Arguing with Zombies

April 3, 2021

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Paul Krugman. Arguing with Zombies: Economics, Politics, and the Fight for a Better Future. W. W. Norton, 2020.

This book is a collection of essays previously published by economist Paul Krugman, many of them in the New York Times. They cover a wide range of issues, including the debates over Social Security and Obamacare, the response to the financial crisis, problems with the European Union, trade wars, climate change, and the Trump phenomenon. The book ranges too widely to be easily summarized, but I will concentrate on the main connections between Krugman’s economics and his contributions to domestic policy debates. Although no one essay lays out his economic perspective very systematically, the main points of his largely Keynesian perspective become clear over the course of the book.

Krugman uses the term “zombies” to refer to “ideas that should have been killed by contrary evidence, but instead keep shambling along, eating people’s brains.” Apparently, he’s not calling his adversaries zombies, just some of their ideas. What he calls the “ultimate zombie” is the idea that taxes on the wealthy are bad for the economy, and that tax cuts for the wealthy are remarkably good for the economy. This idea thrives not because the evidence supports it, but because billionaires can spend a lot of money to support politicians, think tanks and partisan media that promote it.

This example show how easily economic questions are politicized, and how hard it is to have a honest economic debate in a politically polarized society. Nevertheless, Krugman believes that many economists—including himself—really do want such a debate, and really care about distinguishing fact from self-serving fiction.

Zombies in politics

Krugman introduces his collection of essays by saying that “in 21st-century America, everything is political.” The main issue still dividing people is the role of public policy in influencing market outcomes. Do we want a society like America in the Gilded Age, when government did little to alleviate the risks and inequalities of the market economy? Or do we want to become more like Denmark and other social democracies, paying the taxes necessary to support a stronger safety net and more worker protections?

One thing that keeps this from being an honest debate among people who just have different values and opinions is that the people who stand to gain the most from Gilded Age policies are themselves rather gilded. The rich have a vested interest in pushing the argument that what’s good for them is good for everyone. Their views are represented out of all proportion to their numbers—and to the economic merits of their arguments.

Krugman also observes that our two major parties are very differently organized. While the Democratic Party is a “loose coalition of interest groups,” the modern Republican Party is part of a much more organized movement that he and others call “movement conservatism.” In a 2018 essay, he described this as:

a monolithic structure held together by big money—often deployed stealthily—and the closed intellectual ecosystem of Fox News and other partisan media. And the people within this movement are, to a far greater degree than those on the other side, apparatchiks, political loyalists who can be counted on not to stray from the party line.

The word “stealthily” is significant here. On the one hand, it refers to the shroud of secrecy surrounding the political donations of rich people and the uses to which those donations are put. But it can also refer to the need to disguise self-serving economic proposals as policies for the general good. When Republicans cut taxes for corporations and the wealthy, they exaggerate the benefits of tax cuts to the economy and dismiss concerns about budget deficits. When they oppose government spending to help the disadvantaged, they ignore the benefits and warn of a deficit apocalypse. They also describe such spending as “socialist,” in order to confuse social-democratic programs that millions of Americans support with Venezuelan-style state socialism that few Americans would support. Meanwhile, the Democratic Party increasingly embraces social-democratic measures like universal access to health insurance, measures that Krugman regards as fully compatible with a thriving capitalist economy.

Since Krugman regards the Republican economic agenda as essentially elitist, he is not surprised that movement conservatism often appeals to racial and cultural anxieties in order to win working-class votes. He sees the Trump presidency as the culmination of this trend, as I myself have argued. Judging by his political appointments and his tax, health and labor policies, Trump is not really a populist but simply a fraud. He claims to be for the working class, but his economic policies belie that claim. Krugman considers Trump’s tax cut “the biggest tax scam in history.” Economic elitism also goes hand-in-hand with paranoia and authoritarianism. If you can’t win political arguments by showing that what you propose is good for the majority, then you will likely resort to demonizing your opponents as agents of sinister conspiracies against “the people.” In an essay entitled “The Paranoid Style in G.O.P. Politics,” Krugman says that the Republican Party has become “an authoritarian regime in waiting.” He wrote that essay two years before Trump claimed that he was cheated out of reelection and his supporters stormed the Capitol.

Zombies in economics

While zombie ideas are alive and well in what passes for political debate, they are not entirely absent from the field of economics itself. Here Krugman is concerned about the most extreme forms of “neoclassical” or “laissez-faire” economics, which should have been laid to rest after the Great Depression and the turn toward “Keynesian” ideas. The Depression discredited the idea that economies are entirely self-regulating, and market outcomes are always the best outcomes. In the 1930s, John Maynard Keynes argued that government could help stabilize the economy, especially by spending more when productive resources are underutilized and less when the economy is running at full capacity. Although conservatives tried to suppress the teaching of Keynesian ideas in some places, they became part of mainstream economics in the postwar era. A rough consensus emerged around what Krugman describes as a “moderate economic policy regime…that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps….” The Paul Samuelson text that many of my generation studied in college represented that consensus.

It didn’t last very long. When government appeared unable to combat “stagflation”, a combination of both high unemployment and high inflation in the 1970s, the consensus broke down, sending economists back to the drawing board. Conservative opponents of an active economic role for government came to the forefront, attacking Keynesianism and reviving neoclassicism. Under the leadership of Milton Friedman, “monetarists” argued for limiting government intervention to central bank management of the money supply.

Part of the appeal of neoclassical economics was that it made simple assumptions about how economies work, and economists could formulate the logical implications of those assumptions in elegant mathematical models. “As memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations….” Economists could easily mistake a useful simplification of reality for the actual reality, especially if they left out important factors like power relations. The simple assumption that workers get paid as much as they contribute to production fails to mention that workers who are prevented from organizing may get less than their productivity would justify.

More recent events reveal the retreat from Keynesianism to have been something of an overreaction. The great housing bubble and financial crisis of 2008 showed that deregulated financial markets were not as self-stabilizing as the neoclassicists made them out to be. The failure of monetary policy to provide sufficient stimulus once interest rates approached zero showed that government spending was important after all. Krugman concludes that Friedman was largely wrong, and that “Keynesian economics remains the best framework we have for making sense of recessions and depressions.”

As with political disagreements, the economic disagreements here are not just honest differences of opinion among economists who are doing their best to follow the evidence. Krugman accuses some economists of “engaging in whatever intellectual contortions it takes to preserve the free-market faith.” In an article entitled “Bad Faith, Pathos, and G.O.P. Economics,” he identifies a group he calls “professional conservative economists,” who are really economists in name only:

They’re people who even center-right professionals consider charlatans and cranks; they make a living by pretending to do actual economics—often incompetently—but are actually just propagandists. And no, there isn’t really a corresponding category on the other side, in part because the billionaires who finance such propaganda are much more likely to be on the right than on the left.

Krugman charges that the modern Republican Party would rather listen to such people than to serious economists.

Zombies and the media

Krugman’s critique of the mainstream media is very different from what we hear from the right side of the political spectrum. He does not describe the mainstream media as “fake news,” or as suffering from a “liberal bias.” He sees conservative economic views well represented, often better represented than the evidence warrants. He was, for example, dismayed to see how quickly the mainstream media lost interest in economic stimulus in the aftermath of the Great Recession of 2008. With unemployment still very high, most media discussion turned to the dangers of deficits, the potential for as-yet nonexistent inflation, and the need for government austerity. In the “Myths of Austerity” (2010), Krugman explains why cutting spending is counterproductive during a recession. (See also my review of Mark Blyth’s Austerity: The History of a Dangerous Idea.) The media took Paul Ryan’s so-called “deficit reduction plan” far too seriously, considering that it was “basically a trade-off of reduced aid to the poor for reduced taxes on the rich, with the net effect of the specific proposals being to increase, not reduce, the deficit.”

When the media are not being taken in by weak economic arguments and half-baked proposals, they are professing neutrality, seeing a false equivalence even between ideas of unequal merit. Krugman likens this to a headline saying, “Views differ on shape of planet,” when one side is declaring the earth to be flat. Too many in the media avoid doing the work necessary to distinguish a position that is well-founded from one that is merely well-funded.

For all these reasons, fact-based economic ideas get overlooked, while zombies walk the land. My next post will discuss Krugman’s economic positions in a little more detail.

Continued

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The Knowledge Economy (part 2)

March 24, 2021

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Roberto Unger’s book lays out his vision of the emerging knowledge economy, with rapidly innovative, knowledge-based processes in the vanguard of production. So far, however, these advanced practices of production remain highly restricted—employing few workers, controlled by technological elites, and mainly benefiting a small number of global corporations. Unger observes what he calls “pseudo-vanguardism,” in which a company uses the products of advanced production—such as sophisticated software—to run large, highly regimented operations, often in parts of the world far from corporate headquarters. The creative knowledge workers of Silicon Valley are supported by low-paid assembly workers in Asia. “Genuine vanguardism remains restricted to a small inner circle of entrepreneurs, managers, and technicians—an elite of capital and of knowledge—disengaged from the social entanglements of mass production.”

This has two unfortunate consequences: the domination of the global economy by large oligarchies and the weaker position of labor in relation to capital. Most workers don’t yet receive the potential benefits of the knowledge economy, but experience instead greater job insecurity and a declining share of income relative to the owners of capital. Innovative firms want flexible work forces, so they replace secure employment with subcontracts to low-wage firms or part-time and temporary hires. These trends contribute to the “hollowing out” of the middle of the wage distribution and the increase in overall inequality. The potential of the knowledge economy to unleash creative impulses, boost productivity and raise incomes across the board is yet to be realized.

These trends are especially noticeable in the United States, as evidence I have been citing from many sources supports. Frey reported that in the last 40 years, the share of US income going to labor rather than capital has declined from 64% to 58%. Among the 36 countries in the OECD, only three rank higher than the US on the Gini index of income inequality, based on after-tax income.

Unger’s explanation for these restrictions on the knowledge economy starts with the observation that the standardized, formulaic practices of industrial mass production are simply easier to spread from one place to another. Innovative, imaginative forms of work are harder to emulate because they “cannot, as mass production can, be reduced to a stock of readily transportable machines and procedures and easily acquired abilities.” The knowledge economy makes heavier demands on society to provide cultural and institutional support for economic growth and transformation.

What would it take to make the knowledge economy more inclusive? Unger identifies requirements of several kinds:

  • Cognitive-educational requirements include technical training that is not too job-specific, more emphasis on the imaginative side of the mind, in-depth study as opposed to “encyclopedic superficiality,” cooperative rather than authoritative learning, and discussion of contrasting points of view.
  • Social-moral requirements include more emphasis on the kinds of social interdependence that we more often associate with families, communities and churches, as opposed to the unbridled self-interest of traditional business. Social supports that could help compensate for greater flexibility of employment could include portable benefits that workers could take from job to job, or a “social inheritance” granted at birth, available to help finance human capital development and career transitions.
  • Legal-institutional requirements include new forms of coordination between governments and firms. The aim would be to help more firms acquire and use the new means of production, similar to how government helped small farmers in the nineteenth century with land grants, agricultural education and economic support. Analogous support today would include intellectual property reform to keep large corporations from monopolizing the ownership of online, user-generated data.

Unger advocates for a more vigorous democracy, since he sees today’s relatively weak democracies as too easily captured by powerful interests. He wants something in between the minimal government of laissez-faire capitalism and the more intrusive government of state socialism. A stronger democracy would respect and empower group differences, but also develop more rapid and effective means of resolving disputes among them. Otherwise, government may stand by helpless and gridlocked while the economy is generating undemocratic outcomes.

In the long run, Unger expects the emerging knowledge economy to support a more egalitarian society, recent trends in the opposite direction notwithstanding. He also expects it to ameliorate the chronic imbalances of economic supply and demand that create periods of recession and stagnation. He agrees with the Keynesian economists that supply does not create its own demand, and that there is no automatic connection between advances in productive capacity and the capacity to consume. That is the main reason for economic instability. A particularly innovative firm can expand a market by producing a product at lower cost, but that may not solve the problem of economy-wide aggregate demand.

Keynesian demand-side stimulus by government can help, through easy credit or “redistributive social spending.” Government can tax or borrow under-invested savings from the wealthy in order to boost spending and consumption for all. But even that may not be enough, if the problems of stagnation and inequality are severe. This is where Unger sees an institutional solution in the transition to the knowledge economy:

[W]e eventually come to a class of solutions that do expand demand by the same means through which they increase supply: an institutionalized broadening of access to the resources, opportunities, and capabilities of production. At this point, and only at this point, that which increases demand also increases supply. What the prevalent way of thinking supposes to be the natural state of economic life—the reciprocal accommodation of supply and demand—is in fact a characteristic of exceptional varieties of economic organization: those that have the property of breaching the limits of both supply and demand by equipping more economic agents with the means and occasions for productive initiative.

To make this more concrete, consider service workers whose means of production consist mainly of personal computers, software and skills, both cognitive and social. They are both workers and owners of capital, and their capital is intellectual and social as well as material and financial. Assuming they are providing a desired social service, they simultaneously produce something of value and generate income for their own consumption. Anything that increases their access to capital—broadly defined—helps them do so. The sharp division of owners and workers so typical of industrial capitalism—and so central to its inequalities and instabilities—starts to break down.

Unger accuses mainstream economics of a “poverty of institutional imagination,” the kind of imagination he associates with Adam Smith and Karl Marx. The most “fundamentalist” of economists defend the institutional arrangements that developed in Europe and America as part of the fixed laws of capitalism. Others are “agnostic” about such arrangements, limiting the subject matter of economics to what they think would be true of any market economy. Unger doesn’t want to defend or ignore institutions like property law and labor law, but instead bring institutional change back to the center of economic analysis.

In his final chapter, Unger discusses the “higher purpose” of making the knowledge economy more inclusive. The present economy is not only vulnerable to stagnation and growing inequality, but it also wastes human potential.

By condemning the vast majority of the labor force in even the richest countries, with the most educated populations, to less productive jobs, it also belittles them. It forces them to live diminished lives, giving inadequate scope to the development of their powers and to the expression of their humanity. To overcome the evil of belittlement through the transformation of workday experience is the higher purpose of an inclusive knowledge economy.

Keynes looked forward to a time when industrial productivity would eliminate scarcity and free people from the demands of work. That made sense at a time when highly productive manufacturing workers were demanding both good wages and a shorter work week. While some material things have become more abundant, Unger doubts that we could ever have enough of every marketable commodity. He points instead to the human capacity to keep finding new things to desire, especially in an economy that can offer more customized goods and services. Even if we limit our consumption of material things—and I expect limitations on natural resources to make us do so—I agree with Unger that “there is no limit…to our desire for service and attention from one another.” Instead of “freedom from the economy,” he looks for more “freedom in the economy.” This is consistent with his willingness to let the robots do the formulaic work, while humans devote themselves to the more creative functions.

Here are Unger’s closing thoughts:

As it deepens and spreads, the knowledge economy makes the practice of production more closely resemble the workings of the imagination….

Imagination is freedom because it is transcendence in the working of the mind. A form of production giving more space to the imagination than any previous practice of production ever gave represents an advance in freedom. It justifies the hope that we might find freedom in the economy rather than only freedom from the economy.

A knowledge economy in which many can take part does more than increase productivity and diminish inequality. It has the potential to lift us up together, to offer us a shared bigness.

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The Knowledge Economy

March 23, 2021

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Roberto Mangabeira Unger. The Knowledge Economy. Brooklyn: Verso, 2019.

Roberto Unger is a Brazilian philosopher who has studied a wide range of disciplines. Here he sets forth his vision of the emerging knowledge-centered economy. I would describe Unger’s perspective as post-mechanistic in a double sense: He describes an economy that is moving beyond mechanized manufacturing as its core economic activity; and his conception of that economy emphasizes creative processes of institutional change rather than universal mechanical laws. That places him in the tradition of heterodox economic thinking, along with critics of capitalism like Marx and institutional economists like Veblen. The more orthodox neoclassical tradition tends to be less historical, assuming that capitalism works the way it does because of its conformity with timeless mathematically formulated laws.

Unger denies that there is any “natural and necessary way to organize a market economy,” or that capitalism is “governed by immutable regularities, like the ones studied as laws, symmetries, and constants of nature, by fundamental physics.” He calls institutional structures “artifacts” and “ramshackle constructions: the outcomes of many loosely connected sequences of conflict among interests and among ideas.”

How work is changing

Like Adam Smith in the eighteenth century, Unger wants to understand an emerging economy by focusing on its “most advanced practice of production,” or what he calls its vanguard. In Smith’s day, that was a rudimentary form of mechanized manufacturing. Today it consists of rapidly innovative, knowledge-based processes that continually alter the relationship of humans to nature and to one another. Unger says that “economic life has…always been a story of the troubled advance of the imagination,” but now that is becoming truer than ever before, applying across every sector of the economy from agriculture to hi-tech manufacturing to knowledge-intensive services. However, within every sector, the newest practices of production remain highly restricted—employing few workers, controlled by technological elites, and mainly benefiting a small number of global corporations. If we can extend those practices to more work processes, the emerging economy has the potential to alleviate two of the perennial problems of economics–chronic stagnation and extreme inequality. This potential:

…bears on our chances of more fully realizing in practice the ideal that commands the greatest authority in the world and the strongest kinship to democracy: the ideal of effective agency, of the ability of every man and woman to act upon the circumstances of his or her existence.

Unger believes that the best way to stimulate productivity is not just to automate production but to enhance the human ability to innovate and cooperate, which is the promise of a more “inclusive vanguardism.”

The typical work organization of the knowledge economy will differ from the classic industrial factory in many respects. It will engage in more constant innovation in both product design and methods of production. It will create more customized products without entirely sacrificing the economies of scale that come from producing many of the same kind of thing. It will encourage more worker initiative while maintaining teamwork and unity of purpose. It will stop sharply dividing workers into order-givers and order takers. Think of a team of software designers developing a new app, or a team of financial planners using such an app to generate customized financial plans for many clients.

Features of knowledge-intensive production

Unger goes on to discuss three deeper features of knowledge-intensive production that he expects to emerge only as it develops and becomes more widespread. The first is that the economy will be less constrained by the problem of diminishing marginal returns, the decreasing gains in output from increments of one factor of production (such as labor) when other factors of production (such as machinery) are held constant. That is less of a problem when constant innovation based on developing knowledge is upgrading the quality of labor and technology all the time.

The second feature is the closer connection between how people work and how they think. “Now it becomes more accurate to say that the growth of knowledge becomes the centerpiece of economic activity.” Here Unger’s philosophical background is on display as he distinguishes the human mind as a machine from the mind as more than a machine. The first aspect of mind is “formulaic”, operating under stable formulas or algorithms repeated over and over. The second is more imaginative, reacting against established modes of thinking and freely recombining old thoughts into new insights.

Under earlier advanced productive practices—mechanized manufacturing and its successor, industrial mass production—the worker worked as if he were one of his machines. His movements—in Adam Smith’s pin factory or Henry Ford’s assembly line—recalled theirs. The parallelism of worker and machine was more than a metaphor or a distant analogy; it was studied and codified by experts in industrial organization such as Frederick Taylor and offered as a practical guide to managers and foremen.

Under earlier advanced practices of production, we see the mind as machine…. [L]ittle by way of education was in fact required of the worker in the age of mechanized manufacturing and industrial mass production. What he needed was a disposition to obey, basic literacy and numeracy, and manual dexterity, especially hand-eye coordination.

The third feature of the knowledge economy is a relational change to produce more trusted and trusting workers. The factory system of production, with its order-givers and order-takers, has relied on strict managerial control rather than trust. Employees often act as adversaries of management, doing only as much as they are made to do, just like many students in factory-like schools. But workers whose knowledge and imagination are valued must be trusted to exercise discretion in support of the team objectives they share.

Working less or working smarter?

Unger’s conception of the knowledge economy relates directly to the debate over automation’s impact on jobs. In Rise of the Robots, Martin Ford warned of a “jobless future,” where so much of the work is performed by robots that masses of people are unable to find employment at all. They will have to rely on a basic income guaranteed by government, receiving “enough to get by, but not enough to be especially comfortable.” That sounds to me like a rather grim prospect, the ultimate devaluation of human labor by capital and technology. Unger sees a very different potential:

The fact that machines operate formulaically might suggest that their greatest value is to allow those who use them to operate nonformulaically. The users of the machines can then reserve their supreme, and in a sense their only, resource—time—to those activities that we have not yet learned to repeat and therefore to encode in a mechanical device….

The most effective use of these machines is their use by workers who do not work and think as if they were machines. The combination of the machine and the anti-machine—that is to say, the worker—is much more powerful than the worker or the machine alone.

As I discussed in my review of Carl Frey’s The Technology Trap, economists have done some detailed analyses of occupations and specific tasks to determine which jobs are most vulnerable to future automation. They have found that even many non-manufacturing jobs are at risk, especially in the areas of office and administrative support, production, transport and logistics, food preparation, and retail. But they have also found that the vulnerability to automation is much greater for lower-skilled, lower-paid work. If there is a new frontier for job creation, it probably lies in the area of skilled services. There technology can enhance human labor with less risk of replacing the human laborer.

While acknowledging that this has not yet happened on a large scale, Unger believes that the knowledge economy can make workers less dependent on large owners of financial capital and machinery, encouraging freer forms of work like self-employment and cooperating teams that pool their resources. Workers will rely on smart machines to do the jobs that can be reduced to an algorithm, but make creative use of those machines to produce what they can imagine.

Much of this may sound like pie-in-the-sky to someone working in a low-wage, uncreative service job. As I mentioned earlier, Unger sees the vanguard of innovative production as highly restricted within the current economy. I will elaborate on that problem in the next post.

Continued

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Evicted (part 3)

March 1, 2021

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The renters studied by Matthew Desmond in Evicted had incomes so low that they were effectively shut out of the market for good housing. The sad fact is that they had to pay too large a portion of their income even to live in housing at the bottom of the market.

Making housing affordable

The United States does have programs that partially address the housing problem. About 15 percent of poor renters live in public housing, which has evolved from the high-rise towers of the 1950s and 60s to “low-rise, attractive buildings dispersed over several neighborhoods.” Another approach, serving 17 percent of poor renters, is a housing voucher that pays part of the cost of renting in the private market. In both cases, renters only have to pay a portion of the rent based on their income, such as 30 percent. These programs leave about two-thirds of the poor to fend for themselves.

In Milwaukee, Desmond observed some of the limitations of housing assistance. Many landlords, such as Sherrena, would not accept housing vouchers because they came with higher standards and inspection requirements they preferred not to meet. When they did take vouchers, landlords tended to charge more rent, adding to the cost of the program for taxpayers. Public housing often excluded the families that needed it most, since “Housing Authorities count evictions and unpaid debt as strikes when reviewing applications.” Families that did qualify faced waiting lists and delays that could go on for years.

Desmond recommends that the United States do what many other developed countries have done—adopt a universal housing voucher program. He describes it this way:

The idea is simple. Every family below a certain income level would be eligible for a housing voucher. They could use that voucher to live anywhere they wanted, just as families can use food stamps to buy groceries virtually anywhere, as long as their housing was neither too expensive, big, and luxurious nor too shabby and run-down. Their home would need to be decent, modest, and fairly priced. Program administrators could develop fine-grained analyses, borrowing from algorithms and other tools commonly used in the private market, to prevent landlords from charging too much and families from selecting more housing than they need. The family would dedicate 30 percent of their income to housing costs, with the voucher paying the rest.

The logic here strikes me as similar to that of the Affordable Care Act. On the one hand, we set housing standards, analogous to the minimum requirements of Obamacare insurance policies, such as coverage of pre-existing conditions. On the other hand, we provide housing subsidies for the poor, analogous to subsidies of health insurance premiums. If we only try to enforce housing standards without putting more money into the low-end market, landlords may choose to take units off the market instead of spending money on them. That aggravates the housing shortage and contributes to homelessness. Under a universal plan, landlords would be prohibited from evading the housing standards by discriminating against voucher holders. How much the voucher could be worth for a given property would have to be set carefully. Set it too low and the renter still cannot afford a decent place; set it too high and it subsidizes an overpriced or luxurious unit.

Desmond tries to answer some of the objections that taxpayers may have. Would it cost too much? Actually, only an additional $22.5 billion a year, which is much less than the cost of middle-class tax breaks like the mortgage-interest deduction. Would it reduce people’s incentive to work? That’s a more complicated question:

One study has shown that housing assistance leads to a modest reduction in work hours and earnings, but others have found no effect. In truth, the status quo is much more of a threat to self-sufficiency than any housing program could be. Families crushed by the high cost of housing cannot afford vocational training or extra schooling that would allow them to acquire new skills; and many cannot stay in one place long enough to hold down the same job. Affordable housing is a human-capital investment, just like job programs or education, one that would strengthen and steady the American workforce.

Human capital investment is an idea I take very seriously. Are we really strengthening our economy by making children live in substandard housing, in the hope that the deprivation will motivate their mothers to work more hours (probably in low-wage jobs)? Maybe that benefits low-end employers and landlords, but does it contribute to the future productivity of poor children?

Poverty and class consciousness

If poor renters are a disadvantaged class, why don’t they unite as a class, cooperating as a political force to support causes like affordable health insurance and affordable housing? Desmond discusses a few reasons why they don’t.

One reason is that they have more pressing things on their mind than political participation, like scraping together the money for next month’s rent. “Under conditions of scarcity people prioritize the now and lose sight of the future, often at great cost.”

Another reason is that substandard housing and other effects of poverty take a toll on psychological health. They make people feel worthless, defeated and powerless. That applies especially to families who have been stuck in poverty for generations, as opposed to, say, new immigrants who are experiencing more opportunities than they had in their country of origin.

A third reason is that American culture discourages the poor from thinking collectively. America is supposed to be the land of opportunity for any hardworking person of good character. Poverty is easy to associate with individual failure—laziness, immorality or poor decisions. The family stories Desmond tells intermingle social conditions and individual events, allowing us, if we choose, to focus on what individuals did wrong. Arleen shouldn’t have given up her rent-subsidized apartment to live with a friend. Crystal shouldn’t have gotten into fights with other tenants. Vanetta shouldn’t have stolen purses. Larraine shouldn’t have spent money carelessly. Lamar, Scott, Pam and Ned shouldn’t have become drug addicts. The American poor often blame themselves and one another for their problems, developing what Desmond calls a high tolerance for economic inequality and social injustice.

Desmond discusses housing segregation, but he has less to say about the racial divide in our politics. The black poor mostly support the political party that represents their economic interests. The white poor are strongly drawn to the party that appeals to white privilege and Christian conservatism, despite its greater opposition to anti-poverty programs. That makes it pretty hard for the poor to see themselves as a disadvantaged class and join together for their collective advancement. Hopefully, books like this can stimulate a national discussion that can help change that.

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Evicted (part 2)

February 27, 2021

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The subtitle of Matthew Desmond’s Evicted is Poverty and Profit in the American City. The author is interested not only in studying poverty, but in understanding the interaction between poor tenants and their landlords. He begins with the observation that evictions are much more common than they used to be:

Even in the most desolate areas of American cities, evictions used to be rare. They used to draw crowds. Eviction riots erupted during the Depression, even though the number of poor families who faced eviction each year was a fraction of what it is today.

Obviously, we must ask why so many renters are unable to afford their housing. But we must also ask how landlords find it profitable to rent to people who have trouble paying the rent, a situation that bears a suspicious resemblance to subprime lending to borrowers who have trouble making their loan payments. We need to understand both affordability and profitability.

Affordability

Desmond cites a common standard of affordability:

For almost a century, there has been broad consensus in America that families should spend no more than 30 percent of their income on housing. Until recently, most renting families met this goal. But times have changed—in Milwaukee and across America. Every year in this country, people are evicted from their homes not by the tens of thousands or even the hundreds of thousands but by the millions.

At the lower end of the income distribution, wages have not kept pace with the cost of decent housing. The minimum wage for both the United States as a whole and the state of Wisconsin is $7.25 an hour. Even if one works a 40-hour week—and many low-wage jobs only offer part-time hours—that’s only about $1,200 a month. 30 percent of that is only $360. Most of the poor find that they have to spend over half of their income on housing, leaving very little for other expenses.

The loss of manufacturing jobs hit cities like Milwaukee very hard. Those jobs provided an important ladder of upward mobility for people without college educations. Most of the service-sector jobs they were able to get paid less. Women, especially African-American and Hispanic women, were overrepresented in those jobs, so female-headed families were affected the most.

In addition, just when wages for low-skilled labor were declining, welfare reform pushed more poor mothers into the labor force. The Wisconsin Works program was a pioneer in this effort, and it became the state’s version of Temporary Assistance to Needy Families (TANF) when that program replaced Aid to Families with Dependent Children (AFDC) nationwide in 1997. Traditionally, society hadn’t expected unmarried mothers with children to be employed outside the home, but the new program added work requirements to public assistance benefits for able-bodied adults. If a recipient could not find regular employment, Wisconsin Works provided a community job and/or training, but income was set at $673 per month, even less than one would earn in a minimum-wage job. The program also put a five-year lifetime limitation on benefits. For some, this provided a transition out of poverty, but for many female family heads, it simply replaced welfare poverty with working poverty. It also intensified the competition for low-skill employment, helping to hold wages down.

Another development that affected the affordability of housing was the boom in subprime mortgages that led up to the financial crisis of 2008. Abandoning the caution of traditional bankers, a new gang of gung-ho lenders made quick profits by making risky loans. These were often adjustable-rate mortgages with a very low “teaser rate” to create an impression of affordability, but with the potential for large payment increases later. The lenders often didn’t care whether borrowers could make their payments or not, because they quickly sold off the mortgages to financial firms that bundled them for sale to unwary investors. Firms that rate such securities cooperated by underestimating the risks involved. When the housing bubble burst, many owners found that they owed more than their house was worth, and the market experienced a wave of defaults and foreclosures. That left cities like Milwaukee with abandoned homes and displaced homeowners thrown into the rental market. Minority families were hit the hardest, since they had few financial assets besides their homes. “Between 2007 and 2010, the average white family experienced an 11 percent reduction in wealth, but the average black family lost 31 percent of its wealth.”

Profitability

A housing market consists of many sub-markets, with profit-making opportunities at many income levels. Businesses can profit by selling luxurious housing to the wealthy or the bare necessities to the poor. By definition, the poor cannot afford to buy as much as the rich.

But Desmond makes a less obvious point, that the poor are also vulnerable to exploitation, because businesses sometimes make excessive profits by preying on the less fortunate. This is consistent with the old adage that “beggars can’t be choosers,” although Desmond doesn’t use that expression. People who are desperately needy have limited choices and bargaining power, and sometimes put up with being underpaid or overcharged. I think that orthodox neoclassical economics has had trouble acknowledging this. It prefers to describe free markets in which every participant is “free to choose” (in the words of one of Milton Friedman’s book titles), and needn’t engage in any exchange that isn’t free and fair. But freedom and bargaining power are social variables, not constants.

The people of Texas got a taste of desperate need when millions of them lost power during the recent cold wave. They were not only deprived of heat, but many of them were exploited by utility companies trying to extract windfall profits with rate spikes. A democratic society does not have to allow the powerful to take advantage of the needy. That’s why utility companies are usually regulated. Desmond argues that society has to balance the rights of businesses to make money against the rights of citizens to obtain the necessities of life:

If we acknowledge that housing is a basic right of all Americans, then we must think differently about another right: the right to make as much money as possible by providing families with housing—and especially to profit excessively from the less fortunate. Since the founding of this country, a long line of American visionaries have called for a more balanced relationship, one that protects people from the profit motive, “not to destroy individualism,” in Franklin D. Roosevelt’s words, “but to protect it.” Child labor laws, the minimum wage, workplace safety regulations, and other protections we now take for granted came about when we chose to place the well-being of people above money.

A prime example of exploitation in housing markets is the treatment of African Americans during and after their Great Migration from the rural South to cities like Milwaukee. Segregated into ghettos and denied home mortgages even by the FHA, they became a “captive tenant base” at the mercy of inner-city landlords. Real estate speculators also made outsize profits by “blockbusting”—buying houses cheaply from white homeowners on the edge of the expanding ghetto and selling them at inflated cost and one-sided terms to black buyers without other homeownership options. The 1968 Fair Housing Act prohibited discrimination, but it persists in more subtle forms to this day.

Desmond sees racial exploitation as only the most egregious example of a more general process of slum creation. Capitalism did not start out like a game of Monopoly, where all the players get an equal amount of money and an equal chance to buy properties. Capitalism developed within societies already sharply divided between landowners and landless laborers. The transformation of landless laborers into industrial workers created windfall profits for urban landlords.

While agrarian families were driven from the land to increasingly congested cities, the competition for space drove up land values and rents. Urban landlords quickly realized that piles of money could be made by creating slums.

More recently, the failure of low-end wages to keep pace with inflation, along with welfare reform and the 2008 financial crisis, has produced a surge of low-income renters. That creates an opportunity to make large profits without providing a high quality of housing. One sign of that is the relatively high rents being charged for low-end properties.

At the time, median rent for a two-bedroom apartment in Milwaukee was $600. Ten percent of units rented at or below $480, and 10 percent rented at or above $750. A mere $270 separated some of the cheapest units in the city from some of the most expensive.

That meant that a landlord could charge almost as much rent on a dilapidated home in a poor neighborhood as on a decent home in a nicer neighborhood. Not surprisingly then, “In Sherrena’s portfolio, her worst properties yielded her biggest returns.” Squeezing as much money as possible out of needy people aggravates poverty, but it is a viable business model. That also helps explain why some landlords are comfortable accepting drug users and other troublesome tenants.

Some landlords neglected to screen tenants for the same reason payday lenders offered unsecured, high-interest loans to families with unpaid debt or lousy credit; for the same reason that the subprime industry gave mortgages to people who could not afford them….There was a business model at the bottom of every market.

A high rate of eviction has become a normal feature of the low-end rental market. Landlords charge more rent than tenants can really afford; tenants fall behind on rent; landlords refuse to maintain properties; tenants leave or are evicted; and then the cycle repeats with another needy tenant. Evicted tenants sink deeper into poverty for many reasons:

Losing your home and possessions and often your job; being stamped with an eviction record and denied government housing assistance; relocating to degrading housing in poor and dangerous neighborhoods; and suffering from increased material hardship, homelessness, depression, and illness—this is eviction’s fallout.

Desmond believes that allowing this situation to persist is fundamentally at odds with our American values. Whether you agree may depend on what you think our American values are. Democracy? Christian love? Or rugged individualism and unbridled pursuit of self interest. If the citizens of our democracy have the will to tackle slum housing, ways to do so are not too hard to imagine. Desmond’s policy recommendations will be the subject of the final post.

Continued

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