on TV, and call everyone an idiot while offering an obvious solution from the couch. In reality however, our first impressions of the world and its problems are woefully inadequate, and drug addiction is a good example.

 

I recognize that chemical hooks, neurotransmitters, and brain chemistry are major parts of addiction, whether to a chemical substance, to a behavior like gambling, or other forms of addiction, but research that Dave Chase’s book The Opioid Crisis Wake-Up Call presents is a good indication that there is more going on than just a drive to fill the brain with a chemical. Chase writes, “For every one percent rise in unemployment, there’s a four percent rise in addiction and a seven percent increase in emergency department visits.“

 

Our economy, it appears, is deeply connected with addiction. It is not hard to think of a causal model between economic performance and addiction. Having a meaningful job gives people a chance to feel valued, gives people a chance to contribute to society, and gives people an increase in their social status (in political science we might think of Social Construction Theory: working people are Advantaged or at least Dependents whereas the unemployed are simply Deviants).

 

When people lose their job, they feel a loss of social status, they may feel helpless if they cannot find another job of equal status, and they lose their feeling of importance. They become more vulnerable, and it appears are more likely to turn to substances to blunt the pain they feel, either physically, mentally, or emotionally. This sets people up for addiction.

 

In this model, addiction is not just a moral failure. It is a failure at more levels than just the individual and their ability to work and resist chemicals. Our society has isolated people and made it hard to maintain strong family connections. When jobs disappear and people don’t have close people and community connections and organizations to turn to for meaning, purpose, and participation, they will struggle, and in their empty void potentially turn to drug use. Economic data makes this clear, and the solution is not just to provide someone with a bleak call-center job, but to really develop community connections, meaningful work, and opportunities to improve social status while deepening relationships and opportunities to contribute to society. Drug use is not a simple issue, it is tied to larger economic and social forces, and we have to recognize that reality to solve our nation’s problems.