I’ve got a post over at Novel Stance about Brazil’s economic woes and the misguided blame Dilma Rousseff gets for it. Here’s a teaser:

But look closer at the causes of Brazil’s economic performance during the two’s rule: Lula held office at a time when commodity prices were soaring. Nearly half of Brazil’s exports are commodities. The world economy was stronger in the 00s than it is now, meaning other countries had more money to buy the stuff Brazil was digging out of the ground. Rousseff survived one term with decent commodity prices but was in power when the price of iron ore and oil fell 67%, corn lost a quarter of its value and soybeans cheapened by nearly half. These underlying conditions had nothing to do with either Rousseff or Lula.

 

I get it.

You found a candidate that agrees with your views and doesn’t carry the stinky baggage that political “insiders” seem to carry. When your candidate was eliminated, you were left with a binary choice that quite frankly does not excite you. But I beg of you: please do not sit this election out and refuse to vote for Hillary.

This will be the first year I am voting for President, though I have been a registered voter for two previous elections. My hesitation towards voting is still with me. I firmly believe that most people vote uninformed and that a reckless vote is worse than a non-vote. My decision to abstain from voting for the previous two Presidential elections most likely fits into a #NeverHillary mindset: both major party candidates included at least one thing in their platform I considered to be a deal-breaker. Add on the fact that the states I was registered to vote in weren’t even close to swing states, so I was pretty sure my vote would be a waste. Voting symbolically or to give a candidate moral support wasn’t in the cards because they both supported things I considered deal-breakers.

This time around, I can understand why Bernie-or-bust people are saying they won’t vote for Hillary. Decades in Washington have left her with suspicious relationships, more than a few regrettable past positions, and likely a foreign policy that seems reprehensible to you. But this time is much different. To people who defend their non-vote with a cry of her shortcomings being some sort of moral equivalency to Trump: are you kidding?

Unlike the Obama-Romney or Obama-McCain elections, a more-of-two-evils candidate actually threatens the future of the republic this election. Trump has already done damage to our credibility abroad and brought out of the woodwork people and views in America that a lot of us hoped were a relic of the 1950s. Since I’m targeting this post to Bernie supporters, I’m going to skip over any explanation for how bad and morally repugnant Trump is. The point is that, unlike a Mitt Romney or John McCain victory, putting Trump in the White House would do irreparable damage. You thought Bush was bad? He never threatened Federal judges or to default on Treasury debt. One could make the argument that the worst parts of a Bush Presidency are things that will take decades to recover from. But I’m convinced the country, and likely the world, would never recover fully from a Trump Presidency. Bush’s faults are miniscule compared to the damage Trump would do.

I recently spoke with a #NeverHillary Bernie supporter who welcomed the idea of a Trump Presidency because he thought it would speed up the process of getting to a Bernie utopia. Things would get so bad under Trump, the reasoning goes, that the country would have no choice but to turn to a politician like Bernie. This scorched-earth philosophy is misguided in mainly two ways. First, thinking economic/social/political catastrophe will end in your favored result is an insanely big risk to take. A quick gander at history shows that economic depressions and episodes of massive political carnage are just as likely to end up going to the extreme on the other side as the extreme to the side you favor. When the dust settles after the disaster of a Trump Presidency, who’s to say people won’t be even angrier and more drawn to identity politics and xenophobia than they are now?

The second way is that the country as we know it may not survive a Trump Presidency. The American experiment in the last few centuries is a pretty delicate thing. The Civil War showed, among other things, how a single-issue can divide the country apart and test the balances between states rights and the Federal government. A century and a half later, this divide is still around. The Cold War pitted centralized planning versus economic liberalism and the outcome was never a sure thing (my 8 months of living during a world with the Soviet Union were very formative on me). Every step forward in civil rights has been met with backlash and a question of how much freedom the public as a whole wants to grant people. a Trump Presidency could actually be the ultimate test.

The delicacy of liberalism is the rule, rather than the exception, throughout history. For all that Trump campaigns on, he never uses rhetoric based on the words “liberty” or “freedom.” We all have different definitions of what these words mean or to what extent we value liberty over other political goals. But Trump doesn’t value them at all. Censorship of the press, removal of judicial independence, religious litmus testing for not only migrants but also citizens…these are things that would threaten the underlying ethos of America and what I consider to be the political intellectual descendants of the Enlightenment. Trump would send us back to the Dark Ages.

When I think of the last eight or so years when I started to become focused on policy and developed a generally libertarian viewpoint, the political issues I vehemently disagreed with people on seem laughably minor compared to the issues this election. Fighting over the employment effects of a $9 versus $7.25 Federal minimum wage was an adorable quibble during a time when we could wake up knowing politicians weren’t going to say women who had abortions should be punished under the law. Arguing over how to price parking in cities or the efficacy of a 3-cent tax on carbonated beverages is embarrassingly trivial compared to the issues that Trump brings to the global political landscape.

I will say that, within a window of what we might call the status quo political landscape, Hillary will actually be a pretty damn good President. After decades of being in “the game,” she knows how to play it and get stuff done. I think Obama’s first term was filled with surprises of how realistic a President needs to be when working with an opposition Congress. Hillary is a seasoned vet in the landscape and will know how to work the system. My libertarian dreams of nearly-open borders and total drug legalization probably won’t happen under her. But under reasonable expectations, I think she has the ability to be a better two-term President than Obama.

Hillary has her faults, do not get me wrong. I still think a lot of her economic plans are foolish and misguided/ineffective efforts to help the poor. Her hawkishness on foreign policy makes me very uncomfortable. The e-mail stuff does not sit well. I still think there are a lot of squeamish parallels between the Underwoods and the Clintons. In most other elections, I could understand not wanting to endorse some of her baggage by refusing to vote for her. But this election is much different. A Trump victory is something we may not recover from.

So please, Berners, get out there and save the Republic.

Head over to the hot new blog Lombard Street Economics to check out another piece on Brexit from Gaurav Ganguly.

Based on a referendum from last Thursday, voters in the United Kingdom have chosen to leave the European Union. The referendum campaign got the portmanteau of “Brexit” as a combination of the words “Britain” and “Exit.” Now that we have got those basic facts out of the way, let’s move on to the sexier details like what is going to happen and why I think it’s a bad idea.

What Brexit means

No one really knows at this point. The referendum asked “Should the United Kingdom remain a member of the European Union or leave the European Union?” and the “Leave” vote won. This does not mean Brits will not be able to travel or work in the European Union – America and Canada are not in the EU but their citizens are able to – it just means it’s much more likely they’ll face difficulty. The UK will still be more integrated into the happenings of Europe than a country like Australia or Indonesia by virtue of its history and geographical proximity. But it will now make separate laws regarding regulation, trade, immigration, and other hot-button issues. The European divorce could be gradual, and it’s not clear what politicians on both the UK side and European side will negotiate in the future. The end result could be a very isolated Britain or it could be a very still-integrated Britain. People on both sides have made promises about what each result will entail, but the fact is that there is still a lot of uncertainty. In a larger symbolic sense, this vote reverses a consistent post-WW2 momentum of more European integration. The fact that there was even a referendum goes against a main ethos of the EU: This was meant to be a permanent thing!

Why did it happen

Just like any polity that has to live with a supranational power, a chunk of British people felt membership in the European Union was not working out so well. Popular reasons ranged from its immigration policies, its arguably undemocratic nature, or expensive costs that don’t seem to produce many benefits. In the last national election, Conservative Prime Minister David Cameron feared that his party was losing too many voters to the UK Independence Party. In an effort to woo UKIP voters to vote Conservative, he promised more autonomy and an eventual referendum on EU membership. The Conservatives won their first outright parliamentary majority since 1992, but Cameron had to follow through on his promise.

Why Brexit will be bad economically

When barriers to trade and migration are removed, efficiency goes up and economies grow. Creating a common market in Europe to remove frictions and allow flexibility in the overall labor market was one of the great successes of Project Europe. The integration of these countries provided substantial economic benefits overall, though gains and losses were experienced heterogeneously across the population. More on this later. Removing itself from this common market, at least formally, will have some costs to the UK, though it remains to be seen what the magnitude will be.

There are two major costs to Brexit economically, and both could cause a deep deep recession in the near future. The first is a loss of trade of goods and people. Half of British exports are to the European Union. If barriers go up and trade is made more difficult for these exporters, they will have less of a demand to buy their goods and Brits will be poorer. Like most European countries, the UK has a social welfare system built at a time where workers vastly outnumbered retirees/dependents. As birth rates went down and people got older, these pension systems found it difficult to finance themselves. But immigrants come in with money to spend and wanting to work (despite xenophobic conventional wisdom). In many ways, low-wage immigrants from elsewhere in the EU have been a lifeline to Britain’s public fiscus that are inevitably under-appreciated. With less European integration, labor mobility in the UK will decrease and these benefits from migration will shrink. The corollaries aren’t perfect, but look at a country like Japan where a rapidly aging population combined with a hard-line stance on immigration has caused their economy to stall for nearly three decades.

The second is a massive shock of financial outflows. Britain’s current account is a huge deficit. What this means is that they are consuming a lot more than they are producing. By virtue of an accounting identity, this means money from outside the country is coming in to make up for that shortfall. London has become a major financial hub for a variety of reasons, but it has almost certainty retained this position under the assumption that investors – from inside and outside the EU – can move this money seamlessly around Europe. If Continental Europe has different rules and shifting financial assets from the UK to Europe involves burdensome regulation, London is no longer an attractive place to invest. For many years, the UK was being supported by investors in commodity-producing countries. When commodity prices crashed in the middle of 2014, a lot of this money dried up, hurting Brits. With Brexit, even more money will move out of London…and quickly. Major banks have already announced future shifts of main headquarters to Amsterdam, Frankfurt, and Paris. If London can no longer get the financial resources to make up for Britain’s current account deficit, it will come at the expense of consuming less. In everyday people’s terms, this means that Britons will have much less disposable income, also known as a recession.

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Why Brexit will be bad geopolitically

After thousands of years of fighting wars and hating each other, Europe in the last century has been moving generally in a more integrated and peaceful direction. Project Europe as it stood before Brexit was already in a very delicate equilibrium. Countries that weren’t really friends suddenly had to share laws and sometimes the same currency, and allow people to freely cross borders. It took the United States 240 years to get where we are in terms of integration – and we fought a Civil War, have a common language, and our cultural differences are not nearly as vast as those between European countries. Whatever progress America has made to make all areas more “American” took a long time. In many ways, Europe has tried to do this process in half a century.

In this delicate equilibrium, there are only two steady states. One was more Europe – countries would have to sacrifice national sovereignty to make the union stronger. The other is less Europe – more power goes to individual countries at the expense of integration.  Brexit is a step in the direction of Less Europe. Brits have effectively voted to “take care of their own” rather than try to work through difficulties of multiculturalism and foreign economic competition.

To me, this is the greatest fear. A wave of populism has swept the higher-income world and people are turning inward. The world was becoming more peaceful, more integrated, and more multicultural. This new world order had its imperfections, so understandably there was pushback and the time has come for opposing forces to become more powerful. People are blaming outsiders of all dimensions (immigrants, the Chinese, The Rich, bankers, etc) and this is a recipe for decreased prosperity, increased nationalism, and less peace.

People are speaking of Brexit as a signal of what is to come in the Western world. Other countries are calling referenda, xenophobia is running rampant, and Do I Really Need to Mention the Republican Nominee? It’s hard to tell if these warnings are overstated. But I don’t want the world to have to take the risk.

Why Brexit will be bad for Brits’ autonomy

Economics isn’t everything and the liberal global order is not everyone’s cup of tea. A lot of the slacktivism being expressed by non-Britons since the referendum never seems to consider Britons’ desire to rule themselves and determine their own future. The European Union is in many ways a clunky bureaucracy with disproportionate power given to certain countries. Its inherent undemocratic nature also bothers some people (ummm, are they also complaining about the House of Lords?). If you felt a supranational institution was unfairly dictating rules for you, wouldn’t you be pissed off? Nonetheless, the belief that Britain leaving the European Union will lead to more autonomy for Brits is incorrect.

Although it remains to be seen what direction new leadership will take Britain in the context of Europe, many Brexit politicians and activists have suggested they’ll move to be integrated into Europe’s common market without formally being in the European Union. Switzerland and Norway do it, why can’t we? This is getting the goodies with no strings attached, in theory. This is unrealistic not only because I find it overly optimistic about how Continental Europeans will treat Britain in negotiations after this messy divorce. If Britain were to commit to political and economic arrangements made by the EU, they’d be doing so without a democratic voice in the process. This reminds me of Scottish independence supporters paradoxically thinking that they could be simultaneously more independent economically and use the pound as their currency (thus be subjected to a monetary policy over which they have no control as an independent country).

Rather than being a powerful voice in the first/second/third largest economy – the EU, depending on how you measure it – Britain will on its own be barely a top 10 economy. This means that it will have even less of a voice in international negotiations and thus likely less self-rule. I admit there’s a degree of uncertainty here: Leave activists argued that Britain can now make unilateral agreements with other countries and this isn’t impossible. But my best prediction is that overall Britain will now have less of a voice in world affairs than it did before. The most powerful countries that are still in the EU are not going to treat the UK nice to try to lessen the harm to Brexit…they are more likely to punish them to give a message to other countries that they shouldn’t even consider it.

Final Thoughts

There’s a lot to say on this topic – and I know native Brits have a lot more to say from a lifetime of experience compared to my ivory tower reading into it and four short years of living in a Scottish bubble. But I truly hope this isn’t the beginning of a global populist wave. And I weep for my British friends who woke up to see their country no longer a part of Europe.

 

 

If you’re one of the few people that reads this blog, listens to our podcast, and was not aware that we released an episode on the Euro Zone as a potential optimal currency union…here it is! 

 Just a note that this is a part of a larger project from the NYU Eurocrisis Discussion that will have more material in the near future.

I’ve got some original-ish research to report on.

Among the many controversial aspects of expanding medicaid to more Americans, there are debates on whether medicaid:

  • Is low quality care that ends up making its recipients worse off
  • Causes a decrease in the labor supply since some workers on the margin will be less inclined to find work if they already have health insurance
  • Causes significant increases in certain healthcare utilization like emergency room visits that cause a strain on the system
  • Causes an increase in happiness merely by reducing the financial stress of being uninsured

It can be tough to totally figure out the magnitude of these effects since comparing a population that has medicaid and a population that doesn’t can’t account for unobserved characteristics that will almost certainly bias estimates. But luckily, we have a social scientist’s dream.2000px-Oregon_in_United_States.svg

Oregon had decreased its medicaid rolls due to budget cuts and then in 2008 realized they had funding for 10,000 extra spots. Knowing they’d have more interest than availability, they left these spots up to a random lottery that ended up having ~90,000 applicants. Since the chosen households would be picked at random, it’d be possible to compare the population of those who were selected by the lottery to those who didn’t and evaluate their outcomes.

The NBER has already done a lot of good research on this. Their initial findings suggest that after being on Medicaid in Oregon’s Oregon Health Plan for 12 months increases medical utilization (for better or worse), decreases financial strain, and increases self-reported measures of happiness. One significant finding: “…if we compare our estimates to the literature on the impact of income on happiness, the impact of insurance is roughly equivalent to the impact of a doubling of income.”

But what about the effect on labor supply? The CBO and Casey Mulligan have suggested Obamacare will significantly reduce the number of workers in the labor force. Obamacare covers the entire country and the OHP only covers a subset of the Oregon population, so this is not an entirely apples to apples comparison. Nonetheless, I can say from doing initial estimates using the data from the OHP study that, controlling for a variety of individual and household characteristics, being on OHP because of the lottery has no significant effect on employment compared to those who were in the lottery and were not selected.

There has been some work getting to this conclusion, but I haven’t found any that goes as in depth as I have looked. For example, one theory is that this expansion could cause older people to exit the labor force since the only thing keeping them in a job until they’re medicare-eligible is the presence of healthcare. I have so far found that separating on quantiles of age does not produce significantly different results. The same can be said of dividing up the data into quantiles based on household income – the idea that people approaching the income threshold for medicaid will stop working to continue staying on government assistance has also been so far refuted.

The findings still need to be reviewed, but I think it’s a notable find.

In a season 9 episode of Seinfeld, George’s father Frank resurrects a holiday from George’s childhood called Festivus. Among other things, Festivus rejects the gift-giving aspect of many holidays. Frank Costanza may have been onto something.

Around Christmas time, the media will report excitedly that a certain amount of money has been pumped into the economy because of higher consumer spending. While this dollar estimate may seem like only good news, looking behind the numbers reveals a less rosy picture. The gift-giving surrounding Christmas and other holidays can be viewed as a loss in value to society from an economist’s point of view. 

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Consumer Choice

Anytime you go online, go to a store, or browse through a shopping magazine, you decide to buy something only if you value the item(s) at equal or more to the price you’d pay. If you think you could spend the $20 for a widget on better things, you wouldn’t buy the widget. Yes – you can buy impulsively, be under the influence of an illicit substance, or act in an otherwise irrational manner. But generally speaking you’re only going to buy that $20 widget if it’s worth $20 or more to you. This seems self-evident. Less obvious is that how much you value the widget isn’t widely known public information.

When someone goes to buy a gift for you, they’re taking an educated guess at how much you value an item. They have imperfect information about how much you value something. They could be buying a $20 item that you actually only value at $10. That $10 difference is what economists call deadweight loss.

Evidence

Joel Waldfogel at the University of Pennsylvania surveyed different populations to find out the difference between the cost of gifts people received and how much they valued those gifts. Waldfogel found that in general 10-33% of value is lost in gift-giving transactions. Because of this massive amount of destroyed value, Waldfogel has referred to Christmas as an “orgy of wealth destruction.”

How much that difference is correlates highly to the magnitude of imperfect information. The people who know you the best have the best sense of how much you value things. On one end of the spectrum, you have someone’s spouse or significant other. This person is most likely to know the gift recipient’s interests, needs, and daily routines. There is likely the least amount of imperfect information in this case and the lowest amount of wealth destruction. A step down from this is close friends and family; they know the recipient fairly well but there’s still more room for over-valuing a gift. On the other the end of the spectrum – where value goes to die – lies the office Secret Santa exchange. In this scenario people are compelled to buy gifts for people they barely know. The overall lesson, from an economist’s point of view, should be to minimize the level of gift-giving on this end of the spectrum.

Not all economists agree with Waldfogel’s idea of Scroogenomics. People give gifts for reasons other than purely utilitarian ones and these shouldn’t be dismissed. Sentimentality – “it’s the thought that counts” – is of course a significant value in many exchanges. But this sentimentality is partially captured in Waldfogel’s surveys. Additionally, there’s a positive correlation between the level of sentimentality and the accuracy of the gift-giver’s valuation; a gift from a spouse will mean more to the recipient than a gift from the randomly assigned office co-worker. 

Gift-giving is also a method of ‘signaling’ a giver uses to show the recipient how much he/she cares and well he/shes knows the recipient. The diamond ring shows the level of love the giver has (apparently?) for the recipient but more importantly the choice of ring is a signaling device to the recipient as to how well the giver knows him/her. Signaling then could be a value of gift-giving Waldfogel fails to quantify in his results. Or, an argument could be made that it’s an explanation for why we give gifts the way we do today, even if there are much better ways to signal to others how much we care for them.

Larger Implications

Money is the closest gauge we have to putting a number on how much we value something. But spending $20 on digging holes just to fill them back in again doesn’t mean we are $20 richer in our well-being – even if it means our GDP went up $20. This fact should be considered whenever we see government spending has increased our output by a reported amount. Arguably, there are reasons to think government spending makes up for a loss of aggregate demand in the macroeconomy. However, this spending always involves a certain amount of imperfect information on how much individuals actually value things. If the government spends money on a Bridge to Nowhere or bails out companies that we don’t want, there is value destruction. Gift-giving around Christmas time increases the dollar amount of consumer spending but the level of value added to the economy is much less than this spending.

Many economic transactions involve the same sort of imperfect information found in gift-giving. An argument can be made that others will know better than the recipient for how he/she should value something. But most of the time, money is most efficiently spent when the recipient is the one doing the spending. This logic has been the inspiration for recent charitable projects like Give Directly. (Giving cash instead of specific items also works to lower overhead and give as much money to the recipients as possible.) How individuals spend their money reveals their preferences rather than assuming we as givers know what they need the most. The effectiveness of these charities for individuals in developing countries is currently inconclusive but early evidence suggests promising results.

What Could We Do Instead?

Waldfogel has a few suggestions on how we can improve on the level of deadweight loss associated with gift-giving. The first is to just give cash. Cash has this amazing power of giving people the power to exchange it for pretty much anything they see fit. It might not be romantic and it might not look good underneath the Christmas tree, but there certainly is no orgy of wealth destruction. Another option is gift cards. Gift cards could have a small amount of imperfect information; I remember getting a Best Buy gift card as a young child when I was nowhere close to being in the market for electronics or even to buy a CD. But gift cards give enough flexibility that the destruction of value in gift-giving can be significantly minimized.

This takes away the excitement of gift-giving but it could be just because we’re used to the status quo of gift-giving. There are many gift exchanges in modern society that follow purely practical guidelines. Wedding and baby registries, for example, tell gift-givers exactly what the recipient needs. The next time a birthday, holiday, or office exchange comes around, think twice before you buy a gift. Put some money in an envelope and know you are doing your part to minimize the orgy of wealth destruction that is running rampant in modern society. Or give money to The Human Fund.

To hear the ideas of this article in podcast form, check out episode 9 of Upset Patterns found here (iTunes link found here).

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