Economics, Politics, Quick Fix

Why Linking The Minimum Wage To Inflation Can Backfire

Last week I explained how poor decisions by central bankers (specifically failing to spur inflation) can make recessions much worse and lead to slower wage growth during recovery.

(Briefly: inflation during recessions reduces the real cost of payroll, cutting business expenses and making firing people unnecessary. During a recovery, it makes hiring new workers cheaper and so leads to more being hired. Because central bankers failed to create inflation during and after the great recession, many businesses are scared of raising salaries. They believe (correctly) that this will increase their payroll expenses to the point where they’ll have to lay many people off if another recession strikes. Until memories of the last recession fade or central bankers clean up their act, we shouldn’t expect wages to rise.)

Now I’d like to expand on an offhand comment I made about the minimum wage last week and explore how it can affect recovery, especially if it’s indexed to inflation.

The minimum wage represents a special case when it comes to pay cuts and layoffs in recessions. While it’s always theoretically possible to convince people to take a pay cut rather than a layoff (although in practice it’s mostly impossible), this option isn’t available for people who make the minimum wage. It’s illegal to pay them anything less. If bad times strike and business is imperiled, people making the minimum wage might have to be laid off.

I say “might”, because when central bankers aren’t proving useless, inflation can rescue people making the minimum wage from being let go. Inflation makes the minimum wage relatively less valuable, which reduces the cost of payroll relative to other inputs and helps to save jobs that pay minimum wage. This should sound familiar, because inflation helps people making the minimum wage in the exact same way it helps everyone else.

Because of increasingly expensive housing and persistently slow wage growth, some jurisdictions are experimenting with indexing the minimum wage to inflation. This means that the minimum wage rises at the same rate as the cost of living. Most notably (to me, at least), this group includes my home province of Ontario.

I think decreasing purchasing power is a serious problem (especially because of its complicated intergenerational dynamics), but I think this is one of the worst possible ways to deal with it.

When the minimum wage is tied to inflation, recessions can become especially dangerous and drawn out.

With the minimum wage rising in lockstep with inflation, any attempts to decrease payroll costs in real terms (that is to say: inflation adjusted terms) is futile to the extent that payroll expenses are for minimum wage workers. Worse, people who were previously making above the minimum wage and might have had their jobs saved by inflation can be swept up by an increasingly high minimum wage.

This puts central bankers in a bind. As soon as the minimum wage is indexed to inflation, inflation is no longer a boon to all workers. Suddenly, many workers can find themselves in a “damned if you do, damned if you don’t” situation. Without inflation, they may be too expensive to keep. With it, they may be saved… until the minimum wage comes for them too. If a recession goes on long enough, only high-income workers would be sparred.

In addition, minimum wage (or near-minimum wage) workers who are laid off during a period of higher inflation (an in this scenario, there will be many) will suffer comparatively more, as their savings get exhausted even more quickly.

Navigating these competing needs would be an especially tough challenge for certain central banks like the US Federal Reserve – those banks that have dual mandates to maintain stable prices and full employment. If a significant portion of the US ever indexes its minimum wage to inflation, the Fed will have no good options.

It is perhaps darkly humorous that central banks, which bear an unusually large parcel of the blame for our current slow wage growth, stand to face the greatest challenges from the policies we’re devising to make up for their past shortcomings. Unfortunately, I think a punishment of this sort is rather like cutting off our collective nose to spite our collective face.

There are simple policies we could enact to counter the risks here. Suspending any peg to inflation during years that contain recessions (in Ontario at least, the minimum wage increase due to inflation is calculated annually) would be a promising start. Wage growth after a recession could be ensured with a rebound clause, or better yet, the central bank actually doing its job properly.

I am worried about the political chances (and popularity once enacted) of any such pragmatic policy though. Many people respond to recessions with the belief that the government can make things better by passing the right legislation – forcing the economy back on track by sheer force of ink. This is rarely the case, especially because the legislation that people have historically clamoured for when unemployment is high is the sort that increases wages, not lowers them. This is a disaster when unemployment threatens because of too-high wages. FDR is remembered positively for his policy of increasing wages during the great depression, even though this disastrous decision strangled the recovery in its crib. I don’t expect any higher degree of economic literacy from people today.

To put my fears more plainly, I worry that politicians, faced with waning popularity and a nipping recession, would find allowing the minimum wage to be frozen too much of a political risk. I frankly don’t trust most politicians to follow through with a freeze, even if it’s direly needed.

Minimum wages are one example of a tradeoff we make between broad access and minimum standards. Do we try and make sure everyone who wants a job can have one, or do we make sure people who have jobs aren’t paid too little for their labour, even if that hurts the unemployed? As long as there’s scarcity, we’re going to have to struggle with how we ensure that as many people as possible have their material needs met and that involves tradeoffs like this one.

Minimum wages are just one way we can do this. Wage subsidies or a Universal Basic Income are both being discussed with increasing frequency these days.

But when we’re making these kind of compassionate decisions, we need to look at the risks of whatever systems we choose. Proponents of indexing the minimum wage to inflation haven’t done a good job of understanding the grave risk it poses to the health of our economy and perhaps most of all, to the very people they seek to help. In places like Ontario, where the minimum wage is already indexed to inflation, we’re going to pay for their lack of foresight next time an economic disaster strikes.

Ethics, Philosophy, Quick Fix

Second Order Effects of Unjust Policies

In some parts of the Brazilian Amazon, indigenous groups still practice infanticide. Children are killed for being disabled, for being twins, or for being born to single mothers. This is undoubtedly a piece of cultural technology that existed to optimize resource distribution under harsh conditions.

Infanticide can be legally practiced because these tribes aren’t bound by Brazilian law. Under legislation, indigenous tribes are bound by the laws in proportion to how much they interact with the state. Remote Amazonian groups have a waiver from all Brazilian laws.

Reformers, led mostly by disabled indigenous people who’ve escaped infanticide and evangelicals, are trying to change this. They are pushing for a law that will outlaw infanticide, register pregnancies and birth outcomes, and punish people who don’t report infanticide.

Now I know that I have in the past written about using the outside view in cases like these. Historically, outsiders deciding they know what is best for indigenous people has not ended particularly well. In general, this argues for avoiding meddling in cases like this. Despite that, if I lived in Brazil, I would support this law.

When thinking about public policies, it’s important to think about the precedents they set. Opposing a policy like this, even when you have very good reasons, sends a message to the vast majority of the population, a population that views infanticide as wrong (and not just wrong, but a special evil). It says: “we don’t care about what is right or wrong, we’re moral relativists who think anything goes if it’s someone’s culture.”

There are several things to unpack here. First, there are the direct effects on the credibility of the people defending infanticide. When you’re advocating for something that most people view as clearly wrong, something so beyond the pale that you have no realistic chance of ever convincing anyone, you’re going to see some resistance to the next issue you take up, even if it isn’t beyond the pale. If the same academics defending infanticide turn around and try and convince people to accept human rights for trans people, they’ll find themselves with limited credibility.

Critically, this doesn’t happen with a cause where it’s actually possible to convince people that you are standing up for what is right. Gay rights campaigners haven’t been cut out of the general cultural conversation. On the contrary, they’ve been able to parlay some of their success and credibility from being ahead of the curve to help in related issues, like trans rights.

There’s no (non-apocalyptic) future where the people of Brazil eventually wake up okay with infanticide and laud the campaigners who stood up for it. But the people of Brazil are likely to wake up in the near future and decide they can’t ever trust the morals of academics who advocated for infanticide.

Second, it’s worth thinking about how people’s experience of justice colours their view of the government. When the government permits what is (to many) a great evil, people lose faith in the government’s ability to be just. This inhibits the government’s traditional role as solver of collective action problems.

We can actually see this manifest several ways in current North American politics, on both the right and the left.

On the left, there are many people who are justifiably mistrustful of the government, because of its historical or ongoing discrimination against them or people who look like them. This is why the government can credibly lock up white granola-crowd parents for failing to treat their children with medically approved medicines, but can’t when the parents are indigenous. It’s also why many people of colour don’t feel comfortable going to the police when they see or experience violence.

In both cases, historical injustices hamstring the government’s ability to achieve outcomes that it might otherwise be able to achieve if it had more credibly delivered justice in the past.

On the right, I suspect that some amount of skepticism of government comes from legalized abortion. The right is notoriously mistrustful of the government and I wonder if this is because it cannot believe that a government that permits abortion can do anything good. Here this hurts the government’s ability to pursue the sort of redistributive policies that would help the worst off.

In the case of abortion, the very real and pressing need for some women to access it is enough for me to view it as net positive, despite its negative effect on some people’s ability to trust the government to solve coordination problems.

Discrimination causes harms on its own and isn’t even justified on its own “merits”. It’s effect on peoples’ perceptions of justice are just another reason it should be fought against.

In the case of Brazil, we’re faced with an act that is negative (infanticide) with several plausible alternatives (e.g. adoption) that allow the cultural purpose to be served without undermining justice. While the historical record of these types of interventions in indigenous cultures should give us pause, this is counterbalanced by the real harms justice faces as long as infanticide is allowed to continue. Given this, I think the correct and utilitarian thing to do is to support the reformers’ effort to outlaw infanticide.

Quick Fix

May The Fourth Be With You

(The following is the text of the prepared puns I delivered at the 30th Bay Area pun off. If you’re ever in the Bay for one, I really recommend it. They have the nicest crowd in the world.)

First: May the Fourth be with you (“and also with you” is how you respond if like me, you grew up Catholic). As you might be able to tell from this shirt, I am religiously devoted to Star Wars. I know a lot about Star Wars, but I’m more of an orthodox fan- I was all about the Expanded Universe, not this reverend-ing stream of Disney sequels.

Pictured: the outfit I wore

They might be popepular, but it seems like all Disney wants is to turn a prophet – just get big fatwas of cash. They don’t care about Allah the history that happened in the books. Just mo-hamme(r)ed out scripts with flashy set piece battles full of Mecca and characters we med-in-a earlier film.

The EU was mostly books and I loved them despite their ridiculousness. Like, in terms of plots, it’s not clear the writers always card’in-all the books; they often passover normal options and have someone kidnap Han and Leia’s kids.

There were so many convert-sations between the two of them, like “do you noahf ark ‘ids are fine” immediately interrupted by formulaic videos from the kids: “Don’t worry about mi-mam it’s alright, this dude who kidnapped us is a total Luther who just wants to Hindu-s you to vote another way in the Senate”. Eventually they figured out a wafer Leia to communion-cate that the kids needed a bodygod. This led them to Sikh out Winter, who came with the recommendation: “no kidnapper will ever get pastor“.

What else? Luke trains under a clone of Emperor Pulpit-een. Leia is like, “bish, open your eyes, dude’s dark” but Luke justifies it with “well, there’s some things vatican teach me”.
Eventually after Leia asks “how could you Judas to us”, Luke snaps out of it and decides he’s having nun of Palpatine’s evil deeds. He con-vent his anger somewhere else. He comes back to the light side and everyone’s pretty willing to ex-schism for everything he did.
Anyway, I’m really sad that the books aren’t canon anymore. I know there are a lot of ram, a danting number, but I hope I have Eided you in appreciating them.

History, Quick Fix

Against Historical Narratives

There is perhaps no temptation greater to the amateur (or professional) historian than to take a set of historical facts and draw from them a grand narrative. This tradition has existed at least since Gibbon wrote The History of the Decline and Fall of the Roman Empire, with its focus on declining civic virtue and the rise of Christianity.

Obviously, it is true that things in history happen for a reason. But I think the case is much less clear that these reasons can be marshalled like soldiers and made to march in neat lines across the centuries. What is true in one time and place may not necessarily be true in another. When you fall under the sway of a grand narrative, when you believe that everything happens for a reason, you may become tempted to ignore all of the evidence to the contrary.

Instead praying at the altar of grand narratives, I’d like to suggest that you embrace the ambiguity of history, an ambiguity that exists because…

Context Is Tricky

Here are six sentences someone could tell you about their interaction with the sharing economy:

  • I stayed at an Uber last night
  • I took an AirBnB to the mall
  • I deliberately took an Uber
  • I deliberately took a Lyft
  • I deliberately took a taxi
  • I can’t remember which ride-hailing app I used

Each of these sentences has an overt meaning. They describe how someone spent a night or got from place A to place B. They also have a deeper meaning, a meaning that only makes sense in the current context. Imagine your friend told you that they deliberately took an Uber. What does it say about them that they deliberately took a ride in the most embattled and controversial ridesharing platform? How would you expect their political views to differ from someone who told you they deliberately took a taxi?

Even simple statements carry a lot of hidden context, context that is necessary for full understanding.

Do you know what the equivalent statements to the six I listed would be in China? How about in Saudi Arabia? I can tell you that I don’t know either. Of course, it isn’t particularly hard to find these out for China (or Saudi Arabia). You may not find a key written down anywhere (especially if you can only read English), but all you have to do is ask someone from either country and they could quickly give you a set of contextual equivalents.

Luckily historians can do the same… oh. Oh damn.

When you’re dealing with the history of a civilization that “ended” hundreds or thousands of years ago, you’re going to be dealing with cultural context that you don’t fully understand. Sometimes people are helpful enough to write down “Uber=kind of evil” and “supporting taxis = very left wing, probably vegan & goes to protests”. A lot of the time they don’t though, because that’s all obvious cultural context that anyone they’re writing to would obviously have.

And sometimes they do write down even the obvious stuff, only for it all to get burned when barbarians sack their city, leaving us with no real way to understand if a sentence like “the opposing orator wore red” has any sort of meaning beyond a statement of sartorial critique or not.

All of this is to say that context can make or break narratives. Look at the play “Hamilton”. It’s a play aimed at urban progressives. The titular character’s strong anti-slavery views are supposed to code to a modern audience that he’s on the same political team as them. But if you look at American history, it turns out that support for abolishing slavery (and later, abolishing segregation) and support for big corporations over the “little guy” were correlated until very recently. In the 1960s though 1990s, there was a shift such that the Democrats came to stand for both civil rights and supporting poorer Americans, instead of just the latter. Before this shift, Democrats were the party of segregation, not that you’d know it to see them today.

Trying to tie Hamilton into a grander narrative of (eventual) progressive triumph erases the fact that most of the modern audience would strenuously disagree with his economic views (aside from urban neo-liberals, who are very much in Hamilton’s mold). Audiences end up leaving the paly with a story about their own intellectual lineage that is far from correct, a story that may cause them to feel smugly superior to people of other political stripes.

History optimized for this sort of team or political effect turns many modern historians or history writers into…

Unreliable Narrators

Gaps in context, or modern readers missing the true significance of gestures, words, and acts steeped in a particular extinct culture, combined with the fact that it is often impossible to really know why someone in the past did something mean that some of history is always going to be filled in with our best guesses.

Professor Mary Beard really drove this point home for me in her book SPQR. She showed me how history that I thought was solid was often made up of myths, exaggerations, and wishful thinking on the parts of modern authors. We know much less about Rome than many historians had made clear to me, probably because any nuance or alternative explanation would ruin their grand theories.

When it comes to so much of the past, we genuinely don’t know why things happened.

I recently heard two colleagues arguing about The Great Divergence – the unexplained difference in growth rates between Europe and the rest of the world that became apparent in the 1700s and 1800s. One was very confident that it could be explained by access to coal. The other was just as confident that it could be explained by differences in property rights.

I waded in and pointed out that Wikipedia lists fifteen possible explanations, all of which or none of which could be true. Confidence about the cause of the great divergence seems to me a very silly thing. We cannot reproduce it, so all theories must be definitionally unfalsifiable.

But both of my colleagues had read narrative accounts of history. And these narrative accounts had agendas. One wished to show that all peoples had the same inherent abilities and so cast The Great Divergence as chance. The other wanted to show how important property rights are and so made those the central factor in it. Neither gave much time to the other explanation, or any of the thirteen others that a well trafficked and heavily edited Wikipedia article finds equally credible.

Neither agenda was bad here. I am in fact broadly in favour of both. Yet their effect was to give two otherwise intelligent and well-read people a myopic view of history.

So much of narrative history is like this! Authors take the possibilities they like best, or that support their political beliefs the best, or think will sell the best, and write them down as if they are the only possibilities. Anyone who is unlucky enough to read such an account will be left with a false sense of certainty – and in ignorance of all the other options.

Of course, I have an agenda too. We all do. It’s just that my agenda is literally “the truth resists simplicity“. I like the messiness of history. It fits my aesthetic sense well. It’s because of this sense, that I’d like to encourage everyone to make their next foray into history free of narratives. Use Wikipedia or a textbook instead of a bestselling book. Read something by Mary Beard, who writes as much about historiography as she writes about history. Whatever you do, avoid books with blurbs praising the author for their “controversial” or “insightful” new theory.

Leave, just once, behind those famous narrative works like “Guns, Germs, and Steel” or “The History of the Decline and Fall of the Roman Empire” and pick up something that embraces ambiguity and doesn’t bury messiness behind a simple agenda.

Model, Politics, Quick Fix

The Awkward Dynamics of the Conservative Leadership Debates

Tanya Granic Allen is the most idealistic candidate I’ve ever seen take the stage in a Canadian political debate. This presents some awkward challenges for the candidates facing her, especially Mulroney and Elliot.

First, there’s the simple fact of her idealism. I think Granic Allen genuinely believes everything she says. For her, knowing what’s right and what’s wrong is simple. There isn’t a whole lot of grey. She even (bless her) probably believes that this will be an advantage come election time. People overwhelming don’t like the equivocation of politicians, so Granic Allen must assume her unequivocal moral stances will be a welcome change

For many people, it must be. Even for those who find it grating, it seems almost vulgar to attack her. It’s clear that she isn’t in this for herself and doesn’t really care about personal power. Whether she could maintain that innocence in the face of the very real need to make political compromises remains an open question, but for now she does represent a certain vein of ideological conservatism in a form that is unsullied by concerns around electability.

The problem here is that the stuff Granic Allen is pushing – “conscience rights” and “parental choice” – is exactly the sort of thing that can mobilize opposition to the PC party. Fighting against sex-ed and abortion might play well with the base, but Elliot and Mulroney know that unbridled social conservatism is one of the few things that can force the province’s small-l liberals to hold their noses and vote for the big-L Liberal Party. In an election where we can expect embarrassingly low turnout (it was 52% in 2014), this can play a major role.

A less idealistic candidate would temper themselves to help the party in the election. Granic Allen has no interest in doing this, which basically forces the pragmatists to navigate the tricky act of distancing themselves from her popular (with the base) proposals so that they might carry the general election.

Second, there’s the difficult interaction between the anti-rational and anti-empirical “common sense” conservatism pushed by Granic Allen and Ford and the pragmatic, informed conservatism of Elliot and Mulroney.

For Ford and Granic Allen, there’s a moral nature to truth. They live in a just world where something being good is enough to make it true. Mulroney and Elliot know that reality has an anti-partisan bias.

Take clean energy contracts. Elliot quite correctly pointed out that ripping up contracts willy-nilly will lead to a terrible business climate in Ontario. This is the sort of suggestion we normally see from the hard left (and have seen in practice in places the hard left idolizes, like Venezuela). But Granic Allen is committed to a certain vision of the world and in her vision of the world, government getting out of the way can’t help but be good.

Christine Elliot has (and this is a credit to her) shown that she’s not very ideological, in that she can learn how the world really works and subordinate ideology to truth, even when inconvenient. This would make her a more effective premier than either Granic Allen or Ford, but might hurt her in the leadership race. I’ve seen her freeze a couple times when she’s faced with defending how the world really works to an audience that is ideologically prevented from acknowledging the truth.

(See for example, the look on her face when she was forced to defend her vote to ban conversion therapy. Elliot’s real defense of that bill probably involves phrases like “stuck in the past”, “ignorant quacks” and “vulnerable children who need to be protected from people like you”. But she knew that a full-throated defense of gender dysphoria as a legitimate problem wouldn’t win her any votes in this race.)

As Joseph Heath has pointed out, this tension between reality and ideology is responsible for the underrepresentation of modern conservatives among academics. Since the purpose of the academy is (broadly) truth-seeking, we shouldn’t be surprised to see it select against an ideology that explicitly rejects not only the veracity of much of the products of this truth seeking (see, for example, Granic Allen’s inability to clearly state that humans are causing climate change) but the worthwhileness of the whole endeavour of truth seeking.

When everything is trivially knowable via the proper application of “common-sense”, there’s no point in thinking deeply. There’s no point in experts. You just figure out what’s right and you do it. Anything else just confuses the matter and leaves the “little guy” to get shafted by the elites.

Third, the carbon tax has produced a stark, unvoiced split between the candidates. On paper, all are opposing it. In reality, only Ford and Granic Allen seriously believe they have any chance at stopping it. I’m fairly sure that Elliot and Mulroney plan to mount a token opposition, then quickly fold when they’re reminded that raising taxes and giving money to provinces is a thing the Federal Government is allowed to do. This means that they’re counting on money from the carbon tax to balance their budget proposals. They can’t say this, because Ford and Granic Allen are forcing them to the right here, but I would bet that they’re privately using it to reassure fiscally conservative donors about the deficit.

Being unable to discuss what is actually the centrepiece of their financial plans leaves Elliot and Mulroney unable to give very good information about how they plan to balance the budget. They have to fall back on empty phrases like “line by line by line audit” and “efficiencies”, because anything else feels like political suicide.

This shows just how effective Granic Allen has been at being a voice for the grassroots. By staking out positions that resonate with the base, she’s forcing other leadership contestants to endorse them or risk losing to her. Note especially how she’s been extracting promises from Elliot and Mulroney whenever possible – normally around things she knows they don’t want to agree to but that play well with the base. By doing this, she hopes to remove much of their room to maneuver in the general election and prevent any big pivot to centre.

Whether this will work really depends on how costly politicians find breaking promises. Conventional wisdom holds that they aren’t particularly bothered by it. I wonder if Granic Allen’s idealism blinds her to this fact. I’m certainly sure that she wouldn’t break a promise except under the greatest duress.

On the left, it’s very common to see a view of politics that emphasizes pure and moral people. The problem with the system, says the communist, is that we let greedy people run it. If we just replaced them all with better people, we’d get a fair society. Granic Allen is certainly no communist. But she does seem to believe in the “just need good people” theory of government – and whether she wins or loses, she’s determined to bring all the other candidates with her.

This isn’t an incrementalist approach, which is why it feels so foreign to people like me. Granic Allen seems to be making the decision that she’d rather the Conservatives lose (again!) to the Liberals than that they win without a firm commitment to do things differently.

The conflict in the Ontario Conservative party ­– the conflict that was surfaced when his rivals torpedoed Patrick Brown – is around how far the party is willing to go to win. The Ontario Conservatives aren’t the first party to go through this. When UK Labour members picked Jeremy Corbyn, they clearly threw electability behind ideological purity.

In the Ontario PC party, Allen and Ford have clearly staked out a position emphasizing purity. Mulroney and Elliot have just as clearly chosen to emphasize success. Now it’s up to the members. I’m very interested to see what they decide.

Economics, Model, Quick Fix

Not Just Zoning: Housing Prices Driven By Beauty Contests

No, this isn’t a post about very pretty houses or positional goods. It’s about the type of beauty contest described by John Maynard Keynes.

Imagine a newspaper that publishes one hundred pictures of strapping young men. It asks everyone to send in the names of the five that they think are most attractive. They offer a prize: if your selection matches the five men most often appearing in everyone else’s selections, you’ll win $500.

You could just do what the newspaper asked and send in the names of those men that you think are especially good looking. But that’s not very likely to give you the win. Everyone’s tastes are different and the people you find attractive might not be very attractive to anyone else. If you’re playing the game a bit smarter, you’ll instead pick the five people that you think have the broadest appeal.

You could go even deeper and realize that many other people will be trying to win and so will also be trying to pick the most broadly appealing people. Therefore, you should pick people that you think most people will view as broadly appealing (which differs from picking broadly appealing people if you know something about what most people find attractive that isn’t widely known). This can go on indefinitely (although Yudkowsky’s Law of Ultrafinite Recursion states that “In practice, infinite recursions are at most three levels deep“, which gives me a convenient excuse to stop before this devolves into “I know you know I know that you know that…” ad infinitum).

This thought experiment was relevant to an economist because many assets work like this. Take gold: its value cannot to be fully explained by its prettiness or industrial usefulness; some of its value comes from the belief that someone else will want it in the future and be willing to pay more for it than they would a similarly useful or pretty metal. For whatever reason, we have a collective delusion that gold is especially valuable. Because this delusion is collective enough, it almost stops being a delusion. The delusion gives gold some of its value.

When it comes to houses, beauty contests are especially relevant in Toronto and Vancouver. Faced with many years of steadily rising house prices, people are willing to pay a lot for a house because they believe that they can unload it on someone else in a few years or decades for even more.

When talking about highly speculative assets (like Bitcoin), it’s easy to point out the limited intrinsic value they hold. Bitcoin is an almost pure Keynesian Beauty Contest asset, with most of its price coming from an expectation that someone else will want it at a comparable or better price in the future. Houses are obviously fairly intrinsically valuable, especially in very desirable cities. But the fact that they hold some intrinsic value cannot by itself prove that none of their value comes from beliefs about how much they can be unloaded for in the future – see again gold, which has value both as an article of commerce and as a beauty contest asset.

There’s obviously an element of self-fulfilling prophecy here, with steadily increasing house prices needed to sustain this myth. Unfortunately, the housing market seems especially vulnerable to this sort of collective mania, because the sunk cost fallacy makes many people unwilling to sell their houses at a price below what they paid for it. Any softening of the market removes sellers, which immediately drives up prices again. Only a massive liquidation event, like we saw in 2007-2009 can push enough supply into the market to make prices truly fall.

But this isn’t just a self-fulfilling prophecy. There’s deliberateness here as well. To some extent, public policy is used to guarantee that house prices continue to rise. NIMBY residents and their allies in city councils deliberately stall projects that might affect property values. Governments provide tax credits or access to tax-advantaged savings accounts for homes. In America, mortgage payments provide a tax credit!

All of these programs ultimately make housing more expensive wherever supply cannot expand to meet the artificially increased demand – which basically describes any dense urban centre. Therefore, these home buying programs fail to accomplish their goal of making house more affordable, but do serve to guarantee that housing prices will continue to go up. Ultimately, they really just represent a transfer of wealth from taxpayers generally to those specific people who own homes.

Unfortunately, programs like this are very sticky. Once people buy into the collective delusion that home prices must always go up, they’re willing to heavily leverage themselves to buy a home. Any dip in the price of homes can wipe out the value of this asset, making it worth less than the money owed on it. Since this tends to make voters very angry (and also lead to many people with no money) governments of all stripes are very motivated to avoid it.

This might imply that the smart thing is to buy into the collective notion that home prices always go up. There are so many people invested in this belief at all levels of society (banks, governments, and citizens) that it can feel like home prices are too important to fall.

Which would be entirely convincing, except, I’m pretty sure people believed that in 2007 and we all know how that ended. Unfortunately, it looks like there’s no safe answer here. Maybe the collective mania will abate and home prices will stop being buoyed ever upwards. Or maybe they won’t and the prices we currently see in Toronto and Vancouver will be reckoned cheap in twenty years.

Better zoning laws can help make houses cheaper. But it really isn’t just zoning. The beauty contest is an important aspect of the current unaffordability.

Economics, Politics, Quick Fix

Cities Are Weird And Minimum Wages Can Help

[6-minute read]

I don’t understand why people choose to go bankrupt living the most expensive cities, but I’m increasingly viewing this as a market failure and collective action problem to be fixed with intervention, not a failure of individual judgement.

There are many cities, like Brantford, Waterloo, or even Ottawa, where everything works properly. Rent isn’t really more expensive than suburban or rural areas. There’s public transit, which means you don’t necessarily need a car, if you choose where you live with enough care. There are plenty of jobs. Stuff happens.

But cities like Toronto, Vancouver, and San Francisco confuse the hell out of me. The cost of living is through the roof, but wages don’t even come close to following (the difference in salary between Toronto and Waterloo for someone with my qualifications is $5,000, which in no way would cover the yearly difference in living expenses). This is odd when talking about well-off tech workers, but becomes heartbreaking when talking about low-wage workers.

Toronto Skyline
Not pictured: Selling your organs to afford a one-bedroom condo. Image Credit: Abi K on Flickr

If people were perfectly rational and only cared about money (the mythical homo economicus), fewer people would move to cities, which would bid up wages (to increase the supply of workers) or drive down prices (because fewer people would be competing for the same apartments), which would make cities more affordable. But people do care about things other than money and the network effects of cities are hard to beat (put simply: the bigger the city, the more options for a not-boring life you have). So, people move – in droves – to the most expensive and dynamic cities and wages don’t go up (because the supply of workers never falls) and the cost of living does (because the number of people competing for housing does) and low wage workers get ground up.

It’s not that I don’t understand the network effects. It’s that I don’t understand why people get ground up instead of moving.

But the purpose of good economics is to deal with people as they are, not as they can be most conveniently modeled. And given this, I’ve begun to think about high minimum wages in cities as an intervention that fixes a market failure and collective action problem.

That is to say: people are bad at reading the market signal that they shouldn’t move to cities that they can’t afford. It’s the signal that’s supposed to say here be scarce goods, you might get screwed, but the siren song of cities seems to overpower it. This is a market failure in the technical sense because there exists a distribution of goods that could make people (economically) better off (fewer people living in big cities) without making anyone worse off (e.g. they could move to communities that are experiencing chronic shortages of labour and be basically guaranteed jobs that would pay the bills) that the market cannot seem to fix.

(That’s not to say that this is all the fault of the market. Restrictive zoning makes housing expensive and rent control makes it scarce.)

It’s a collective action problem because if everyone could credibly threaten to move, then they wouldn’t have to; the threat would be enough to increase wages. Unfortunately, everyone knows that anyone who leaves the city will be quickly replaced. Everyone would be better off if they could coordinate and make all potential movers promise not to move in until wages increase, but there’s no benefit to being the first person to leave or the first person to avoid moving [1] and there currently seems to be no good way for everyone to coordinate in making a threat.

When faced with the steady grinding down of young people, low wage workers, and everyone “just waiting for their big break“, we have two choices. We can do tut-tut at their inability to be “rational” (aka leave their friends, family, jobs, and aspirations to move somewhere else [2]), or we can try to better their situation.

If everyone was acting “rationally”, wages would be bid up. But we can accomplish the same thing by simple fiat. Governments can set a minimum wage or offer wage subsidies, after all.

I do genuinely worry that in some places, large increases in the minimum wage will lead to unemployment (we’ll figure out whether this is true over the next decade or so). I’m certainly worried that a minimum wage pegged to inflation will lead to massive problems the next time we have a recession [3].

So, I think we should fix zoning, certainly. And I think we need to fix how Ontario’s minimum wage functions in a recession so that it doesn’t destroy our whole economy during the next one. But at the same time, I think we need to explore differential minimum wages for our largest cities and the rest of the province/country. I mean this even in a world where the current minimum $14/hour wage isn’t rolled back. Would even $15/hour cut it in Toronto and Vancouver [4]?

If we can’t make a minimum wage work without increased unemployment, then maybe we’ll have to turn to wage subsidies. This is actually the method that “conservative” economist Scott Sumner favours [5].

What’s clear to me is that what we’re currently doing isn’t working.

I do believe in a right to shelter. Like anyone who shares this belief, I understand that “shelter” is a broad word, encompassing everything from a tarp to a mansion. Where a certain housing situation falls on this spectrum is the source of many a debate. Writing this is a repudiation of my earlier view, that living in an especially desirable city was a luxury not dissimilar from a mansion.

A couple of things changed my mind. First, I paid more attention to the experiences of my friends who might be priced out of the cities they grew up in and have grown to love. Second, I read the Ecomodernist Manifesto, with its calls for densification as the solution to environmental degradation and climate change. Densification cannot happen if many people are priced out of cities, which means figuring this out is actually existentially important.

The final piece of the puzzle was the mental shift whereby I started to view wages in cities – especially for low-wage earners – as a collective action problem and a market failure. As anyone on the centre-left can tell you, it’s the government’s job to fix those – ideally in a redistributive way.


[1] This is inductive up to the point where you have a critical mass; there’s no benefit until you’re the nth + 1 person, where n is the number of people necessary to create a scarcity of workers sufficient to begin bidding up wages. And all of the people who moved will see little benefit for their hassle, unless they’re willing to move back. ^

[2] For us nomadic North Americans, this can be confusing: “The gospel of ‘just pick up and leave’ is extremely foreign to your typical European — be they Serbian, French or Irish. Ditto with a Sudanese, Afghan or Japanese national. In Israel, it’s the kind of suggestion that ruins dinner parties… We non-indigenous love to move. We don’t just see it as just good economic policy, but as a virtue. We glorify the immigrant, we hug them at the airport when they arrive and we inherently mistrust anyone who dares to pine for what they left behind”. ^

[3] Basically, wages should fall in a recession, but they largely don’t, which means inflation is necessary to get wages back to a level where employment can recover; pegging the minimum wage to inflation means this can’t happen. Worse, if the rest of the country were to adopt sane monetary policy during the next bad recession, Ontario’s minimum wage could rise to the point where it would swallow large swathes of the economy. This would really confuse price signals and make some work economically unviable (to do in Ontario; it would surely still be done elsewhere). ^

[4] I think we may have to subsidize some new construction or portion of monthly rent so that all increased wages don’t get ploughed into to increased rents. If you have more money chasing the same number of rental units and everything else remains constant, you’ll see all gains in wages erased by increases in rents. Rent control is a very imperfect solution, because it changes new construction into units that can be bought outright, at market rates. This helps people who have saved up a lot of money outside of the city and what to move there, but is very bad for the people living there, grappling with rent so high that they can’t afford to save up a down payment. ^

[5] No seriously, this is what passes for conservative among economists these days; while we all stopped looking, they all became utilitarians who want to help impoverished people as much as possible. ^

Economics, Model, Quick Fix

Regulation Revisited

Previously I described regulation as a regressive tax. It may not kill jobs per se, but it certainly shifts them towards people with university degrees, largely at the expense of those without. I’m beginning to rethink that position; I’m increasingly worried that many types of regulation are actually leading to a net loss of jobs. There remains a paucity of empirical evidence on this subject. Today I’m going to present a (I believe convincing) model of how regulations could kill jobs, but I’d like to remind everyone that models are less important than evidence and should only be the focus of discussion in situations like this, where the evidence is genuinely sparse.

Let’s assume that regulation has no first order effect on jobs. All jobs lost through regulation (and make no mistake, there will be lost jobs) are offset by different jobs in regulatory compliance or the jobs created when the compliance people spend the money they make, etc., on to infinity. So far, this is all fine and dandy.

Talking to members of the local start-up community, I reckon that many small sized hardware start-ups spend the equivalent of an engineer’s salary on regulatory compliance yearly. Instead of a hypothetical engineer (or marketer, or salesperson, etc.), they’re providing a salary to a lawyer, or a technician at the FCC, or some other mid-level bureaucrat.

No matter how well this person does their job, they aren’t creating anything of value. There’s no chance that they’ll come up with or contribute to a revolutionary new product that drives a lot of economic growth and ends up creating dozens, hundreds, or (in very rare cases) thousands of jobs. An engineer could.

There’s obviously many ways that even successful start-ups with all the engineers they need can fail to create jobs on net. They could disrupt an established industry in a way that causes layoffs at the existing participants (although it’s probably fallacious to believe that this will cause net job losses either, given the lump of labour fallacy). Also, something like 60% of start-ups fail. In the case of failure, money from wealthy investors is transferred to other people and I doubt most people care if the beneficiaries are engineers or in compliance.

But discounting all that, I think what this boils down to is: when you’re paying an engineer, there’s a chance that the engineer will invent something that increases productivity and drives productivity growth (leading to cheaper prices and maybe even new industries previously thought impossible). When you pay someone in sales or marketing, you get a chance to get your product in front of customers and see it really take off. When you’re paying for regulatory compliance, you get an often-useless stamp of approval, or have to make expensive changes because some rent-seeking corporation got spurious requirements written into the regulation.

Go on, tell me all million pages of this are necessary to protect consumers – I dare you. Image Credit: Coolcaesar on Wikimedia Commons

Or the regulatory agency catches a fatal flaw and averts a catastrophe. I’m not saying that never happens. Just that I think it’s much rarer than many people might believe. Seeing the grinding wheels of regulation firsthand has cured me of all my youthful idealistic approval for it. Sometimes consumers need to be protected from out of control profit-seeking, sure. But once you’ve been forced to actually do some regulatory compliance, you start to understand just how much regulation exists to prevent established companies from having to compete against new entrants. This makes everything more expensive and everyone but a few well-connected shareholders worse off.

Regulations has real trade-offs; there are definite goods, but also definite downsides. And now I think the downsides are even worse than I first predicted.

Model, Quick Fix

Living Beyond Your Time Means

[3 minute read]

Most of us are familiar with what it looks like when someone we know is living beyond their means. Expensive vacations, meals, or possessions pile up, accompanied by a veritable mountain of credit card debt. People fall into the horrible habit of paying one credit card off with another and get punished by punitive credit card interest rates.

If someone lives beyond their means for years, they may never be able to retire. Only frantic work keeps them just ahead of the tsunami of debt.

People living beyond their means often have a higher material standard of living then their friends. They have a nicer house, nicer cars, take nicer vacations and eat out more. But they tend to be more stressed out. Every month they have to figure out how to make ends meet.

For people who like possessions and don’t mind stress, it can be smart (albeit risky) to live beyond their means. As long as nothing happens that prevents them from working, they’ll get more of things they enjoy than they otherwise could, all at the cost of a little (to them easily ignorable) stress.

I think it’s also possible to do something like this with your time. By analogy, I call it living beyond your time means.

What does this look like?

When you’re living beyond your time means, you’re almost always overbooked. You have to hustle from event to event if you ever want to be able to do everything you’ve signed up for and your occasional failures make you seem at least a little bit flaky. It becomes very hard to schedule anything involving you. Your friends may have to take drastic action, like asking you about plans three months in advance.

There are benefits to this! Your life will almost always be interesting and you’ll quickly end up with a large network of friends. You’re less likely than most to get fear of missing out, because you miss out on so little. On Mondays, you have more stories about the weekend than anyone you work with.

There are costs to this as well. Many basic person- and space-maintenance tasks take time and time is your most precious currency. It’s more likely than not that your living space deteriorates and is never quite as clean as you’d like it to be (unless you pay someone to clean it for you). Your food situation tends to become interesting, with you as likely to eat restaurant or take-out meals as quick, weird snacks or instant meals. Home-cooked, nutritious meals can become a rare luxury.

(If you buy more time with money, you can avoid some of these pathologies, at the risk that you might live beyond your material means as well.)

And when you’re living beyond your time means, you so rarely get the feeling that all of the things you need to do are done (e.g. the plants watered, lunch for tomorrow is made, the washroom is clean, and the dishes washed) and your time is now entirely your own, with no more nagging worries at least until tomorrow. I love this feeling and couldn’t imagine living without it, but I know people who only experience it once every month or so.

(I think all new parents inevitably spend a few years living beyond their time means and often experience great relief when their kids get old enough that they no longer need to be constantly supervised. This isn’t so much a deliberate choice as it is a natural consequence of the difficulties of keeping young children fed, happy, and safe from their own destructive natures.)

Just as some people get a lot of net benefit from living beyond their financial means, some people find living beyond their time means to be net good. They love moving fast and doing interesting things and they’re quite happy to get that in exchange for a chaotic living situation and the nagging feeling that they’ve left basic tasks undone.

The purpose of this post isn’t to moralize at people who are living beyond their time means. Just because the thought of trying to do it stresses me out doesn’t mean that it isn’t really good for some people. But I do worry that there are people who are accidentally living beyond their time means and feeling very stressed out about that. If that describes you, consider this your wakeup call. I promise you that your life can still be interesting and your friends will still like you if you cut back on the activities a bit.

Model, Politics, Quick Fix

They don’t hate your values; they just assign them no weight

[3-minute read]

Content Warning: Extensive discussion of the morality of abortion

Previously, I talked about akrasia as one motive for socially conservative legislation. I think the akrasia model is useful when explaining certain classes of seemingly hypocritical behaviour, but it’s far from the only reason for social conservatives to push for legislation that liberals oppose. At least some legislation comes from a desire to force socially conservative values on everyone [1].

Liberals are terrible at understanding the values underlying conservative legislation. When an anti-abortion single issue voter took a reproductive rights seminar at Yale, he was surprised to hear that many of his classmates believed that anti-abortion laws were aimed entirely at controlling women’s sexuality, rather than stopping the (to his eyes) moral crime of abortion [2].

This is an easy mistake to make. It’s true that limiting abortion also limits women’s financial and sexual freedom. In the vast majority of cases it’s false to claim that this is a plus for the most vociferous opponents of abortion. To their detriment it also isn’t a minus. For many of the staunchest opponents of abortion, the financial or sexual freedom of women plays no role at all in their position. Held against the life of a fetus, these freedoms are (morally) worthless.

People opposed to abortion who also value these things tend to take more moderate positions. For them, their stance on abortion is a trade-off between two valuable things (the life of a fetus and the freedoms of the mother). I know some younger Catholics who fall into this category. Then tend to be of the position that things that reduce abortion (like sexual education, free prenatal care, free daycare, and contraceptive use) are all very good, but they rarely advocate for the complete abolition of abortion (except by restructuring society such that no woman feels the need for one).

Total opposition to abortion is only possible when you hold the benefits of abortion as far less morally relevant than the costs. Total support likewise. If I viewed a fetus to be as morally relevant as a born person, I could not support abortion rights to the extent I do.

The equation views my values as morally meaningless + argues strongly for things that would hurt those values can very easily appear to come out to holds the opposite of my values. But this doesn’t have to be the case! Most anti-abortion advocates aren’t trying to paper over women’s sexual freedoms (with abortion laws). Most abortion supporters aren’t reveling in the termination of pregnancies.

This mistake is especially easy to make because you have every incentive to caricature your political enemies. It’s especially pernicious though, because it makes it so hard to productively talk about any area where you disagree. You and your opponents both think that you are utterly opposed and for either to triumph, the other must lose. It’s only when you see that your values are orthogonal, not opposed that you have any hope for compromise.

I think the benefits of this model lie primarily in sympathy and empathy. Understanding that anti-abortion advocates aren’t literally trying to reduce the financial security and sexual freedom of women doesn’t change the fact that their policies have the practical effects of accomplishing these things. I’m still going to oppose them on the grounds of the consequences of their actions, even if I no longer believe that they’re at all motivated by those specific consequences.

But empathy isn’t useless! There’s something to be said for the productivity of a dialogue when you don’t believe that the other side hates everything about your values! You can try and find common values and make compromises based on those. You can convince people more effectively when you accurately understand their beliefs and values. These can be instrumentally useful when trying to convince people of your point or when advocating for your preferred laws.

Abortion gave me the clearest example of orthogonal values, but it might actually be the hardest place to find any compromise. Strongly held orthogonal values can still lead to gridlock. If not abortion, where is mutually beneficial compromise possible? Where else do liberals argue with only a caricature of their opponents’ values?

Epistemic Status: Model


[1] Socially liberal legislation is just objectively right and is based on the values everyone would have if they could choose freely. Only my political enemies try and force anything on anyone. /sarcasm ^

[2] People who aren’t women can also have abortions and their ability to express their sexualities is also controlled by laws limiting access to abortion. If there exists a less awkward construction than “anyone with a uterus” that I can use instead of “women”, I’d be delighted to find it. ^