In conversation with Richard Reeves

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this installment, Equitable Growth’s Senior Director for Family Economic Security and Senior Fellow Elisabeth Jacobs talks with Richard Reeves, senior fellow in Economic Studies and co-director of the Center on Children and Families at The Brookings Institution and most recently the author of Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It (2017).

[Editor’s note: This conversation took place on October 11, 2017.]

Elisabeth Jacobs: Let’s jump right in, Richard. Who are the dream hoarders?

Richard Reeves: I define them in two ways. One, they are the people at the top of the income distribution who are essentially the winners of the inequality divide in our country, who have risen to the top over the past three or four decades. They are, in my view, the top 20 percent roughly of the income distribution. That means they earn healthy six-figure household incomes, with average incomes of about $200,000 a year.

This is where I see the divide between the bottom 80 percent and the top 20 percent. But then, more specifically, I identify some behaviors among those at the top of the distribution that I think amount to kind of a form of hoarding. In other words, they are kind of overconsuming, or unfairly consuming, some goods or services that actually give them a leg up or give their kids a leg up in a way that perpetuates the inequality that they are currently benefiting from.

Jacobs: What kinds of goods and services?

Reeves: Education and housing are at the top of my list, and the way that they kind of interact with each other. Think about the way the geography of our cities now reflects economic inequality. There has been a slight drop in racial segregation from very high levels but an increase in economic segregation between neighborhoods, between different areas. I think that’s true at the top, as well as the bottom of the income distribution too. So, we are seeing those who are affluent, the top 20 percent and above, separate themselves off into different neighborhoods, which means they can access education resources such as Kindergarten through grade 12 education, and then use local zoning laws to protect the neighborhoods and the land in those neighborhoods from incursions by those who are of more modest economic backgrounds.

That’s all subsidized through the federal mortgage interest deduction. If you want to think about the way in which money buys opportunity and therefore perpetuates inequality, the interaction between the income trends and earning trends, the residential segregation of neighborhoods, the way that education is provided and local zoning laws and regulation of land—they all interact with each other in a way that effectively means the federal government subsidizes me in an expensive neighborhood in an area with great schools. I can then defend against anybody else using unfair exclusionary zoning laws. And my kids therefore get to go to a good public high school and live in a relatively affluent neighborhood.

Jacobs: Why do you think this happened?

Reeves: It’s the combination of millions of small decisions. I think that what happened was that we’ve seen growing labor-market inequality, which combined with inequalities in family formation and family structure and, using a stunningly unromantic phrase, assortative mating, has led to even greater household income inequality. That money, in a society where money matters so much, has been able to be readily transferred into other kinds of advantages, including wealth, including housing, and including access to education.

So, you can see the how. The question then is why, and I think you have to talk about incentives, and the particular incentives of those who are doing well to protect their own position and to protect the position of their children. And I think there is inequality and class perpetuation that really speak to each other.

One of the things I think more strongly now than when I even wrote the book is that actually it’s a long way down from the upper-middle class. It’s a long way down. And the stakes are higher because actually dropping from the 90th to the 50th percentile of income doesn’t look very good down there.

Jacobs: Right.

Reeves: So, being in the middle or lower than that in the United States has dramatic consequences for other things such as access to health care, access to housing, and access to your kids’ education. So it’s both farther to fall and a harder landing, which means the upper 20 percent are highly incentivized to use every means at their disposal to protect their position and the position of their children, and if there are tools available to do that, even if they become exclusionary and unfair, they are highly incentivized at an individual level to use everything, every tool at their disposal. And individually that’s kind of rational, and in some ways sort of justifiable because of this fear of falling, as [author and activist] Barbara Ehrenreich phrases it.

Fear of falling is a really great phrase. The worse inequality gets, the greater the incentives among upper-middle class households to prevent downward mobility and protect their position. The more successfully they do that, the worse inequality gets. I think one other thing that’s important as to why it happens is the more separate these households become, the more their reference point for what counts as rich or affluent changes. It gets distorted because they tend to use local reference points. And it’s much easier to convince yourself you’re not very rich, even if you are in the 95th percentile, if everyone who you know is in the 98th percentile.

This “I’m not rich” problem is getting worse because they are seeing people who are segregated by neighborhood, by institution, by occupation, by marriage, and essentially spending their time more and more with people like themselves or wealthier than themselves. And that actually increases the fear of failure because you don’t see yourself as the winner because you’re always looking up.

This creates real problems as a political way of thinking because it does encourage those who are maybe not quite in the top 1 percent, earning $400,000 or more, to say “I’m not rich. I’m not rich.” Everyone wants to tax the rich, and no one thinks they are rich. And that’s another side effect of economic inequality when it becomes physical, becomes corporal, is incorporated into our neighborhoods and our institutions—so incorporated that it has these huge effects of reference point bias and insulation from what’s really going on. This institutionalization of inequality in the various ways that I’ve talked about speaks to this class divide, and that most troubles me. To me, this speaks to the kind of infantilized debate about inequality, where it’s much easier to stop eating avocado toast than it is to talk about the fundamental problems of the wage distribution.

Jacobs: Part of the problem, too, is the connection between this “I’m not rich” effect and the provision of public services and public goods. Underlying your argument about the separation of classes is that society today doesn’t actually have a unified sense of public goods and have a floor for the quality of public goods in this country.

Reeves: One argument for public goods is it de-risks downward mobility, it lowers the stakes about your own position and the position of your children, and therefore somewhat blunts the incentives to do absolutely everything in your power to protect your position. You can’t get that desperate because the stakes are little bit lower. Therefore, people in the upper-middle class will pull back a bit, be persuaded that actually they need to give up a little bit, and it’s not the end of the world.

Still, for the top 20 percent of households, it does feel like a long way down. When people in the upper-income neighborhood I live in obsess about their kids getting into a good college, and I tend to say, “Relax already,” and they say, “No, it’s different now.” And what they say, it’s because the Chinese are coming, or robots, or whatever—they point to this much more competitive world. But actually I think it is different now, but in a different way. It’s different now because the stakes are higher—that actually failing to get a good start in the labor market will have kind of tougher consequences.

The other thing it speaks to, and you’ve written about this yourself, is the growing importance of human capital of various forms in terms of the labor market. It means you’ve got to do better earlier now. It doesn’t feel as if, well, if you don’t do so well now, then maybe you don’t do so well in college, but you can catch up later. I think the labor market can still do that, but my sense is that it doesn’t do it as effectively as it did before. Unless you hit the labor market with a decent running start in the labor market—and that means increasingly certain qualifications, credentials, human capital, and so on—it’s just tougher to succeed than it was before.

I am making it personal because I think inequality is more personal, that some people are willing to accept as a necessary first step toward saying, “Oh, well, in that case, maybe we do need to do more redistribution. Maybe things aren’t as fair. Maybe actually I could give up a bit more as a necessary first step towards doing that.”

Jacobs: You say in your book that you believe in meritocracy for adults but not for kids. Which is like halfway there, right, but like you still believe in meritocracy for adults?

Reeves: Well, I still basically believe in the market for adults. That invites some criticism from the left, too, because I think the other things being equal, a sort of reasonably freely functioning labor market tends to be relatively meritocratic. I think it has helped to overcome historic prejudices of various kinds, based on gender and race, though there’s still a long way to go. It’s like the alternative to democracy, it’s better than the alternatives.

The idea that social engineers can start deciding that person A is worth more than person B, I think, flies in the face of the evidence of human capital skills. The things that are rewarded in the market tend to be rewarded in the market. It doesn’t mean you can’t then do more to distribute market rewards, but I quite like that. What I don’t like is the fact that the preparation for the market is so uneven. Once the market starts to kick in, it does its thing. So, broadly, the reason why kids of the upper-middle class go on to do so well is not because, by and large, the labor market discriminates wildly in their favor. It does discriminate, but not wildly. It’s because they are chock-full of human capital and skills and credentials, soft skills, hard skills, you name it. They are pretty awesome in the labor market.

The problem is, the idea of meritocracy creeps into childhood. There is selection into our education institutions, even selection into our high schools. That leads to thinking that, well, the brighter kids should get the greater resources, they should get more opportunities. So, the idea of meritocracy kicks in quite early. And if anything, education should be antimeritocratic. If the goal is to equalize the contest, then we need to think about it completely differently and then have the contest.

The other criticism from the left is the top 1 percent. But if one looks at how much real income growth has gone to the 1 percent, and if one uses the share of growth and income accruing to the 1 percent to illustrate the point, then one can produce this amazing chart and say, “This is wrong.” But it’s not just that 1 percent. Some people say, “No, that’s ridiculous, it’s not the top 20 percent, it’s much more like 15 percent, maybe 10 percent.” I say, “Fine, okay, great, big deal.” I’ll take it. I would like to cut the upper-middle income distribution a little bit broader, but I’ll take 10 percent or 15 percent because at least that level is just the 1 percent.

Some people do genuinely still think it is just the top 1 percent who define inequality in the United States. They still have to deal with the fact that individuals and families are moving in and out of the 1 percent quite a lot, but they do still think that that’s the real fracture. There are two kinds of inequality here. There’s a kind of plutocratic inequality and a bourgeois inequality. I think both can be true. You can have the kind of pulling away, not just among the top 1 percent but also the top 0.1 percent. I think within the top 1 percent, there are many who get upset about the 0.1 percent. The 0.1 percent get upset at the 0.01 percent. Every time you add the zero, you just move the class wall a few notches up. The people who fly commercial versus the people who fly first class, and the people who fly on private jets versus the ones who have got their own planes. No matter how high you go, you can always kind of find a class fracture. I don’t think we can just do it on the basis of the top 1 percent.

But in my book, I also examine the danger of the classic “born on third-base thinking you’ve hit a triple” problem. I choose a few examples that get into problems such as legacy preferences in education or the way neighborhoods are zoned or how internships are secured. Because all of that looks like cheating to me. I’m trying to interrupt what I think is a complacent narrative that’s there on the conservative right, which is just, well, they are just amazing people and they are not doing anything wrong.

Jacobs: You talk a lot about legacy admissions, internships, occupational licensing, and exclusionary zoning. Say a little bit more about that and about why you highlighted those.

Reeves: Some of my suggestions about restructuring the financing of higher education, more access to health care, family planning, restructuring K–12, are all highly important and totally unoriginal. There is a vast literature on all of those. We know what need to do. The problem is that we can’t do it. And the reason we can’t do it is because the upper-middle class has convinced themselves that they don’t need to give anything up and that things are hunky-dory, basically. Or they have subcontracted it all out to more distant institutions. They don’t have to do anything personally. I’m trying to interrupt that narrative.

Take the most trivial problem—legacy preferences—and there’s a trivial objection to that, which is made all the time. People say, oh, it won’t make any difference. Great, let’s do it then. So, let’s do that and move on. If it really won’t make any difference, then why are you so worried about it? Why is everyone so troubled about it if it won’t make any difference?

I think the conversation about inequality has to be uncomfortable, and legacy preference is one example of that. It’s outrageous, it’s racist, it’s outdated, it’s a national embarrassment. So you might say, well, if you win that, so what? I would say, if I can’t convince the top of the upper-middle class, these affluent, well-educated liberal Americans that it’s unfair to have a hereditary principle operating in college admissions, then I think the chance of radically transforming the financing of higher education basically is zero.

Jacobs: I’m going to ask one more question. I think the relationship between inequality and mobility is at the heart of what you are getting at. But I think in the American story, race and class are fundamentally interwoven. So, I’m curious how you reflect on that, why you spent so little time on it in the book, whether that was an intentional choice.

Reeves: One of the reasons why that is not a big part of this book is because I am focused on the upper-middle class, the top 20 percent, who remain predominantly white, and are actually whiter than the general population today than they were a few years ago. However, I do think, and I wish now in retrospect that I had said more about the tools that are used to perpetuate class inequality—tools that are racist in origin and remain racist in practice, even if not legally sanctioned.

So, that’s why I’m doing more work now on exclusionary zoning. If you live in a relatively affluent neighborhood, then you don’t have to do that much to change the zoning rules. The status quo favors you anyway. It’s much harder to change things than it is just keep things as they are. And one of the reasons things are the way they are is because of the legacy of racist zoning laws and redlining and so on, which is now being sort of repurposed, I think, to perpetuate class, which again still has racist consequences, even if it is not on its face racist.

I now think there is more to the interaction between the two than I thought. The hardest question, and I think we should stop on the hardest question, is from Hispanic or African American upper-middle class families who ask me, “Do you think that if I am black or Hispanic and I have made it to the upper-middle class, I shouldn’t do everything to help my kids remain there?” That’s one of the hardest questions I’ve had to answer. Because the honest answer is, well, no, I don’t think it is the same. There is a different salience there, and there is a much greater risk of downward mobility for black kids anyway.

Jacobs: We could keep on talking until tomorrow, but you’re right to end on the hardest question.

Reeves: All great questions. Thank you.

Reinvent: Determining Bargaining Power in the Platform Economy

Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster…

…The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.

Fixes for the economy?:

  • A 4 percent inflation target from the Federal Reserve, * Incentivizing businesses to invest in workers,
  • Reinvigorating the idea that technology should be used to augment workers, not replace them.

The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.

Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore…says….”

Should-Read: Peter Leyden: California is the Future of American Politics

Should-Read: Peter Leyden: California is the Future-of American Politics: “The 21st-century hit California early, and the innovative state adapted quickly…

…and has pioneered a promising new way forward in many fields-including politics. The same forces-from demographics to technology adoption- re now hitting the rest of America in roughly a 15 year time delay. So what happened politically in California about 15 years ago is paralyzing America right now, and what’s happening politically now in California will hit the rest of America over the next 15 years. The once politically Red, now deep Blue state is inventing a progressive political playbook that will soon come to all America and even other parts of the world. That’s because California is in the early stages of inventing what will eventually be understood as a new digital, sustainable civilization for the 21st century…

Three Books for 2017: Economics for the Common Good, Janesville, Economism

3 books

Ken Murphy asked me for three books for 2017. Mine are: Amy Goldstein: Janesville: An American Story, Jean Tirole: Economics for the Common Good, and James Kwak: Economism: Bad Economics and the Rise of Inequality:

  • Amy Goldstein: Janesville: An American Story (9781501102233): The best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy…

  • Jean Tirole: Economics for the Common Good (9780691175164): A very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department…

  • James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): How a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters…


Amy Goldstein: Janesville: An American Story (9781501102233): This is the best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy. General Motors closed its Janesville plant in 2008 as it teetered on the edge of bankruptcy. Students began showing up at the local high school hungry and dirty. Teachers and others started social service organizations to supply them with supplies and food. Contributions to local charities fell off just when the need spiked. The closing of the GM plant triggered the closing of its nearby supplier plants as well.

The GM assembly-line workers had earned \$30 an hour at the plant. Some—a few—maintain their paychecks by becoming “birds of passage” working at still-open GM plants in other states. Others see their paychecks collapse: settle at jobs paying half as much, and with minimal benefits. For nobody was willing to pay anywhere near \$30 an hour for the skills and the energy of ex-GM workers. And the ex-workers could not use their skills and energy themselves to find a retraining path to anywhere near the pay levels that GM had offered them.

The big flaw, of course, is Amy Goldstein’s ignorance of and unwillingness to learn about the macro picture that makes the closing of the GM plant so devastating for Janesville. Plants, after all, close all the time because the money being spent on the products they had made is diverted to purchase other commodities made more efficiently that promote greater prosperity. Why weren’t the Janesville ex-workers able to benefit from spillovers from that greater efficiency and greater prosperity? Goldstein has no clue.


Jean Tirole: Economics for the Common Good (9780691175164): This is a very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department. “The distinctive characteristic of academics”, Tirole writes, “their DNA, is doubt”. This creates a substantial tension: economists need to teach what they know not just to their peers and their students but to the public sphere; but the public sphere today—did it ever?—does not want nuanced arguments from two-handed economists. Cable TV and Twitter do not like to be told: “It is difficult to tell”. Yet, often, that is what Tirole has to say. Nevertheless, Tirole thinks—and I agree—that we have no alternative but to try: we must imagine Sisyphus happy.

In its thoughtful discussions of market-state interactions, boundaries, and synergies; in its focus on the government’s role not in prescribing actions but remedying information and other externalities; in its pleas for a diversified portfolio of institutional forms; in its speculations about the long-run impact of information and communications technology revolutions; in its use of the economics of information as an organizing principle; in its rich institutional detail; in its application of theory to real-world examples; and in its (much appreciated) boosterism for behavioral economics—this is the best book I read in 2017.


James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): This is a very good book about how a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters.

First of all, I think the book is mistitled. It is not economics that becomes a misleading and destructive ideological “-ism”. Rather, it is, as my friend Noah Smith puts it, it is Econ 101—supply and demand, and where the curves cross is always the bet place to be—that became a misleading and destructive ideological “-ism”.

Second, as James Kwak writes, Econ 101 became a misleading and destructive ideological “-ism” because it suited the interest of powerful groups with megaphones that it become so: neoclassical economics badly done via those who learned little economics simplistically applying the most basic supply-and-demand models. Our large upward leap in inequality, the financial crash, and the large holes in our safety net are some of the current flaws in America that Kwak traces to 101-ism. And he is in large part correct do so. 101-ism makes people think that whatever inequality there is in the current market is natural and just, and that government policies will always reduce wealth by generating Harberger triangles. And these are very convenient beliefs for plutocrats—not for plutocrats to hold them, but for those who pay rents to plutocrats to hold in order to make plutocrats richer.

Noah Smith hopes that empirical evidence will disrupt and dismantle 101-ism:

The economics discipline itself has been shifting from theory to data for years now, and the world is taking notice. Every time studies show that tax cuts don’t do much to encourage investment, or that the impact of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101. The cure… is more and better economics…. Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis…

I think Noah is wrong here: 101-ism provides a simple and powerful intellectual framework easily grasped that makes sense of a complicated world and also works to the advantage of people with a great deal of money who benefit from its spread. Thought is vulnerable to simplistic theories which then gain an unshakeable hold. Simplistic theories are easily propagated because they are, well, simplistic. When it is in the interest of someone with resources that others believe a doctrine, they will devote their resources to spreading it. And it is very difficult to convince somebody of anything when their pocketbook or their sense of self-worth depends on their thinking otherwise. 101-ism thus has powerful material and cognitive advantages over alternatives. And the only thing that the alternatives have going for them is that they are the truth.

I think that James Kwak is showing us here both how much and how little arguments based on the truth can do in the modern public sphere.

But, as I said in talking about Jean Tirole’s Economics for the Common Good: we must imagine Sisyphus happy…

John Maynard Keynes: Essays In Biography

Should-Read: You really cannot do the history of economic thought without being willing to do counterfactuals! Now it is true that many times the counterfactual will be “somebody else would have done exactly this same work five or fifteen years later: it was immanent in the structure of the theory and in the empirical data being fed to the profession by the world”. But not always: John Maynard Keynes: Essays In Biography: “If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!…

…We have laboriously to rediscover and force through the obscuring envelopes of our misguided education what should never have ceased to be obvious…. Malthus proceeded to apply these principles “to the Distresses of the Labouring Classes since 1815.” He points out that the trouble was due to the diversion of resources, previously devoted to war, to the accumulation of savings; that in such circumstances deficiency of savings could not possibly be the cause, and saving, though a private virtue, had ceased to be a public duty; and that public works and expenditure by landlords and persons of property was the appropriate remedy….

The whole problem of the balance between Saving and Investment had been posed in the Preface to the book, as follows:

Adam Smith has stated, that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable…. But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing, and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence….

The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest…

Surely it was a great fault in Ricardo to fail entirely to see any significance in this line of thought…


John Maynard Keynes: The General Theory of Employment, Interest and Money: “The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics…

…which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed.

The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;¾a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away…

Jeffrey Friedman: What’s Wrong with Libertarianism?

Should-Read: I think the very smart Jeffrey Friedman gets this… not quite right. The case for the empirical benefits of capitalism is very strong—but only if one is willing to remove libertarian blinders and focus on eliminating the market failures (in distributions, in aggregate demand, in externalities, in information, etc.) that keep the function the market maximizes from being a good proxy for societal well-being. And once one has the market properly supported and disciplined, the philosophical discussion can commence: Jeffrey Friedman: What’s Wrong with Libertarianism: “Libertarian arguments about the empirical benefits of capitalism are, as yet, inadequate…

…to convince anyone who lacks libertarian philosophical convictions. Yet “philosophical” libertarianism founders on internal contradictions that render it unfit to make libertarians out of anyone who does not have strong consequentialist reasons for libertarian belief. The joint failure of these two approaches to libertarianism explains why they are both present in orthodox libertarianism they hide each other’s weaknesses, thereby perpetuating them. Libertarianism retains significant potential for illuminating the modern world because of its distance from mainstream intellectual assumptions. But this potential will remain unfulfilled until its ideological superstructure is dismantled…

Thus John Maynard Keynes was not the enemy but, indeed, about the best and only friend of the True Friends of Liberty: John Maynard Keynes (1936): General Theory: Chapter 24: “In some other respects the foregoing theory is moderately conservative…

…It indicates the vital importance of establishing certain central controls…. The State will have to exercise a guiding influence on the propensity to consume…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But… if the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary….

If our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again…. When 9,000,000 men are employed out of 10,000,000 willing and able to work… the complaint… is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production….

The modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what these advantages are:

  • They are partly advantages of efficiency¾the advantages of decentralisation and of the play of self-interest.
  • The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far.
  • But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice.
  • It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state.

For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future…

Should-Read: Murat Iyigun, Nathan Nunn, and Nancy Qian: The Long-run Effects of Agricultural Productivity on Conflict, 1400-1900

Should-Read: Murat Iyigun, Nathan Nunn, and Nancy Qian: The Long-run Effects of Agricultural Productivity on Conflict, 1400-1900: “A newly digitized and geo-referenced dataset of battles…

…in Europe, the Near East and North Africa covering the period between 1400 and 1900 CE. For variation in permanent improvements in agricultural productivity, we exploit the introduction of potatoes from the Americas to the Old World after the Columbian Exchange. We find that the introduction of potatoes permanently reduced conflict for roughly two centuries. The results are driven by a reduction in civil conflicts…

Should-Read: Noah Smith: How Affordable Urban Housing Stays Affordable

Should-Read: Noah Smith: How Affordable Urban Housing Stays Affordable: “San Francisco’s black population has declined… Hispanic population has… fallen in some historically Hispanic neighborhoods like the Mission District…

…The obvious explanation is economic: Rents in San Francisco have gone way up. Despite measures like rent control designed to shield existing occupants, rising rents put inexorable pressure on low-income residents to move out—they increase local prices for food and other goods, and they give landlords an incentive to evict rent-controlled tenants by any means they can find. Higher rents also discourage new low-income tenants from moving into the city.

How can rising rents be checked? One way is… an economic slump, possibly severe. A safer approach would be to build more housing… worth trying, for anyone worried about the exodus of low-income residents and disadvantaged minorities from the city. That’s why it’s so puzzling to see progressive activists fighting tooth and nail against the idea of allowing more housing development….

Zelda Bronstein… falls back on the old argument that new apartments in expensive cities are expensive:

Private developers don’t take advantage of permissive zoning or incentives to build affordable housing, because doing so doesn’t yield the profits that they and their investors demand…Because affordable housing doesn’t yield acceptable profits to real estate investors, the only way a substantial amount of it is going to get built is if it’s publicly funded.

Bronstein’s notion that housing is only affordable if government builds “affordable housing” is a common fallacy. The affordability of an apartment doesn’t depend solely on the inherent value of its roof and walls; it depends on the market. There are plenty of rentals in San Francisco that used to be affordable housing, and now are luxury units. Conversely, if prices go down, existing luxury units might morph into affordable housing…. We shouldn’t let suspicion of developers override rational consideration of the economics of housing…

Heather Boushey: “The tax bill should’ve been called The Inequality Exacerbation Act”

“The permanent corporate tax cuts and other cuts benefiting the wealthy, combined with only short-term benefits for the middle class and measures that increase the cost of health insurance for those lucky enough to have it, lead to a result that the American public well understands — a tax bill designed for the rich,” writes Washington Center for Equitable Growth’s Heather Boushey in The Hill.  Her column, “The tax bill should’ve been called The Inequality Exacerbation Act,” notes: “A more insidious way that this tax bill increases inequality is that it’s not paid for; it adds more than $1 trillion to the national debt over 10 years. Supporters are not waiting for the ink to dry before making clear how they intend to pay for it — by cutting programs important to middle- and low-income Americans.”

Must-Read: Laura J Keller, Ben Steverman, and Charles Stein: Inside Wall Street’s Towers, Traders Grouse Over Trump Tax Plan

Must-Read: If you are neither a plutocrat nor an activist seeking validation of your ethno-cultural grievances, you are not of concern to today’s Republican Party. We’re looking at you, the entrepreneurial and enterprising white upper-middle class who were both Teddy Roosevelt and Ronald Reagan’s core supporters: Laura J Keller, Ben Steverman, and Charles Stein: Inside Wall Street’s Towers, Traders Grouse Over Trump Tax Plan: “Many are figuring out greater benefits will go to billionaires. One, sipping a Bloody Mary, vows to quit the Republican party…

…Wall Street traders who rake in hundreds of thousands of dollars a year or more eagerly awaited a Republican overhaul of the U.S. tax code. Now, many are huddling with accountants and concluding the real gains will go to billionaires and other captains of the industry. Those in trenches—the merely wealthy—are grousing. Atop their list of worries: New limits on deductions for mortgage interest and state and local taxes… will cost them thousands of dollars annually while depressing the value of their homes… chop local tax revenues and erode the quality of schools and other amenities…. Most spoke on the condition they not be named. Many were self-aware enough to realize they won’t garner sympathy. One trader, sipping a Bloody Mary on a morning flight to somewhere more tropical, said he’s going to stop registering as a Republican. En route, he sent more than a dozen text messages ripping the tax bill. A pair of hedge fund managers said they’ll stop donating to Republicans they’ve long supported. One of them said he spent weeks berating a politician who’s taken his money, arguing the tax bill is too tilted toward corporations, rather than individuals who should get more relief.

“My clients are hard-working young professionals on Wall Street. I don’t have a lot of good news for them,” said Douglas Boneparth, a financial adviser in lower Manhattan who counsels people throughout the industry. Most are coming to terms with it. “I don’t think anyone is going to be surprised by the economic reality.”… The biggest source of pain in the tax bill is its limits on deductions. It eliminates the deduction for unreimbursed employee expenses, for example, and caps at $10,000 the deduction for local and state taxes. Homeowners can still deduct mortgage interest, but the cap for new loans would be $750,000, down from $1 million. The median asking price for a resale home in Manhattan is almost $1 million….

Manhattan’s army of salaried financial professionals are in a niche where the benefits thin out. They’ll still get goodies such as a higher threshold for the alternative minimum tax, and a drop in the top marginal rate to 37 percent from 39.6 percent. But, along with losing key deductions, they’re explicitly barred from a new 20 percent tax deduction aimed at business owners. Like doctors, lawyers and other service professionals, they can only get the full pass-through break if they own their own firm and earn less than $315,000 for a married couple, and half that for single taxpayers…