Category: Economics

Why debate about a wall?


What underlies the debate about building a wall on the U.S.-Mexico border?

As with so many seemingly intractable political arguments, debaters usually don’t explicitly state their premises describing which moral values are informing their position, because they rarely even realize their opponents are even operating on different moral dimensions.



A compressed argument from the right might take the form:

  • Premise 1: The government’s primary role is to provide security, in the form of law enforcement, to its citizens and legal aliens.
  • Premise 2: A government has the right to control who enters its borders.
  • Conclusion: Therefore, the government’s policy should be to spend more resources enforcing laws against illegal border crossings, and one such tool would be a wall to help prevent said illegal border crossings.

Some on the right might find the above argument completely obvious and convincing, but the argument has many unstated premises with which to disagree. A decompressed form of the argument with more premises stated explicitly, might take the form:

  • Premise 1: The government’s primary role is to provide security, in the form of law enforcement, to its citizens and legal aliens.
  • Premise 2: A person’s national origin conveys probabilistic information about their security risk inside the United States.
  • Premise 3: Legal immigration channels provide a necessary audit of the security risks of foreigners entering the country.
  • Premise 4: It is possible and practical for unskilled workers to enter the country legally and work legally, but illegal immigrants are criminals who merely prefer to cut corners.
  • Premise 5: A foreigner’s proclivity to circumvent legal immigration channels into the United States demonstrates a disrespect for the rule of law and an unhesitating willingness to commit criminal acts.
  • Premise 6: Law enforcement should devote resources to prevent criminal activity, including illegal border crossings.
  • Premise 7: A wall would be an effective tool to restrict illegal border crossings.
  • Premise 8: The marginal financial costs of a wall are less than or equal to the combined marginal economic and security benefits of a wall.
  • Premise 9: Deference to authority moral foundation: Following the law is an important moral value in and of itself, so it’s wrong for rule-violators to go unpunished.
  • Premise 10: In-group loyalty moral foundation: The government should grant preferential treatment to United States citizens and legal aliens in the form of economic protectionism.
  • Premise 11: Fairness and reciprocity moral foundation: By selling their labor off-the-books and without paying taxes, illegal immigrants don’t contribute to paying for government-provided infrastructure and services.
  • Conclusion: Therefore, the government should construct a wall on the U.S.-Mexico border.

Contrast the above argument from the right to the below argument from from the left:

  • Premise 1: Harm and care moral foundation: There are desperate, impoverished people who are attempting to improve their lives by crossing the border to work in the U.S.
  • Premise 2: Fairness and reciprocity moral foundation: Such impoverished people are poor from circumstances beyond their control, based on wherever they happened to be born.
  • Premise 3: In-group loyalty moral foundation: There’s no special moral obligation to confer privileges, rights, or resources on the basis of national origin.
  • Premise 4: Deference to authority moral foundation: It’s not particularly important to follow or enforce unjust laws.
  • Premise 5: Liberty and oppression moral foundation: Laws restricting the free movement of people are oppressive.
  • Conclusion: Constructing a wall to more strongly enforce an unjust law is undesirable.

Spelling out all of the unstated premises improves the discourse and reveals what exactly the impasse is. This is a similar technique to “Tabooing the words.”



The argument for or against a border wall actually follows a distinct pattern observable in many other political debates. The specific “wall” debate is generalizable to more-or-less any debate about harsher crackdowns on victimless crimes.

What were the policy objectives of alcohol prohibition in the 1920s? The intended objectives were to (1) reduce alcohol consumption in order to (2) reduce the the social ills caused by alcohol consumption. Unfortunately, when governments successfully achieved (1), they made (2) much, much worse. The policy problem with prohibition wasn’t that the government failed to reduce alcohol consumption—the problem was that by harshly cracking down on a victimless crime, they drove the activity underground into a black market, fueled organized crime, and made production, sale, and consumption of alcohol much more dangerous. The costs created by prohibition proved much higher than when alcohol had been legal.

The logic of harsher crackdowns for victimless crimes almost always fails, 180° from the intended policy objectives. Some other examples:

  • Modern-day marijuana prohibition
    • Modern-day marijuana prohibition fuels violent, depraved Mexican drug cartels.
    • There are no equivalent “tobacco cartels” or “alcohol cartels,” because neither tobacco nor alcohol are traded on a black market.
  • The illegality of prostitution
    • Prostitution is largely an illegal, underground business, which makes it more dangerous for prostitutes and their johns. Prostitutes or johns who find themselves in danger can’t rely on law enforcement for protection or recourse.
    • Driving prostitution underground makes sex slavery and human trafficking a viable business model. Ceteris paribus, pushing the supply curve to the right with legal, regulated prostitution businesses would obliterate the slavery business model.
  • Exploiting tax loopholes instead of paying taxes
    • U.S. corporations hire lobbyists, lawyers, and accountants to create, find, and exploit tax loopholes—if taxes were simply lower, it would be more cost-effective just to pay the taxes. The stated intent of high corporate income tax rates is to extract more revenue from corporations, but the higher tax rates spur firms to find clever ways to pay less in taxes.
    • Even though Arthur Laffer was empirically wrong about his parabola’s numerical values, his concept was more or less correct. Hauser’s law holds.

The logic of harsher crackdowns applies in the same way to human migration. By driving the victimless crime of human migration underground, the government is spurring social ills—funding organized crime through cayotaje, and making living and working more dangerous for laborers who are merely seeking to sell their labor.



Much of the immigration debate can be stripped down to two opposing outlooks. The core question is whether, on net, outsiders are:

  1. Either a cost to the United States, consuming resources and predating on American citizens;
  2. Or a benefit to the United States, looking to improve their lives by consensually selling their labor and participating in positive-sum economic transactions in iterated games.

The explanation from Matt Taibbi on the rise of Trump, the leftist-style economic protectionism on the right, and the “politics of resentment” applies to the immigration debate as well.

It seems like a historical accident that the left and right divided on the immigration debate in the way that they did. Why didn’t we see labor unions on the left promote economic protectionism against immigrants, and the free-marketeers on the right promote free markets for unskilled labor?



One cliché heard from the right is “being only against illegal immigration, and for legal immigration,” which presumes that it’s at all possible for unskilled workers to enter the country legally. It’s not.



The same logic of 180° unintended consequences from harsh crackdowns on victimless crimes applies for “national security” concerns as well. It would merely promote cayotaje to crack down more harshly on current immigration laws before actually reforming laws to make immigration for unskilled immigrants legal.

Because immigrants are primarily seeking to sell their labor, there would be no reason migrate illegally if legal immigration were actually a viable option.

Just as the repeal of alcohol prohibition eliminated the revenue stream to organized crime during prohibition, legalizing immigration for unskilled workers would eliminate cayotaje. At the moment, potential terrorists and dangerous criminals are free to use the cayotaje infrastructure, which decreases national security.


Brands, product consistency, and the ascent of television and subscription-based VOD

One economic explanation of why brands proliferate is that brands provide consumers consistency of product. A classic illustration is a national restaurant chain. A traveler who’s passing through an unfamiliar town doesn’t know local restaurants, and the variance in quality among the mom-and-pop shops is high. Even though the quality of a chain might not be the highest in any given town, a risk averse consumer might prefer eating an average meal at a chain, rather than risking a low-quality meal at a mom-and-pop shop.

In Hollywood, it’s exceedingly difficult and rare for film studios to establish such consistency across their different marquee offerings. There are some mechanisms for doing so: moviegoers will often select films based on specific directors or actors. For more formulaic movies, sequels provide consistency for established demographics.

In the past decade, television has exploded with a vast amount of content. John Landgraf, the CEO of FX, has even worried that there is too much television. There’s more dreck, like reality television, but there is also more high production value television. Such high production value television competes with 2-hour theatrical feature films.

Story arcs are fractals. An audience will follow characters in a good story through a not only a 2-hour film, but also through a 12-episode television season, a single 45-minute television episode, or even just a 2-minute scene.

What does this mean for television? Filmic shows might contain long story arcs that follow characters across six seasons, but episodes often function as standalone short films. Episodes of The Walking Dead in later seasons often have self-contained, coherent stories that can draw in new viewers without requiring that they watch earlier seasons. Characters come and go from season to season. No additional context is required. This is a highly successful mechanism to actually create a consistent product across tens and tens of hours of entertainment content. This is more successful branding than any traditional movie studio could hope for, even one that specializes in zombie horror.

Subscription-based VOD services like HBO, Netflix, and Amazon, through their original content, have been able to establish brands in a way that film studios never quite could. Sophisticated audiences understand what it means for a show to be “an HBO show” or “a Netflix original.”

Is the brand loyalty to these subscription-based VOD services merely an artifact of their captive audiences? Subscribers who have already opted into particular subscriptions might actually be receptive to mere feature-length films, and not just entire television seasons. Economies of scale nudge subscription-based VOD services toward the production of entire television seasons rather than two-hour films, because consumers who have opted into a subscription want the most bang for their buck. There are exceptions, however—the Netflix feature film “Beasts of No Nation,” HBO documentaries like “Going Clear,” or even just shorter miniseries like “Oliver Kitteridge,” “Angels in America,” et cetera. Perhaps, insomuch as content producers own distribution channels, they can maintain attractive brands for their subscribers.

Why avoid panel data in examining social mobility?

Last week at Politics and Prose, I had the opportunity to hear Robert Putnam’s book talk for Our Kids: The American Dream in Crisis. In his book, he focuses on data that purport to show a growing divide in income inequality and social unraveling.

Putnam told a personal anecdote about his deteriorating home town in the Rust Belt. If Putnam were able to prove that the shrinking economy from the loss of manufacturing jobs in the Rust Belt proportionately reflected the larger economy in all other sectors, he might have a strong data point, but a personal anecdote is not enough. The availability heuristic is not strong evidence.

So much of the talk concerning income inequality pertains to an unstated premise about social mobility. The widespread fear is not just that the rich are getting richer, but that the rich are getting richer at the expense of the poor. The mental model assumes some fixed share of wealth that exists in the world should be divvied up fairly so as to avoid predation by the strong on the weak. Often, the evidence presented for a “fixed pie” theory is to show the shrinking share of income among the lower quintiles and the growing share of income among the higher quintiles. The problem with this methodology is that it doesn’t actually account for social mobility. To prove that capital is flowing from individuals in the bottom quintile to individuals in the top quintile, we need panel data.

If we don’t analyze with panel data, we might observe the top quintile, profiting from some entirely new high-tech sector, drastically increasing their income by 20% while lower quintiles still increase at 2%. More wealth generated at the top wouldn’t imply material loss for the bottom quintile.

In the Q&A, I pressed Professor Putnam on his methodology, specifically, to what extent he used panel data to show decreased social mobility. After his book signing, he elaborated for me.

Putnam claimed that there was some good panel data for income, but that it couldn’t be used to show current trends in social mobility.

We might suppose that the relevant panel data to measure social mobility would include income, y_{it} for i=Poor, i=Rich, t=20, t=40.

At t=40 or so, we might expect people to be generating the most amount of income for their life.

The methodological issue Putnam pointed out was that individual incomes over a lifetime are highly nonlinear. If you were to track a random sample of individuals starting at t=20, very different kinds of individuals would look very similar, but both would appear in the bottom quintile. Specifically, y_{Rich,20} could be -$100,000 for a Harvard pre-law student who’s taking out student loans, and y_{Poor,20} could be $16,000 for a minimum wage job. However, y_{Rich,40} might be $450,000, while y_{Poor,40} might be something like $25,000.

Putnam pointed out that because of how this panel data is measured, the data is always intrinsically 30-40 years out of date. Wait, is this a cop out? Is this methodological laziness?

Just because any one particular study requires 40 years doesn’t mean that we couldn’t observe multiple concurrent staggered studies, with different individuals to show panel data over time. We can imagine Study A starting in 1945 with a batch of individuals at t=0, Study B that tracks t=0 at 1950, Study C that tracks t=0 at 1955, and so on and so forth. Then, despite nonlinearity in lifetime earnings, we would still be able to see trends in how individuals are or aren’t moving up, out of their birth quintiles.

Did F. A. Hayek understand optionality?

Nassim Nicholas Taleb writes in Antifragile,

We may be drawn to think that Friedrich Hayek would be in that antifragile, antirationalist category. He is the twentieth-century philosopher and economist who opposed social planning on the grounds that the pricing system reveals through transactions the knowledge embedded in society, knowledge not accessible to a social planner. But Hayek missed the notion of optionality as a substitute for the social planner. In a way, he believed in intelligence, but as a distributed or collective intelligence— not in optionality as a replacement for intelligence.1

Au contraire, Hayek wrote in The Constitution of Liberty, in Chapter 2: “The Creative Powers of a Free Civilization,”

It also follows that the importance of our being free to do a particular thing has nothing to do with the question of whether we or the majority are ever likely to make use of that particular possibility. To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.2

In a footnote for the paragraph, Hayek cites a comprehensive scholarly history for the idea:

Cf. Rev. Hastings Rashdall, “The Philosophical Theory of Property,” in Property; Its Duties and Rights: Historically, Philosophically, and Religiously Regarded, Charles Gore and Leonard Trelawney Hobhouse, eds. (new ed.; New York: Macmillan, 1915) pp.61-62: “The plea for liberty is not sufficiently met by insisting, as has been so eloquently and humorously done by Mr. Lowes Dickinson (Justice and Liberty: A Political Dialogue, e.g. pp. 129 and 131), upon the absurdity of supposing that the propertyless labourer under the ordinary capitalistic regime enjoys any liberty of which Socialism would deprive him. For it may be of extreme importance that some should enjoy liberty—that it should be possible for some few men to be able to dispose of their time in their own way—although such liberty may be neither possible nor desirable for the great majority. That culture requires a considerable differentiation in social conditions is also a principle of unquestionable importance.” [The full citation of the book quoted by Rashdall is: Goldsworthy Lowes Dickinson, Justice and Liberty: A Political Dialogue (London: J. M. Dent, 1908).—Ed.] See also Bennett E. Kline and Norman H. Martin, “Freedom, Authority, and Decentralization,” p. 69: “If there is to be freedom for the few who will take advantage of it, freedom must be offered to the many. If any lesson is clear form history, it is this.”3

1 Nassim Nicholas Taleb. Antifragile (New York: Random House, 2012), Kindle edition.

2 F. A. Hayek, The Constitution of Liberty: The Definitive Edition (Chicago: The University of Chicago Press, 2011), 83.

3 Ibid.

How does one person’s wealth affect another’s?

Matt Bruenig attempts to disprove a conservative talking point about income inequality, that one person’s wealth doesn’t have an effect on another person’s:

First, even if you wrongly think of wealth as a store of money and property created long ago, the distribution of it still impacts people’s lives, especially in America.

I’m already confused. Wealth, as far as I understand it, is the net value of the entity being examined. Net income is a measure of wealth over time. Is there some kind of obfuscation going on here? It seems that there’s imprecise jargon here. “Wealth” isn’t a store of “money,” but “money” is a store of value.

Modern life is fraught with very expensive risks lurking around every corner. A sudden illness or accident could render you disabled and unable to work. A recession or economic restructuring could render you unemployed and render the skills you’ve spent your life learning useless. Reaching old age with inadequate savings could mean living your golden years in poverty.

By what measure is modern life riskier than than the pre-modern era? When exactly was this golden age of low-risk living? This is not just a pedantic semantic objection. By modern standards, life in the pre-modern era was characterized by utter poverty. Until about 1800,  no society had experienced sustained growth in per capita income. So, while it may be true that there was less risk in the pre-modern era, because pre-modern people didn’t have as much wealth to lose, I don’t think Bruenig is trying to celebrate the massive gains in per capita wealth after the Industrial Revolution.

Many societies have created robust social insurance systems to protect their populations from these kinds of risks. The U.S. has done so as well, but to a much lesser extent. Because social insurance in the U.S. is so inadequate, it is incumbent upon people to self-insure against these risks. That means they need to have enough wealth to draw upon as a cushion if they end up facing hard times. But here’s where the social contract fails: When the bottom half of the country owns basically none of the country’s wealth, they can’t self-insure against these risks. Instead, they must lead a relatively perilous life in which one misstep or mistake could wreck them and their families.

I think this is confusing because there’s an unstated assumption here, that social insurance is just a state program that redistributes money from the wealthy to the poor. This isn’t Bruenig’s fault, but “social insurance” has become a kind of Newspeak term for state redistribution from the wealthy to the poor. Before the rise of the welfare state, there was a robust history of mutual aid societies. That kind of social insurance wasn’t deployed through governments, and wasn’t relevant to the tax code. In fact, that kind of social insurance often functioned to counteract government institutionalized racism.

There’s an unstated premise that redistribution from the wealthy to the poor would lessen the poor’s vulnerability to financial risks. This is true but irrelevant. Bruenig still hasn’t laid out what the exact negative externality is.

Second, wealth is not just a pile of dead value created in years past. When utilized properly, wealth ensures its owners a share of future income, too.

What is this term “dead value?” What does that even mean? Does it refer to a kind of Marxist labor theory of value, or a marginalist subjective theory of value? What is this caveat, “When utilized properly?” Show your work!

It seems that there’s another unstated assumption here, about capital accumulation. The underlying theory is that once an entity has collected a certain amount of capital, the capital will start generating returns without much attention, and that owners of capital can passively collect interest.

It seems obvious to me that there are significant costs to managing capital, but maybe it’s not so obvious. Most startups fail. Venture capitalists and investment banks are constantly assessing and lending capital from household savers to cash-poor entrepreneurs. The total economic surplus generated by the few successful companies outweighs the deadweight loss from overproduction of failed businesses. Investing isn’t simple; it’s not inevitable that once an entity has a certain amount of capital, there will be easy and steady returns.

 Most people seem to equate income with working: You go to your job, do your tasks, and get a paycheck. But this is only half of the story. At a macro-economic level, a nation’s income is divided between owners and workers, with the part flowing to the owners called “capital’s share” and the part flowing to the workers called “labor’s share.” In recent years, capital’s share of the national income has been as high as 37 percent, which is to say 37 cents of every dollar of income in a year goes to passive owners of wealth.

I had hoped when I started reading Bruenig’s article that I might find something other than rehashed social conflict theory. If Bruenig wants to abandon the neoclassical paradigm, he should say so explicitly. If not, then it’s not useful to talk of conflict between capital and labor. Both are mere inputs.

I think I can make Bruenig’s argument stronger than he formulated it here. Bruenig never explained what the negative externality was, but I can hazard a guess. The negative externality exists from whatever institutional arrangements preserve the inequality. That may sound obvious, but I’ll unpack it.

What Bruenig should have argued is not that the wealthy are only wealthy by withholding capital from the poor, but that the wealthy have historically used their wealth in the political process to calcify their social position. Why is a donation to the opera tax-deductible? Why are there home ownership deductions? If there is political power available to be purchased, it will be purchased.

Invasive monitoring for discounted health insurance policies

What is often called “health insurance” in the United States often isn’t actually health insurance, but a kind of imperfect prepayment plan for medical services.

If “insurance” companies were ever again to become actual insurance companies, seeking profit by assessing and pricing risks of payouts, how much producer and consumer surplus might be available through invasive health monitoring? If insurance companies could more comprehensively and invasively monitor their customers’ risk factors by, for instance, requiring monthly blood tests, or requiring shared access to a 23andMe profile, how much economic surplus might be available?

Surely there’s potential producer surplus, because insurance companies would be able to keep more money if they knew certain kinds of healthy customers would require fewer expenditures. Surely there’s potential consumer surplus, because healthy customers would be rewarded with lower prices for their good health. Pricing could even be dynamic, depending on the particular monitoring technology.

Aside from gains in producer and consumer surplus, there would be an even greater benefit. Prices would serve as a kind of check on biased medical research. Medical academics politicking for research money might continue to make wild and untrue claims about different pathologies, but insurance companies would have skin in the game to evaluate medical research.

As far as I know, privacy regulations and price regulations make this idea completely impossible today.

Why cash transfers, not social programs, make for better charity

Both This American Life and Tina Rosenberg recently covered GiveDirectly, a charity started by a few grad students who understood that social programs that provide specific kinds of goods or services can’t be as efficient as simple cash transfers.

What’s efficiency? Laypeople incorrectly assume that efficiency, for any given process, has to do with maximizing output while minimizing input. When economists discuss efficiency, it’s actually shorthand for Pareto efficiency. An allocation of resources is Pareto efficient if no individual can be made better off without making another individual worse off.

Assume that X represents a specific good or service, and Y represents all other possible goods or services. Without any help, an individual with budget constraint BC would consume at E. A social program that distributes only X would shift the recipient’s budget constraint from BC to BD, and the recipient would then consume at F. However, if the recipient were to receive cash, the budget constraint would shift to AD, and the recipient would be on an even higher indifference curve, and would consume at G.

BC is parallel to AD. It’s important to realize that, in either case, the donor would be spending the exact same amount of money. The donor has no way of knowing the recipient’s precise consumption preferences, so donating cash gives the recipient the freedom to more precisely choose how much to purchase of X and Y.

Tina Rosenberg discusses how politically unpalatable cash transfers are,

Those on the left tend to believe that the differences come from giant structural problems: bad or no education, health, transport, housing, few jobs. Giving cash to the poor, while helpful, solves one of these problems: credit constraints. It’s a big problem. But once it’s solved, another problem is likely to get in the way.

The right-wing argument is that the poor are poor because of the culture of poverty: people make bad choices, lack discipline, look for short-term gratification. This argument holds that giving cash to the poor doesn’t help much — and many people will misspend it in ways that make things worse.

Standard consumer choice theory dissolves these kinds of left-wing and right-wing superstitions. Unfortunately, such flawed political narratives tend to be based more on availability heuristics than sound systematic analyses.