I think I’ll basically be repeating what Matt Yglesias said yesterday, but maybe I can put things more plainly.

“Marriage promotion” as a means of address social problems at the lower end of the socioeconomic ladder is a bad idea. It’s not a neutral idea, or a nice idea that probably won’t work. It’s inexcusably obtuse and may be outright destructive. It is quite literally a cargo cult.

A cargo cult is a particularly colorful way of mistaking cause for effect. Airplanes do not actually come to remote Pacific Islands because of rituals performed by soldiers at airports. But absent other information, to someone with no knowledge of the larger world, it might well look that way. So when the soldiers leave and the airplanes full of valuable stuff no longer come, it’s forgivable in its way that some islanders populated the abandoned tarmacs with wooden facsimile airplanes and tried to reenact the odd dances that used to precede the arrival of wonderful machines. It is forgivable, but it didn’t work. The actual causes of cargo service to remote Pacific Islands lay in hustle of industries vast oceans away and in the logistics of a bloody war, all of which were invisible to local spectators. Soldiers’ dances on the tarmac were an effect of the same causes, not an independent source of action. That is not to say those dances were irrelevant to the great bounty from the skies. An organized airport is part of the mechanism through which the deeper causes of cargo service have their effect, so something like those dances would always be correlated with cargo service. But even a perfectly equipped and organized airport will not cause airplanes sua sponte to deliver valuable goods to islanders. A mock facsimile even less so.

The case for marriage promotion begins with some perfectly real correlations. Across a variety of measures — household income, self-reported life satisfaction, childrearing outcomes — married couples seem to do better than pairs of singles (and much better than single parents), particularly in populations towards the lower end of the socioeconomic ladder. So it is natural to imagine that, if somehow poor people could be persuaded to marry more, they too would enjoy those improvements in household income, life satisfaction, and childrearing. Let them eat wedding cake!

But neither wedding cake nor the marriages they celebrate cause observed “marriage premia” any more than dances on tarmacs caused airplanes to land on Melanesian islands. In fact, for the most part, the evidence we have suggests that marriage is an effect of other things that facilitate good social outcomes rather than a cause on its own. In particular, for poor women, the availability of suitable mates is a binding constraint on marriage behavior. People in actually observed marriages do well because they are the lucky ones to find scarce good mates, not because marriage would be a good thing for everyone else too. Marrying badly, that is marriage followed by subsequent divorce, increases the poverty rate among poor women compared to never marrying at all. Married biological parents who stay together may be good for child rearing, but kids of mothers who marry anyone other than their biological father do no better than children of mothers who never marry at all. As McLanahan and Sigle-Rushton put it (from the abstract):

[U]nmarried mothers and their partners are vastly different from married parents when it comes to age, education, health status and behaviour, employment, and wage rates. These differences translate into important differences in earnings capacities, which, in turn, translate into differences in poverty. Even assuming the same family structure and labour supply, our estimates suggest that much of the difference in poverty outcomes by family structure can be attributed to factors other than marital status. Our results also suggest that full employment is essential to lifting poor families — married or otherwise — out of poverty.

Let’s stop with the litany of citations for a minute and just think like humans. Marriage is a big deal. The stylized fact that the great preponderance of grown-ups with kids who seem economically and socially successful are married is known to everybody, rich and poor, black and white. Yes, the traditional family is not uncontested. There are, in our culture, valorizations of single-parenthood as statements of feminist independence, valorizations of male liberty and libertinism, aspirational valorizations of nontraditional families by until-recently-excluded gay people, etc. But, despite the outsized role played by Kurt on Glee, these alternative visions are numerically marginal, and probably especially marginal among the poor. Single motherhood is the alternative family structure that matters from a social welfare (rather than culture-war) perspective. The problem marriage promotion could solve, if it could solve any problem at all, would be to increase the well-being of the people who currently become single mothers and of their children.

But why do single women choose to become single mothers? It does not, in any numerically significant way, seem to have much to do with purposeful rebellion against traditional family norms. No, marriage of poor women seems constrained by the availability of promising mates. And why might that be?

Charles Murray recently wrote a wonderful, terrible, book called “Coming Apart“. The book is wonderful, because it identifies and very sharply observes the core social problem of our time, the Great Segregation (sorry Tyler), or more accurately, the Great Secession of the rich from the rest, and especially from the poor. The book is terrible, because it then analyzes the problems of the poor as though they come from nowhere, as though phenomena Murray characterizes as declines in industriousness, religiosity, and devotion to marriage among the poor have nothing to do with the evacuation of the rich into dream enclaves. There are obvious connections that Murray doesn’t make because, I think, he simply doesn’t wish to make them. Let’s make some. We were talking about marriage.

Murray does a wonderful job of describing the homogamy of our socioeconomic elites. The people who, at marriageable age, seem poised to succeed economically and socially, tend to marry one another. Johnnie doesn’t marry the girl next door, who might have been a plumber’s daughter while Daddy was a bank manager. Johnnie doesn’t marry anyone at all he met in high school, but holds out for someone who got into the same sort of selective college he got into. The children of the rich marry children of the rich, with notable allowances made for children of the nonrich who have accumulated credentials that signal a high likelihood of present or future affluence. Of course, love knows no boundaries.

As a matter of simple arithmetic, increasing homogamy among the elite and successful implies a reduced probability that a person who cannot lay claim to that benighted group will be able to “marry up”, as it were. Once upon a time, in the halcyon days that Murray contrasts to the present, the courting would not have been so crass. There were many fewer markers of social class and future affluence. The best and brightest were not so institutionally, geographically, and culturally segregated from the rest. (That is, within the community of white Americans. For black Americans, all of this is old hat.) The risk of “mismarrying”, for a male, was not so great, as he would be the primary breadwinner anyway, and her family, while perhaps poorer than his own, was unlikely to be in desperate straits. Men could choose whom they liked, in a personal, sexual, and romantic sense without great cost. Women from poor-ish backgrounds had a decent chance at landing a solid breadwinner, if not the next President. Very much like an insurance pool, a large and mixed pool of potential spouses renders marriage on average a pretty good deal for everyone. Really bad future husbands existed then as now, and then as now women were wise to do all they could to avoid marrying them. But the quality of a marriage is never revealed until well after you are in it. In a middle-class society, it was reasonable for a woman to guess that a nice guy she could fall in love with would be able to be a good husband and father too.

Flash-forward to the present. We now live in a socially and economically stratified society. By the time we marry, we can ascertain with reasonable confidence what kind of job, income, neighborhood, and friends a potential mate is likely to come with. The stakes are much higher than they used to be. Our lifestyle norms are based on two-earner households, so men as well as women need to think hard about the earning prospects of potential mates. Increasing economic dispersion — inequality — means that it is quite possible that a potential mate’s family faces circumstances vastly more difficult than ones own, if one is near the top of the distribution. It is unfashionable to say this in individualistic America, but it is as true now as it was for Romeo and Juliette that a marriage binds not only two people, but two families. If you have a good marriage, you will love your spouse. If you love your spouse and then her uninsured mother is diagnosed with cancer, those medical bills will to some perhaps large degree become your liability. More prosaically, if the inlaws can’t keep the heat on, do you wash your hands of it and let them shiver through the winter? In a very unequal society, the costs and risks of “marrying down” are large.

As with an insurance pool, too much knowledge can poison the marriage pool, and reduce aggregate welfare by preventing distributive arrangements that everyone would rationally prefer in the absence of information, but which become the subject of conflict when information is known in advance. Because the stakes are now very high and the information very solid, good marriage prospects (in a crass socioeconomic sense) hold out for other good marriage prospects. The pool that’s left over, once all the people capable of signaling their membership in the socioeconomic elite have been “creamed” away, may often be, objectively, a bad one. Marriage has a fat lower tail. When you marry, you risk physical abuse, you risk appropriation of your wealth and income, you risk mistreatment of the children you hope someday to have, you risk the Sartre-ish hell of being bound eternally to someone whose company is intolerable. More commonly, you risk forming a household that is unable to get along reasonably in an economic sense, causing conflicts and crises and miseries even among well-intentioned and decent people. It is quite rational to demand a lot of evidence that a potential mate sits well above the fat left tail, but the ex ante uncertainty is always high. When the right-hand side of the desirability distribution is truncated away, marriage may simply be a bad risk.

If you are at all libertarian, what the behavior of the poor tells you is that it is a bad risk. After all, marriage is not subject to a Bryan-Caplan-esque critique of politics, where people make bad choices in the voting booth that they would not make in the supermarket because they don’t own the costs of a bad vote. The consequences of a decision to marry or not to marry or who to marry are internalized very deeply by the people who make them. Humans, rich and poor, have strong incentives to try to make those choices well. Both common sense, social science, and revealed preference suggest that marriage rates among the poor have declined because the value of the contingent claim upon the future represented by the words “I do” has also declined within the affected population.

Promoting marriage among this population is not merely ineffective. It is at best ineffective. If the marriage-promoters persuade people to marry despite circumstances that render it likely they will marry poorly, the do-gooders will have done outright harm. Pacific Islanders no doubt bore some cost to build their wooden planes, lashed to a mistaken theory of causality. But lives were not destroyed. Overcoming peoples’ well-founded misgivings about the quality of potential mates with moral exhortations and clipboards of superficial social science might well destroy lives. It would create plenty of success stories for marriage promoters, sure, because even bad bets turn out well now and again. But it would create more tragedies than successes, tragedies that very likely would be blamed on personal deficiencies of the unhappy couple while the successes would be victories for marriage itself in some insane ideological version of the fundamental attribution error.

Fortunately, people aren’t stupid, so marriage promotion is more likely to be ineffective than devastating. But why go there at all? There is some evidence, for example, that where prevailing social norms prohibit premarital fun stuff and push towards early marriage, people do marry earlier and they marry poorly. Social norms matter, and even smart people are sometimes guided by them to do stupid things. Let’s not reinforce foolish norms.

None of this is to say marriage is bad! On the contrary, despite my lefty hippie enthusiasm for transgressive goat sex and stuff, I think in the context of the actually existing society, the prevalence of durable marriages is a reflection of social health. Marriage is part of how we organize a good life when a good life is on offer, just like airports with people guiding planes on the tarmac are part of how Pacific Islanders might organize trade for valuable cargo. But before the odd dances on the tarmac must come the production of goods and services for trade, or at least some kind of arrangement with the people in faraway places who control the airplanes. Before you get to smiling families, you have to create the material circumstances that render marriage on average a good deal. For poor women in particular, it very often is no longer a good deal.

But what about the children? One variant of marriage-centric social theory refrains from pushing marriage so hard, and simply asks that people delay childrearing until the marriage comes. (See e.g. Reihan Salam for some discussion.) If a woman is likely to find a good spouse at a reasonable age, then it might make sense to suggest she delay childbearing until the happy couple is stable and married, since kids reared by married biological parents seem to do better than other kids. Even that is subject to a causality concern: Perhaps childrearing is best performed by the kind of mother capable of finding a good mate, and at a time some unobservable factor renders her both ready to raise a child well and likely to take a husband. This would create a spurious correlation between the presence of biological fathers and good kid outcomes. We can’t rule that out, sure. But we have no reason to think it’s so, and lots of common sense reasons to think a biological father in a stable marriage improves outcomes by contributing to better parenting. So, I’d agree that women likely to find great marriage partners should by all means delay children until they have actually found one.

But women likely to find great marriage partners already do exactly that. Single motherhood is not a frequent occurrence among women who expect to marry happily and soon. The relevant question is whether we should discourage from having children women who reasonably expect they may not find a good spouse at all, at least not while they are in their youth. That is to say, should we tell women who have been segregated into the bad marriage market, who on average have lowish incomes and unruly neighbors and live near bad schools, that motherhood is just not for them, probably ever? We could bring back norms of shame surrounding single motherhood, or create other kinds of incentives to reduce the nonadoption birth rate of people statistically likely to raise difficult kids. It is possible.

I think it would be monstrous. I believe that, as a society, we should commit ourselves to creating circumstances in which the fundamentally human experience of parenthood is available to all, not barred from those we’ve left behind on our way to good schools and walkable neighborhoods. Women unlikely to marry who wish to have children by all means should. The shame is ours, not theirs. It belongs to those of us who call ourselves “elite”, who are so proud of our “achievements” that we walk away without a care from the majority of our fellow citizens and fellow humans, from people who in other circumstances, even in the not so distant past, would have been our friends and coworkers, lovers and spouses. It’s on us to join together what we have put asunder.

Property rights are primarily rights to exclude. If I “own” something, what that means is that it is legitimate for me to exclude others who may wish to use or consume it.

Exclusion, very obviously, carries externalities. My choice to exclude alternate uses of a resource affects those who might have benefited from those uses. By convention, we don’t usually refer to the effects of the exclusion at the core of a property right as an “externality”. One could argue, as is often argued of so-called “pecuniary externalities“, that the effect of property rights on alternative users is the sort of externality that should not be discouraged — because undoing the externality would amount to a mere redistribution rather than a welfare gain, or because the operation of the externality is part and parcel of the process by which the market system functions. But, as with pecuniary externalities, there are devils in details.

The social cost of the excluding alternative uses varies dramatically between resources. A Ferrari, for example, may be a costly and valuable resource, but it is plausible to claim that its owner’s exclusive control does not subject potential alternative users to real deprivation. On the other hand, the exclusive right to commercialize a potentially lifesaving medicine may impose huge costs on potential users deprived of access because a patent owner has chosen not to make a drug available where they live, or has chosen to set an inaccessible price. The new urbanists (Yglesias / Avent / Glaeser ) frequently argue that homeowners’ ability to exclude alternative uses of their neighborhoods (a kind of tacit property right) imposes very large social and economic costs by preventing higher-density alternative use of uniquely situated real estate.

I presume that most ordinary property rights don’t burden alternative users so much as to merit policy intervention. It is wise to simply tolerate very small externalities and address their consequences collectively, rather than create annoyances and transaction costs by trying to impose fine-grained discipline. We don’t tax humans for eating beans, despite the fact that methane is a powerful greenhouse gas.

But for some classes of property, most notably patents and real estate, a tax on the externalities of exclusion might be very sensible. You can frame it as a Pigouvian tax, or alternatively as a kind of user fee that compensates the state for its enforcement of a right to exclude despite external harms. But on what basis should such a tax be collected?

Usually property or wealth taxes are levied against the “market value” of an asset, with the scare quotes particularly appropriate. When property taxes are assessed against real property, some appraisal or estimation has to be made of what is often an entirely hypothetical value. Assessment procedures are vigorously contested and frequently reflect social and political concerns unrelated to the question of what a property “would” sell for. Patents are extraordinarily specialized and illiquid assets. Any bureaucratic value assessment would be a farce.

There is, of course, a much easier way to gauge what a property would sell for: Solicit from its owner a price.

The price at which an owner would be willing to sell a thing has a particularly valuable characteristic. It limits the burden to alternative users of the exclusion in a property right. If the price is set low, a user harmed by exclusion can simply purchase the thing and have at. If the price is set high, alternative users may be seriously burdened yet be unable to buy access.

So, for the sorts of exclusion that do impose substantial burdens to alternative users, a natural policy intervention would be to require property owners to declare a price at which they commit to sell the property (for some period of time), and levy a tax of some legislatively determined percentage against that actual, actionable price, rather than a hypothetical market value. Property owners could pay as much or as little tax as they choose. When they set their price, they face a trade-off, between the risk of being undercompensated for losing the asset if the price is too low, and an exaggerated tax burden if they set a price so high that the risk of sale is negligible or the required overcompensation extreme. The owner is free to choose how much she values certainty of continued ownership, but she must pay for that.

The price set by the property owner might constitute an option to buy for all comers, or just for the state. (I’m not sure which would be best. What do you think?)

This sounds very dry and complicated, but ultimately it’s a simple and natural scheme. Suppose that a drug company invents a cure for a rare tropical disease that could cure thousands in the developing world but only hundreds domestically. It might well be the case that the profit-maximizing commercialization strategy would be to make the drug available at a very high price domestically, but not sell it cheaply in poor countries, to prevent reimportation from cannibalizing sales. As long as the tax rate is material, the drug company would try to set its price no higher than the discounted value of domestic profits, less the discounted cost of the new tax. However, since the social value of the drug if the patent were not used to exclude is much higher than that market value of the profits, governments and nonprofits could pool funds to buyout the patent. In theory, this can happen already — governments and nonprofits could band together and negotiate with drug companies to buy out patents. But the coordination costs of that are very high, and once interest has been signalled the patent owner has every incentive to hold out for a price very near the drug’s social value, which is much higher than the market value it would otherwise have realized. A tax on enforcement of exclusion would force all patent holders to decide a value and precommit to a price without the negotiating advantage of knowing they have a captive buyer. Of course, if a company thinks a public-interest buyout is very likely, it might set its price high in hopes of earning a windfall gain from a sale. But there are limits to that strategy unless a swift buyout is certain. The cost in overpayment of taxes and the risk that a buyout won’t actually happen increases with the level at which the price is set.

Firms will set a dear price on patents with such high and unique social value that a prompt buyout is inevitable. But as long those patents are genuinely for new, nonobvious inventions — admittedly a weak point! — that’s arguably a feature, as the scheme creates incentives that don’t now exist for firms to develop goods with high social value but low market value. At present, there is no functioning market in public-interest sales of patents. Instead, firms understandably avoid high-social-value, low-market-value projects. Given the negotiating realities and political perceptions surrounding licensing or sale of patent rights to the public sector, the prospect of a high payout is offset by risks of outright expropriation and public relations catastrophes.

Urban property is another domain where the externalities associated with enforcing exclusive property rights are arguably very large. Suppose a developer or a city government believes that a neighborhood is horrifically underutilized, and wants to redevelop it at high density. Under this proposal, every parcel in the neighborhood would have a prearranged price. The developer (with or without a requirement of political buy-in) could plan to buy the lots she needs and those of near-neighbors with effective veto power, and then do with them what she will. As with patentholders, for most homeowners the best strategy would be to set the price at the actual value that would compensate them for the loss of the house and the trouble and heartache of eviction from their home (which might be a lot!), less the discounted cost of expected taxes. As with patents, some homeowners might strategically try to set very high prices in hopes of a windfall buyout, but again, that’s a costly and self-limiting strategy, unlikely succeed except in very rare cases where some parcel is so unique that alternative development plans that exclude it cannot compete. A real problem here is that this scheme would disadvantage property owners so cash poor they cannot afford any substantial taxation, who might set prices below what would actually compensate for the loss of property. But then these property owners have a hard time paying existing property taxes too. That devil would live in the detail of arranging the actual tax burden.

Just what should the tax rate on stated price be? Should it be a flat or progressive? I don’t know. Maybe some clever modeling can be done to try to elucidate the issues. Qualitatively things are pretty clear: the higher the tax rate, the more costly it will be to enjoy the rights of exclusion that come with property ownership. That’s already true with any sort of property tax. This new sort of property tax simply gives the owner the right to pay the tax in cash or in risk of being forced into a sale. A low tax rate, especially the status quo zero tax rate for patents, is very comfortable for property holders. It encourages people to set an infinite “sticker price” and so force potential buyers to reveal themselves as needful in bespoke negotiations. A high tax rate would be less comfortable. Owners would be forced to either pay up for the right to exclude or bear real risk that their property will be bought-out for a higher value use. In each domain — patents, real estate, whatever — legislators (or city councilpersons) would have to balance the social benefits associated with certain and inexpensively maintained property ownership, the social costs of excluding high-value alternative uses, and of course revenue requirements.

There are more radical, arguably better, solutions to problems created by socially costly exclusive use of real or intellectual property. But within the confines of incremental, neolibbish ideas, I think this one merits some consideration.

This proposal owes something to a recent conversation with Leigh Caldwell (@leighblue), the king of prices. The good ideas are his. The crappy ones are mine.

Last week, I objected unquietly to what I thought and still think was a very poor column by Ezra Klein. However, Klein has followed that piece up with several more on the same subject. Although I doubt Klein worries all that much what I think, I feel honor bound to point out that his most recent columns, one at Bloomberg and another at his Wonkblog home, are decidedly not terrible. They are excellent.

On the bright side, I guess I couldn’t ask for a better example of the phenomenon I described in “Standards of Evidence” than this piece by Ezra Klein.

It’s terrible.

I have no idea whether inequality is the “defining challenge of our time”. That’s a meaningless trope. But Klein takes the phrase from a speech by President Obama and turns it into a question in order to knock inequality down a few pegs from the economic priority list. He does a very dishonest job of it.

Here’s the worst:

Economist Jared Bernstein has been worrying about inequality since way before worrying about inequality was cool. But in a careful paper released on the same day as Obama’s speech, Bernstein found that there wasn’t strong evidence for the idea that inequality is weakening demand — or for any of the other theories tying inequality to a weaker economy. There “is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth,” Bernstein wrote.

That doesn’t mean inequality isn’t hurting growth. It just means it’s difficult to find firm proof of it. But if inequality really was the central challenge to growth, would proof really be so hard to come by?

Read Bernstein’s paper. Klein is misrepresenting Bernstein’s views. An intelligent reader would interpret Klein as saying that Bernstein looked for evidence, failed to find it, and concluded it just wasn’t there. In fact, Bernstein reviews the research and finds lots of suggestive connections between inequality and growth. The unfortunate bit that Klein quotes reflects a kind of handwringing on Bernstein’s part — no, the research is not incontrovertible, there are a lot of “moving parts”, the research is young. Bernstein offers a cautious invitation to take seriously evidence of connections between inequality and growth. Klein pulls the caution out of context and misuses it as an excuse to dismiss those connections.

[And “worrying about inequality since way before worrying about inequality was cool”? Excuse me? Way to conflate concern over an ongoing social catastrophe, and a genuine vocation on Bernstein’s part, with the latest thing to go viral on Buzzworthy. Not all of us are paid by the click.]

There is no such thing as “the central challenge to growth”. Proof is impossible to come by with respect to all macroeconomic controversies. Klein vapidly handwrings that, “Growth simply isn’t producing enough jobs” without meaningfully addressing the question of how to achieve growth, or addressing the arguments that Bernstein carefully catalogs for why a broader distribution might be growth-supportive. When Klein writes “fixing [unemployment] is necessary, though not sufficient, to making real headway against inequality”, he is making an empirical assertion without evidence, and probably getting causality backwards. We might well move towards economic arrangements in which wages become less central to the income of the middle class, just as labor income is only one of multiple income sources for the wealthy. Broadening the distribution of income may well be prerequisite to full employment going forward, as jobs that cannot be automated or outsourced are largely in personal services, and mass employment in personal services requires a mass of customers with disposable income.

There is little tension between addressing inequality and pursuing the other goals Klein says we should focus on. Klein sets up a straw man when he argues

A world in which inequality is the top concern is a world in which raising taxes on the rich is perhaps the most important policy choice the government can make. A world in which growth and unemployment are top concerns are worlds in which very different policies — from stimulus spending to permitting more inflation — might be the top priorities.

One could make the world more equal just by burning everything down too! But no one advocates this. So obviously inequality doesn’t matter, right?

People concerned with inequality in fact argue not to tear down the rich but to raise up the rest — at the expense of the rich to the degree that is necessary, but not just because. We argue for policies like basic income, wage subsidies, and, yes, more inflation-tolerant macro policy and more fiscal stimulus where those policies help support the poor and middle. A focus on inequality sometimes does create wedges between us and other “progressives”. We might not be so excited, for example, by a fiscal policy that is “expansionary” by virtue of a deficit accounted for in large part by tax expenditures to the rich. We might celebrate less than a Democratic party that treats inflation in the price of real estate and financial assets as unambiguously good news.

A policy apparatus for which inequality is not a “top concern” might content itself with spurring demand by protecting and increasing the wealth of the politically-connected rich, on the theory that anyone’s misfortune hurts at the margin and providing support to the non-rich is politically impossible. But that’s, like, totally science fiction, right?

In a broadly excellent discussion of theories relating inequality and growth, Jared Bernstein writes:

all of this research is relatively new, and while it makes suggestive connections, there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.

Bernstein absolutely right, of course. But really? “concrete proof to lead objective observers to unequivocally conclude” Is that a remotely meaningful standard of evidence for, well, anything?

People on the political right, including many respected economists, make strong claims that ceteris paribus taxation is bad for growth. They certainly have plausible models in which it would be. But as an empirical matter, the fair thing to write would be there is not enough concrete proof to lead objective observers to unequivocally conclude that taxation has held back growth. The evidence is very conflictatory! To steal Bernstein’s apt metaphor, there are a lot of moving parts! It is in fact almost certainly false to claim that taxation is always and everywhere bad for growth, and almost certainly true that there are circumstances under which it has been and would be good. If you are behaving as a scientist, it’s kind of a shitty, stupid question, “how does XXX affect growth?” How does molybdenum affect life? They are related! But if you start running regressions of liveliness against concentrations of molybdenum, you won’t get very far. If you want to study the relationship between molybdenum and life, or XXX and growth, for any XXX, you’ll have to characterize mechanisms and offer detailed, contingent accounts. You won’t find simple, black box relationships.

But we are not always, or even usually, behaving as scientists. The Tax Foundation will tell you right off that taxes are bad for growth, much worse than spending cuts. Studies prove it, and if you disagree you are simply wrong. Steve Roth aptly wonders why so few voices among “respectable progressives” are willing to even give fair consideration to the case that inequality might be an impediment to growth. I think he has a point. This isn’t a general phenomenon. It’s not like “liberals are cautious scientists, while conservatives run roughshod over the truth”. Progressive economists are willing to assert, in the same stentorian, authority-of-science voice as the Tax Foundation people, that fiscal multipliers are real or that evidence against expansionary austerity is incontrovertible. But on connections between inequality and the macroeconomy, it feels like respectable progressives are always looking for an excuse to say there’s no there there. People who are usually very smart make very thin arguments that are frankly beneath them to cast doubt on the relationship.

Now let’s be perfectly clear: there is no reliable quantitative relationship between inequality and growth, just as there is no reliable quantitative relationship between taxation and growth, between government spending and growth, monetary policy and growth, or pretty much anything else and growth. There are studies, which pare and tease their panels in ways they justify on some grounds or other, and those studies yield conclusions. You can buy the assumptions, methodologies, and mechanisms implicit in those parsings or not, it’s your choice. But you won’t find a clear, incontrovertible relationship between any simple thing and developed world, per-capita growth. It’s too complicated a phenomenon. You have to buy someone’s stories, and interpret the numbers through those stories, to claim the evidence is strong.

But that doesn’t mean there is nothing at all that we can say about inequality and the macroeconomy. We can, for example, say that marginal propensity to consume effects are real. The intellectual history of MPC goes something like this:

1. There is and has always been an obvious, intuitive, and robust stylized fact that people with higher incomes save greater fractions of their incomes than people with lower incomes. In the post-Great-Depression intellectual climate, which was acutely sensitive to the dangers of demand shortfalls, this suggested, uncomfortably to some, that inequality could be a macroeconomic hazard.

2. Milton Friedman pointed out that differing marginal propensities to consume observed in the data might have nothing at all to do with inequality. If people try to smooth consumption over time, then in a stochastically equal society (one in which everyone’s expected incomes are the same, but each individual is subject to random fluctuations in any period), we would observe that individuals who happen to have unusually high incomes in one period save a lot, to cover the periods where they will have unusually low incomes. Friedman’s elegant Permanent Income Hypothesis suggested people just spend a constant fraction of their lifetime incomes in every period, so (under perfect information about that “permanent” income) each individual’s spending would be constant and apparently different marginal propensities to consume would be due solely to fluctuations in income, with no actual changes in spending.

3. For reasons that would be baffling, if I weren’t so cynical about the economics profession, the Permanent Income Hypothesis was generally accepted as sufficient explanation of observed MPC effects in cross-sectional data, and the issue was considered closed. You were naive and ill-informed if you thought MPC effects in the data had anything to do with inequality. They had been explained.

Of course, you had to be an idiot to believe that the Permanent Income Hypothesis fully accounted for MPC effects. Undoubtedly consumption smoothing explains a part of cross-sectional variation in marginal propensities to consume, but you don’t need careful empirics to prove that it can’t explain all of them. Why not? Because not consuming leaves a residue, something called savings, which becomes wealth. If across the income spectrum everyone spent and saved in equivalent proportions, we’d expect no cross-sectional variation in terminal wealth as a proportion of lifetime income. But in real life, much of the bottom of the income distribution dies with zero or negative wealth (i.e. they stiff their creditors), while those near the top of the distribution leave large bequests. An intergenerational Permanent Income Hypothesis could only explain this if poorer people expect their kids to be much wealthier then the children of moguls. Which is not so plausible.

If things that are obvious don’t persuade you, if something has to have tables in the back and be peer-reviewed to qualify as “rigorous”, you are a very severely deluded human. Nevertheless, a few courageous researchers have done the work of examining in numerical detail whether the Permanent Income Hypothesis is sufficient to account for variations in spending, and the answer is always no. I’ve cited ’em before, I’ll cite ’em again: “Why do the rich save so much?” by Christopher Carroll; “Do the Rich Save More?”, by Karen Dynan, Jonathan Skinner, and Stephen Zeldes. I’m sure if MPC makes a comeback in macroeconomic conversations, someone prestigious will find some way to parse the data differently and explain it all away again. That researcher will surely die rich.

OK. So inequality-related MPC effects are real. But what to they have to do with growth? Nothing at all, in an unconditional sense. I’ll go further than Bernstein. It’s worse than “there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.” There’s little reason at all to think that inequality has held back growth, in the past tense, through an MPC channel. Why not? Because we didn’t observe in the past anything that looked like an intractable insufficiency of aggregate demand! Past-tense, we reconciled inequality with growth. MPC effects suggest that one way to generate more demand would be to broaden the distribution of income. They do not imply that broadening the distribution of income is the only way. The macroeconomic footprint of increasing inequality lies not in growth, but in the interest rates and financial chicanery that were necessary to support that growth. Call it the monetary offset.

Prior to 2008, we found means of supporting aggregate demand despite an almost certain drag imposed by increasing inequality. Those means included a broad mix of fiscal policy (we ran deficits), unsustainable equity booms, the “democratization of credit” and unsustainable credit booms, and of course straightforward monetary policy. Real interest rates have collapsed since the early 1980s. The reason we might talk about inequality is not because it is mechanically, unconditionally, here-is-the-regression-now-STFU connected with growth. It’s because many of us have decided that other, more “conventional”, demand stimulants have run their course, that repeating them or increasing the dose won’t work, or would have adverse side effects we’d prefer to avoid.

We have a large menu of ways we can try to support demand. We can go the Scott Sumner route, double down on monetary policy. We could do big, old-style fiscal stimulus, have the government give money to those who lobby best without worrying about fairness or income distribution. We could embrace inefficient health care provision and build more university rec centers. We could have the financial sector figure something out again, some means of enabling those who otherwise wouldn’t be able spend to do so. We can find ways of persuading rich people to spend more. We can import demand from elsewhere, like China and Germany. We can try electronic money and negative interest rates. We are, as they say, free to choose.

But the reality of MPC effects means that, along with all those other possibilities, broadening the distribution of income would be expansionary and narrowing that distribution would be contractionary, ceteris paribus. If, like Larry Summers, it pains you that maybe the “natural interest rate” is negative now, the reality of MPC effects means that policy which broadens the distribution of income would help push it positive, and put us back into more comfortable territory. If, like me and Pope Francis, you think that present levels of inequality are horrific for human and communitarian reasons, then among the many macro policies that might support demand, it is rational to tilt towards those more likely to engender a broad distribution. It is quite irrational, as I think some well-meaning economists do, to hold MPC effects to much higher standards of evidence than the mechanisms that justify other interventions, because “economics is not a morality play” and reducing inequality would be the moral thing. Better to err on the side of human welfare rather than reputational purity.

I happen to think that the macroeconomic case for reducing inequality is much stronger than the case I’ve made here. I think the character of growth is badly misshapen when demand is narrowly sourced, that technological stagnation is mostly a distributional problem, that institutional correlates of growth are harmed by increasing inequality. But those are all more speculative claims. You can tell me the “jury is still out” on those. But the jury is not out, it never reasonably has been out, on the reality of distribution-related MPC effects. I’ll disagree, respectfully, if you claim that for supply-side or libertarian reasons we should ignore that reality and prefer other means of supporting demand (or that we should not worry about supporting demand at all). But don’t say “it’s unclear” whether income distribution affects aggregate demand, holding other factors constant. Of course it does.

Paul Krugman writes:

Incidentally, small nerdy note. Some people argue that the concept of the monetary base has lost its relevance now that the Fed pays (trivial) interest on reserves. I disagree. Reserves and currency are fungible: banks can turn one into the other at will. But the total of reserves and currency is fixed by the Fed — nobody else can create either. That, as I see it, makes them a relevant aggregate — and anyone who believes that all those reserves are sitting idle because of that 25 basis point reward is (a) silly (b) ignorant of Japan’s experience, where the BOJ sharply increased the monetary base without paying interest on reserves, and what happened looked exactly like our own later experience.

Nerdy indeed! Some might even describe it as dork-ish.

But I think that Krugman is mischaracterizing the view he is arguing with. I’m not sure he would even argue with the view properly characterized. Of course he might!

Perhaps there are people in the world who think that paying 25 basis points of interest on reserves means that base money doesn’t matter, but I have not met any of them. I certainly agree with Krugman that those 25 basis points have a pretty negligible macroeconomic effect now.

The view of people who think that interest-on-reserves permanently diminishes the macroeconomic meaning of base money is contingent on a conjecture that, henceforth, the Fed will always pay interest-on-reserves at a rate comparable to the rate paid by short-term US Treasury securities. If that conjecture is false, then the quantity base money will someday matter again.

In either case, the quantity of base money that exists right now is largely meaningless , and would be meaningless if the Fed were not paying any interest on reserves, because Treasury rates are near zero. This is Krugman’s liquidity trap, an effect of the negative unnatural rate of interest.

The quantity of base money is meaningless right now even if I am wrong about the Fed henceforth always paying interest on reserves at the short-term Treasury rate. Because if I am wrong, the only way that the Fed can create a spread between the interest rate paid on base money (whether zero or something higher) and the Treasury rate is to dramatically reduce the quantity of base money, so that some convenience yield on holding scarce base money offsets the opportunity cost implied by a T-bill / base money spread. Current quantities of base money simply can’t coexist with with a spread between the interest paid on reserves and the interest paid on Treasury bills. (Unless some unexpected thing dramatically increases the convenience yield of holding base money!).

So, there is almost no direct informational value to the current quantity of base money. Perhaps there is indirect information that matters. It could well be that the rate of change of the quantity of base money contains information about the likelihood of future interest rate changes, so it is not irrational of market participants to respond to rumors of tapering or moar QE. Perhaps there are institutional quirks related to the fact market participants can only hold interest-paying base money indirectly via banks, while the stock of risk-free securities depleted by monetary expansion can be held (and hypothecated) by non-bank actors. (If so, “monetary expansion” might be contractionary!)

But the first-order effect of monetary policy is gone. Changes in the base used to engender straightforward imbalances between a direct opportunity cost and the convenience yield of holding money. A reduction of interest rates / expansion of the monetary base would lead to an increase in the direct cost of holding money rather than Treasuries, and put the economy in disequilibrium until NGDP or (too frequently) asset prices adjusted to increase the convenience yield attached to the monetary base. A contraction did the reverse. While we are stuck at zero we can argue over expectations or collateral chains, but the old, blunt, simple channel no longer functions.

And it will never function, as long as the Fed always pays interest comparable to Treasuries on base money. There is nothing special about zero, or 25 bps. What makes a liquidity trap is that the rate of interest paid on money is greater than or comparable to the rate of interest paid on Treasury bonds. So long as that is true, whatever the level of interest rates of interest, macroeconomic outcomes will be much less sensitive to changes in the quantity of money than in once-ordinary times. That is not to say, full-stop, that monetary policy is impotent. Those squishy expectations and institutional quirks may matter. But post-2008, we live in a world where insufficiently expansionary monetary policy has meant tripling the monetary base. Pre-2008, tiny changes in the quantity of base were sufficient to halt an expansion or risk an inflation. The relative impotence of changes in the monetary base is not a function of the zero-lower-bound. It is a function of the spread between base money and risk-free debt, a spread which may well be gone forever.

So, my working hypothesis is that, should the debt ceiling actually bind, the US Treasury will prioritize payment on formal debt securities and then institute some form of delayed payments on the rest of its obligations. Like the vaunted small business struggling to make payroll, it will borrow funds from suppliers and other creditors by stretching accounts payable. If I’m wrong about that, everything that follows will be wrong.

This is my second post trying to think through the consequences of such a regime. In the first, I pointed out that claims to future delayed payments would be securitized, and that prices of those securities would be informative, they would constitute a kind of back-door approximation of an NGDP futures market, which, as Scott Sumner has persuasively argued, would be a useful thing to have around.

That was an optimistic take on delayed payments. But there is a flip-side of the missing platinum coin that is a bit darker. If Treasury delays payments, what will not happen is a simple withdrawal of missing government expenditures from the economy. (It really is important to think about banks!) One of the oldest and most basic functions of a bank is to discount accounts receivable, to advance funds today against credible obligations of third parties to pay in the near future. Originally this was a service offered to business clients. Today, the same principle underlies credit lines offered to individuals, including direct-deposit, payday, “structured settlement”, and tax-refund loans.

If the government starts delaying payments, banks will be able to fill in the gap, quickly and profitably. Advances against government obligations would require no meaningful credit analysis. As they would be secured by obligations of the Treasury, they would have little or no cost in terms of regulatory capital. The banking system faces no meaningful reserve constraint. Nothing whatsoever would prevent the banks from simply lending “from thin air” payments that the US government is withholding.

The first hit might even be free! (ht Brad Plumer) But this service won’t be free over an indefinite long-term. Large business customers might pay the few basic points implied by a loan against government security for a few months time. But individual marks customers will undoubtedly be charged “convenience fees” for the service of drawing advances on government payments that render the overall cost of the loans, when annualized, very high. We will, of course, be treated to the usually litany of justifications for exorbitant short-term loan costs: You don’t annualize hotel rates and compare them with apartment rents! Dealing with stinky, not-rich people is expensive! But in the end, this would be a nice line of business, which would multiply over time if delayed payments become the new normal for debt-ceiling-constrained government borrowing.

A delayed payments regime would amount to a regressive tax issued at two levels: first by the Federal government, and then by the financial industry. By delaying payments, the Federal government would tax recipients of government disbursements by forcing them to finance loans to the Treasury for free. Like all taxes, the actual incidence would be more complicated than the direct hit. Payees with bargaining power — say vendors of bespoke military systems or well-connected contractors — would find ways to add the finance cost to their bills, and largely escape the tax. Payees without bargaining power — your average social security recipient, for example — would have to simply accept the delayed payment and eat the interest cost that the government should be paying. A second regressive “tax” would be imposed by financial service providers. They would, as usual, compete to offer cost-efficient products to wealthier and more astute customers, while charging smaller, weaker, more desperate customers large fees. In the end, the Federal deficit would be reduced and bank profits would swell, primarily on the backs of the least-savvy, lowest-bargaining-power government payees.

A common narrative about the debt ceiling is basically a Frankenstein story: businesspeople funded these Tea Party crazies, and now despite pulling all their levers, they just can’t control the monster they have created. And maybe that’s right.

But suppose, plausibly, that the Jamie Dimons of the world know what Treasury has assiduously ensured the rest of us do not, which is exactly what Treasury is capable of and planning to do when George Washington bumps his head. And suppose it is debt prioritization plus delayed payments. Is it too much to wonder whether some quarters of the business community — you know, the ones who own the place — may not be pushing quite as hard as they pretend to raise or eliminate the debt ceiling?

I hope that it is too much to wonder. I hope it is evidence only of my own paranoia that I do wonder.

Lots of times in conversations about inequality, mobility is cited as a potential remedy. What matters, according to this argument, is not how much inequality there is, but whether there is opportunity for people anywhere in the wealth/income spectrum to rise. American politicians of both parties, loathe to tackle actual inequality, have made a religion of the phrase “equality of opportunity”.

It is easy, and accurate, to counter the “equality of opportunity” fetish on practical grounds. “Equality of opportunity” echoes another famous phrase in American politics, “separate but equal”. Even if one concedes the theoretical point (which one should not), neither sort of equality is achievable in a real-world social context. The schools into which an impoverished and oppressed minority are herded were never going to match those offered to children of the affluent and well-enfranchised. Children born to parents who can barely afford even to be present themselves will never have the same opportunities as kids tutored for hundreds of dollars an hour and groomed for internships by well-connected professionals.

But if you are a utilitarian, the case for social mobility is incoherent even on theoretical grounds. Under ordinary assumptions of diminishing marginal utility and a social welfare function that aggregates individual utilities, for any distribution of wealth, overall welfare is maximized when each individual knows her place with perfect certainty from the start. A person who expects to land on the bottom of the distribution might prefer that some uncertainty be added into the mix, but that benefit will be more than balanced by the cost to someone near the top of the distribution facing downward mobility. If we augment standard utility functions with plausible notions of habit formation and social reference group comparison, the case against mobility grows even stronger. The cost and shame of downward mobility dramatically outmatches the potential benefit of upward mobility. If that sounds abstruse and theoretical, it shouldn’t. For example, I don’t think you can understand the United States response to the financial crisis without taking into account the genuine sympathy of policymakers and other influencers for the plight of people within their social communities who faced banishment to dramatically lower stations under theoretically superior policy alternatives. A functional polity values rising fortunes across the wealth spectrum, but it fears and resists falling fortunes much more strenuously. I would go so far as to claim this is a universal social fact, a characteristic of all polities that endure. Capitalism is always crony capitalism — and socialism tends towards crony socialism! — not because of corrupt bad actors but because human lifestyles are sticky-downward. Large social divergences can in practice be remedied smoothly only by convergence upward from the bottom. The wise course is to prevent extreme divergence from emerging in the first place. Once it has, the only way out is to hope for growth, and to direct the fruits of growth towards the bottom of the distribution.

These issues are glaringly obvious at a global level. The United States and Europe are full of people who tut and cluck about poverty and misery in the erstwhile Third World and elsewhere. But no one imagines that “mobility” in the sense used in domestic politics would be an acceptable answer. If we are honest, do we want, would we even remotely tolerate, any sort of political change that gave our children “equality of opportunity” with children born in Gabon today, holding the global distribution of outcomes constant? Obviously not. We might embrace a fig-leaf “level playing field”, where advantages we can reliably provide would ensure our kids the 90+ percentile lifestyles we consider civilized despite some self-aggrandizing formal equality. (All hail the meritocracy!) But we would resist with the full horror of our armaments any reform that meant our kids should face anywhere near the probability of deprivation and poverty implied by a fair lottery of the global distribution of outcomes. At a global level, we will either have “stability” that is really ossification (or expansion) of present divergences, or convergence via rise from beneath. Convergence from the top, downward absolute mobility, is simply unthinkable.

The first-order utilitarian costs of social mobility outweigh the benefits, full-stop. Obviously, there are more complicated stories you can tell about why social mobility is a good thing, desirable to some degree. Perhaps the prospect for social mobility creates incentives for individuals that cause the distribution of outcomes for the full population to shift upwards. Perhaps concerns about justice (however we define that) should supervene to some degree the utilitarian cost of social mobility. I buy all that. To some degree.

But if you fancy yourself a utilitarian, you have to acknowledge that mobility, like the inequality that renders it possible, is attended by first-order costs to social welfare. Those costs may be outweighed by second-order “dynamic” effects over some range, but that’s a case you have to work to make that goes well beyond conventional utilitarian analysis, well beyond most models that economists actually write down and use. And it’s a case with built-in limits. The first-order costs of inequality and mobility will eventually overwhelm whatever second-order benefits we wish to ascribe to them.

The case for both inequality and social mobility is very much like the case for patents and copyrights. Patents and copyrights are first-order economic distortions, grants of monopoly power by the state. But we claim these particular distortions also “promote the progress of science and useful arts“. So we face a trade-off. We accept and even encourage the distortions, within limits. But we understand (or we should understand) that we are playing with fire, that there is only a narrow range within which these prima facie bad ideas might be redeemed by more complicated virtues. I favor inequality, but not too much of it, just as I favor copyrights for strictly limited terms. But in this era of Mickey Mouse protection acts and rent extracting oligarchs, those limits have been exceeded and the bad ideas are just bad ideas that need to be pared back.

Update: Unsurprisingly, Alex Tabarrok and Tyler Cowen at Marginal Revolution were miles ahead of me on this, see Stasis, Churn, and Growth. My mind is a device which operates by so thoroughly confusing unoriginal thoughts that I can no longer identify their provenance.

Suppose that the debt ceiling is never raised. Never ever. It remains in perpetuity at its current level of $16.7 trillion dollars.

Suppose also that the Treasury chooses to (and is operationally able to) prioritize payments on formal Treasury securities so that there is never a default on a US bond or bill. At or near the statutory debt limit, Treasury suspends other payments to build up a cash buffer sufficient to cover any spikes in payments due net of taxes. Once that is accomplished, Treasury securities can resume their role as the nearly default-risk-free asset at the center of the global financial system.

The question, then, is how are the other obligations of the US Treasury to be discharged? If the US government cannot (formally) increase its borrowings, then it is in theory subject to a cash-in-hand constraint. It can only spend the money it has, primarily in the form of funds on deposit at the Federal Reserve. (Yes, my chartalist friends, this is stupid, since the consolidated government/central-bank need never be bound by a financing constraint in a currency it issues. But in this case, the political system chooses, however bizarrely or foolishly, to constrain itself. C’est la vie!)

Humans, when ostensibly subject to a cash-in-hand constraint, do not in fact always live within their means. In particular, humans sometimes surreptitiously borrow money by writing checks against funds they don’t actually have. If I write a check for goods and services you provide today, you are lending me money. Usually that is mere transactional credit — an advance of convenience against funds I already have. But not always. If I write a check against funds I hope I’ll have in my account before it clears, you’re lending me money, whether you know it or not.

This is usually an expensive borrowing strategy for humans, because if I fail to assure an inflow of funds before my bank is ordered to pay the check, I will be hit by all kinds of costs — overdraft fees, returned-check fees, perhaps even fines or jail time if the “bad check” (defaulted loan) is deemed to be fraudulently arranged.

However, the government has a much cozier relationship with its bank than your typical check-kiter. Suppose the government, in response to the insoluble problem presented by congressional spending mandates and a debt limit, simply decides to pay all its bills as old-fashioned paper checks. It then asks the Federal Reserve not to “bounce” checks presented for payment against insufficient funds, but simply to hold them and make payments on a first-in, first-out basis as funds become available. Everyone who deposits a US Treasury simply finds that the funds don’t appear in their account until weeks or even months later. (Banks, in order to protect their own cash flows, would revise their “hold period” policies with respect to checks from the US Treasury, making funds available only when the checks actually clear, like they might with deposit of a large personal check.)

Suddenly, the debt ceiling is moot. Every check issued by the US Treasury is basically a credit line that does not count towards the debt limit. The Treasury pays its bills, on time and as usual, in the form of paper checks. It’s just that those checks clear a bit sluggishly.

Of course, recipients of US Treasury checks may not be happy to wait some indeterminate period before actually spendable funds appear in their bank accounts. There would quickly arise a liquid market discounting endorsed Treasury checks. Suppose “the market” expects payment of checks two months following a deposit, and the current short-term Treasury bill rate is about 1%. then you should be able to sell an endorsed $100 check from the Treasury for $99.83. Let’s call it $99.80, because the purchaser would want to be compensated for the uncertainty surrounding the exact time of payment. Of course, 1% is much higher than current T-bill rates. At a more realistic yield of 0.02%, you’d pay about a nickel per $1000 to redeem a two-month delayed check today, including some compensation for buyers’ uncertainty.

But this would be a very large market, and banks would quickly find themselves accumulating and trading billions of dollars of endorsed Treasury checks every day, with each day’s cohort trading at slightly different prices. The delay would initially be short, but it would expand for a while, then slow and eventually become pretty stable, somewhere (I am guessing!) between several months and two years. More precisely, the delay would be (total_debt - traditional_debt) / (tax_receipts - interest_on_traditional_debt). Traditional US Treasuries would remain actively traded in a $16.7T market, providing us with full risk-free yield curves. So we’d have good market predictions of the interest cost of traditional debt, and know the appropriate risk-free rate to discount for any length of delay. The only real unknowns relevant to pricing endorsed Treasury checks would be 1) the rate of future tax receipts and 2) a risk premium surrounding date-of-payment uncertainty. Date-of-payment uncertainty would itself be mostly a function of tax-receipt uncertainty. To a first, pretty good, approximation, the price of these these securities would just reflect a market estimate of the rate of future tax receipts relative to the known current stock of debt. One would have to adjust a little bit for illiquidity and uncertainty premia, but on these ultimately very low-risk securities, the adjustments would probably be quite small.

Holding tax law and the character of economic activity constant, tax receipts are pretty proportional to… nominal GDP. Of course, tax law and the character of economic activity are never constant. But periods of real uncertainty surrounding near-future tax law are infrequent, and the character of economic activity changes slowly. So a “futures market” in Federal tax receipts would not be a bad approximation of a futures market in nominal GDP!

I think Scott Sumner is the Svengali behind all of Ted Cruz’s antics. He must be. It’s the only sensible explanation.

I can’t quite wrap my head around what Treasury will actually do when the debt ceiling binds, if they won’t “mint the coin” or issue super-premium bonds, or invoke the “constitutional option”. Obviously the scenario described here is very speculative. But prioritizing Treasuries and slowing payments to everyone else doesn’t sound totally wacko. And if they do that, even if it’s not via paper checks, financial markets will try to figure out ways to discount and trade the loans implicit in delayed Treasury obligations. Maybe that will turn out to be a good thing!

p.s. i’ve been interested for a while in the possibility securities that pay-out fixed, predetermined sums on uncertain, revenue-dependent schedules. they strike me as a nice sort of debt-equity hybrid, offering some of the certainty of debt but much less hazard to issuers that payments will come due when they cannot easily be met. prices of such securities would be informative and easy to interpret. i’ve primarily thought about these with respect to small business finance. they seem an odd fit for a government that can in theory issue currency at will. such a government would pay for insurance it does not need because investors would on average demand a higher-rate of return than for fixed-term debt. but the informative prices might be worth the extra cost! and, in the debt-ceiling-forced scenario described here, the cost would be borne at least in part by recipients of government checks, who face an implicit tax.

Here’s a statement that I don’t think will be too contentious, across the ideological spectrum:

The American way is to draw sharp distinctions between winners and losers, in order to encourage people to hustle.

People on the political left might rephrase this in stronger, more derogatory language. People on the political right would mostly celebrate the statement. But as a description of the American status quo, I think it is fairly uncontroversial. It expresses the barely tacit rationale behind a whole panoply of American institutions that comfort the already comfortable and afflict the already afflicted. Consider the so-called corporate welfare state, or tax expenditures like the mortgage interest deduction and the deductibility of health costs (only) of the stably employed. These things come to exist for specific historical reasons, they are won by particular lobbies, but they endure because of widespread hospitable ideology. It should be possible to “make it”. “Making it” should be a safe, comfortable place, while those who fail to make it should bear consequences for their deficiencies.

Suppose, as I think many people on the right would argue, this ideology or worldview has contributed to power and prosperity of the United States. Sharp distinctions between winners and losers encourage individuals to work hard rather than slack off. Some succeed, some don’t, but the net effect is to reward effort and enterprise, generating a vibrant, prosperous economy. The punishment of losers is a price that must be paid to create a nation that is collectively a winner. And the burden of that price falls on those who most deserve it, those who lose — in part due to misfortune sure, but largely because they simply failed to work as hard or as well as their competitors.

People on the political left would dispute this account for all kinds of (good) reasons. But let’s put that aside, and consider it on its own terms. This perspective on American life would, I think, be described as “rugged individualism”.

But, in the lingo of economics, consider the “social welfare function” embedded in this story. The claim is emphatically not that this system maximizes some measure of aggregate utility that could be decomposed to a sum of individual welfares. On the contrary, it celebrates as necessary large costs in individual welfare for the sake of impersonal characteristics of the aggregate: “prosperity”, or “strength”. It is an entirely collectivist justification for policies that are deeply harmful at an individual level, if you take seriously at all the idea of diminishing marginal utility. The individualist approach to maximizing welfare would be to redistribute. If we (contentiously but commonly) assume people share comparable utility functions, aggregate utility is maximized by taking from the rich and giving to the poor. At least in a methodological sense, it is socialists who are the individualists, attending to the sum of individual welfares, while unsympathetic capitalists rely upon collectivism to justify their good fortune and the policy apparatus that magnifies and sustains it.

People on the political right who are uncomfortable with the claim that their policy views are only coherent if they put the welfare of a depersonalized collective above the welfare individual humans might respond in two ways. Some libertarians would slough off the whole conversation, and argue that they are not concerned with either the well-being of any collective, or of individual human beings in the abstract, but require only that just procedures should be followed and concrete liberties respected, regardless of outcome. That’s a self-consistent view, but one that will never be very useful or interesting, other than to its disproportionately comfortable adherents. The more interesting rejoinder is a claim that there is no tension between individualism and collective goals like American strength and prosperity. Even accounting for the utilitarian harms provoked by celebrating and therefore engineering sharp divergences in outcome, the success of the collective improves characteristics of the population of outcomes so much that welfare gains due to increased prosperity outweigh welfare losses due to tolerance of internal divergences.

That’s an interesting claim, contestable but not incoherent. It would in principle depend upon the scale of the increase in prosperity and the degree to which it “raises all boats”. I think it’s a hard view to support, what with sinking rowboats and rising yachts and successful counterexamples like the Nordic countries. But perhaps Acemoglu, Robinson, and Verdier are right and the Nordics only succeed by free-riding off of America’s collective achievement.

Regardless, it’s a very communitarian view, one in which welfare dynamics cannot be adequately understood by building from individual microfoundations. It is a theory that both acknowledges divergences in individual welfare and posits an important role for social or “meso”-level abstractions in explaining (and justifying) the American status quo. The religious right and “national greatness” conservatives will be perfectly at home with all this. But it’d be nice if the economists on whom they rely to craft (and justify) policy would catch up.

Inspired by @zerg_rush01 and @MattBruenig.