Do You Deserve Your Income?

Like Tyler and Alex, I find Elizabeth Anderson's remarks about Hayek and desert to be rather cryptic. The argument, as far as I can make it out, is this:

(1) If P deserves x at t, then there is something P did prior to t in vittue of which x is deserved.
(2) One's income is determined by the price of one's labor on the market.
(3) The price of one's labor is determined by the demand for one's labor on the market.
So, (4) one's income is determined by the demand for one's labor on the market.
(5) Suppose x is P's income.
So, to reiterate, (1) if P deserves x at t, then P did something prior to t in virtue of which she deserves x.
But, (6) P did not do anything to create demand for her labor on the market.
Therefore, (7) P does not deserve x.

That is, because you didn't have anything to do with demand being what it is, you don't deserve the price you command for your labor on the market.

There are a number of problems with this particular argument. The first problem is premise (1). I don't believe desert is always backward looking. People can, for example, deserve love, not for anything they have done, but because of the way it could transform them. (Christians, do you hear me?) Similarly, people can deserve a chance or an opportunity, although they haven't done anything yet to earn it. But let's set that aside.

It strikes me that (6) just has nothing to do with anything relating to desert. What I did prior to t to deserve x (whatever the value of x is) was complete my end of a contract that was entered into voluntarily by the relevant parties within a system of just rules. It just doesn't matter what I did to fix the particular value of x. If S agreed to pay me x for completing my end of a contract, and I complete my end of the contract, then I deserve x from S. THIS IS OBVIOUS and if an argument implies the contrary, then we have a ready reductio of the argument.

The question Anderson seems to raise is: how is it that I could possibly deserve, say, $67,456.84 per year rather than $23,764.45 per year when I have so little to do with determining the conditions under which my labor commands either amount?

And the answer is easy. The same way I can deserve a silver medal in Olympic tennis, even though I had so little to do with determining the existence of the Olypmics, or the rules of tennis, or the quality of my pool of competitors. My reward is fixed by a combination of my performance, chance, and the rules of the games. The existence of chance or my lack of responsibility for the rules simply does not bear on what I deserve in this context.

Do you know what's annoying? Computer programmers who were making $90,000 per year because of the labor shortage in computer programmers, and who are now whining because they get $50,000, or can't find work at all because of some eager low-cost chap in Bangalore. Why is this annoying? Because computer programmers don't deserve to get any particular amount of money for their labor. They deserve to get whatever is specified by a fair contract within a just system of rules. If the number shifts, it has nothing to do with what the programmer deserves. The programmer, or whomever, deserves whatever the value of of the variable happens to be, but they don't deserve that the value of the variable be anything in particular.

Some further thoughts.

Does Anderson's argument imply that I would be making a fundamental mistake if I argued to my boss that I deserve a raise because everyone else doing the same job is being paid more?

How close does Anderson get to committing the Fundamental Redistributivist Error (the FRE), which is the very common but nonetheless logically horrifying error of inferring from the fact that P doesn't deserve x to the conclusion that there exists someone who is morally authorized strip x from P. Somebody ought to write an article about the manifold expressions of FRE titled “How Not to Argue For Taxes.”

Now, I myself believe that there are conditions under which the state is legitimate, and under which it may justly redistribute holdings. However, I think it's a lot harder to show that there is someone who is morally authorized to use coercion to take stuff than it is to show that people deserve what is specified in a fair contract when they complete their end of it.

Markets and Trust

In his important paper on Endogenous Preferences, Samuel Bowles writes:

. . . Markets thus affect not only the demand for, but also the supply of cultural traits. Among these are reputations for trustworthiness, generosity, and vengefulness.

If markets require less trustworthiness, for instance, then you may get less of it.

. . . Thus where markets approximate the ideal complete-contracting assumptions of the standard model, the adverse consequences of lack of trustworthiness or generosity may be attenuated; but at the same time markets may militate against the evolution of these traits. Thus markets may undermine the reproduction of traits necessary for efficient market transactions in the absence of complete contracting

Notice anything peculiar about the reasoning here? Bowles follows the standard model and stipulates complete contracts, draws out a consequence of that model, and then says . . . what? That if that model both did and didn't obtain we'd get a bad consequence, and then blames the bad consequence on the market. This is weird. Either we have complete contracts or we don't. If we don't, and we don't, then we need trust. If markets enable contracts that enable gains that are impossible without markets, and trust is necessary to complete these contracts, then there may be higher payoffs to trust in market interactions than in non-market interactions, and we'd expect norms of trust to be reinforced by the presence of markets.

That members of market cultures are more trusting, by the way, seems to be a result of a set of cross-cultural experiments conducted by Bowles and others after the publication of his endogenous preferences paper.

The Tim Lee Social Security Calculator

Ygelesias, among others, is skeptical of the various pro-reform social security calculators. My colleague Tim Lee responds. Here's a bit:

More to the point, even if you grant all of Matt's objections, personal accounts still end up doing better. I whipped up a little calculator of my own, which does the math in a transparent fashion. Cato's calculator says that if I start out at 25,000 at age 25, that I'll end up with a stock portfolio of $406,000 and an annuity of $38,685. My calculator more or less duplicates that result. If we grant all of Matt's objections and use a 4.2% rate of return (60% stocks at 5%, 40% bonds at 3%, with let's say a higher .5% transaction cost), then my personal account still ends up being worth $310,000. And if we assume the annuity pays out a conservative 7%, instead of Cato's assumption of 9%, I would still end up with an annual benefit of about $22,000. According to Cato's calculator, Social Security would pay $15,748 for the same wage profile.

Check out the whole thing.

I'd Like to See More . . .

ethnographic policy analysis. I want richly described accounts of the lives of people affected by policy changes before and after the change. How do they live? How do they represent the choices open to them? If the change shifts relative prices, how do they respond to the price change? If they change behavior in the face of changing prices, how do they conceive of their change of behavior? How do they justify and rationalize it. Do their mental models of the relevant domain change significantly? If so, do these changes spill over into areas not directly affected by the policy change at issue?

Why isn't there more of this? I guess because anthropologists don't generally think of changes in norms and cultural meanings having much to do with shifts in relative price.

Paging Dr. McCracken.

Social Security Bleg: PRAs and Socio-political Transformation

Please cite by email or comments the best “bigthink” magazine and journal articles about social security reform. I'm especially interested in pieces that explore that claim that PRA's, by creating a class of “worker capitalists,” will have a transformative effect on the economy, politics, society, and so forth. This is in my opinions the most interesting argument about PRA's, but I'm not seeing anything that pays close attention to the claim, or attempts to substantiate it in detail. Please let me know if I'm missing something!

How Much Does SS Screw You?

Here are my results from Heritage's Social Security Calculator:

You can expect to pay $350,881 in Social Security taxes over your working life for retirement and survivors benefits. For those taxes, you can expect to receive $2,467 a month in Social Security retirement benefits. Your rate of return under today's Social Security is -3.56%.

However, if you had been able to invest your Social Security taxes in a Personal Retirement Account (PRA), you would have had a total of $1,401,434 when you retired. Your monthly benefits would have been $11,416. You lost $8,948 a month.

Now, what's supposed to be the problem with this, exactly, especially when much poorer folk than me can also expect to be doing a lot better? Why are so many people so eager to oppose a program that makes almost everyone better off? I find it truly baffling.

More Trust Fund

I found this explanation of the Social Security Trust Fund and its differences from a legitimate trust fund, by Heritage's David John, to be useful.

How the Trust Fund Operates.Workers pay their Social Security taxes through their employers. Each employer periodically sends a lump sum payment to the U.S. Treasury that includes all of the income taxes and Social Security and Medicare payroll taxes paid by both the employer and its employees.

The Treasury both receives the payroll taxes (and income taxes that higher-income retirees pay on their Social Security benefits) and pays monthly benefits on behalf of the Social Security Administration (SSA). The money stays in the Treasury's hands until it is either paid out as Social Security benefits or otherwise spent by the government. In fact, no money ever goes into the trust fund. Instead, the trust fund balance is the result of two accounting entries by the Treasury.

First, the Treasury estimates how much of the aggregate tax receipts are Social Security taxes and “credits” the Social Security trust fund with that amount. Then the Treasury “subtracts” the total amount paid in monthly Social Security benefits from the trust fund balance. No money actually changes hands; these are strictly accounting entries.

Any “money” remaining in the trust fund is converted into special-issue Treasury bonds, which are really nothing more than IOUs. In addition, the Treasury pays interest on the trust fund's balance by crediting the trust fund with additional IOUs. These are also strictly accounting entries, and again no money changes hands. After crediting the trust fund with the proper amount in IOUs, the government spends the extra Social Security tax collections just like any other tax revenue–to finance anything from aircraft carriers to education research.

At the end of 2002, the Social Security trust fund had a balance of $1.22 trillion. During 2003, the Treasury received $544 billion in Social Security taxes and paid out $406 billion in Social Security benefits. Therefore, the trust fund received $138 billion in these special-issue Treasury bonds, resulting in a trust fund balance of $1.36 trillion at the end of 2003.

Why the Social Security Trust Fund Differs from Real Trust Funds. Private-sector trust funds invest in real assets ranging from stocks and bonds to mortgages and other financial instruments. However, the Social Security trust funds are only “invested” in a special type of Treasury bond that can only be issued to and redeemed by the Social Security Administration. As the Congressional Research Service noted in a report on May 5, 1998:

When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.

According to the Office of Management and Budget under the Clinton Administration in 1999:

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. [Emphasis added.]

In short, the Social Security trust fund is really only an accounting mechanism. The trust fund shows how much the government has borrowed from Social Security, but it does not provide any way to finance future benefits. The money to repay the IOUs will have to come from taxes that are being used today to pay for other government programs. For that reason, the most important date for Social Security is 2018, when taxpayers must begin to repay the IOUs, not 2042, when the trust fund is exhausted.

The point is, if the government abolished the trust fund and threw all the special issue securities in a big pit and burned them tomorrow, the financial picture of Social Security would be exactly the same.

[Should we call those who tout the massive assets of the trust fund “trust fundamentalists”?]

Kiesling vs. Rosen on Egocasting; Dissertation Assignment Desk

Lynne Kiesling dismantles Christina Rosen's qualms about “egocasting.” Check it out.

The issue of informational fragmentation and social coherence is an issue I'm putting on the “to do” list. Hmm, I guess I really should have a bigthink “to do” list. No doubt it is too much, and too hard, for me to do. So think of it as a bigthink assignment desk. If you're game, go for it!

  • Rebut: unrestricted liberty to choose the content of one's entertainment, news, art, children's education, etc., threatens the existence of a common culture, which is necessary to maintain a viable liberal social order.
  • Understand: how institutional change alters behavior by changing preferences and belief systems, and not simply by changing relative prices (i.e., get a grip on likely processes of endogenous preference change), and how to apply this rigorously and in a non-ad hoc way to policy analysis without the ability to resort to traditional notions of efficiency.
  • Defend: Behavioral economics does not provide an argument for regulation or paternalism, unless we think of regulation and paternalism as the implementation of market institutions that economize on (neo-classical) “rationality.”
  • Clarify: the difference between “social engineering” in the rationalistic or constructivistic sense, and institutional design in the Madisonian/Buchanan sense; how dynamic renegotiation of constitutional contract/institutional structure politically resembles “regulation,” but how, once in place, changes are robustly self-regulating, “ecologically rational.”
  • Illuminate: how it is possible to distinguish between norms or social practices that have an adaptive function in preserving the main properties of a desirable social order and mere self-reinforcing equilibria, which may be opressive or illiberal, without resorting to rationalist/constructivist fallacies. The possibility of being a principled selective or progressive conservative; i.e., the inherent interdepedence of conservatism (rightly understood) and liberalism (rightly understood).
  • Investigate: what, if any, are the policy implications of “happiness research”? What, if any, are the implications for implicitly or explicitly hedonist or eudaimonist theories of efficiency, or of the good?

Oh, and there's more. I'm just not thinking of it right now. Did you not drop out of grad school? Well, you know where to come for dissertation topics!

Foreign Aid and How to Make a Difference

As you probably know, I'm a critic of development aid. Why? Well, for one thing (and there are many other things), it's a massive waste of money. For a taste, let me quote myself quoting William Easterly in an article I wrote a while back on globalization and capitalism (or just skip down to the end of the post for some ideas about effective ways to express your altruistic impulses):

Adebe is an impoverished Ethiopian man. There’s a pothole the size of a Toyota in the street facing his house. He’d like to have it fixed before it devours his bicycle, his dog, or his four-year-old daughter. So what does it take to fix it?

According to William Easterly of the Center for Global Development, formerly of the World Bank, it takes, well, a lot.

In his paper, “The Cartel of Good Intentions: Bureaucracy Versus Markets in Foreign Aid,” Easterly lays out the mind-numbingly complex process. Unlike you and me, Adebe can’t just phone the Division of Public Works, or call his city council member. Fixing his pothole is an arduous, time-consuming journey of Godknows- how-many steps, an alphabet soup of acronym and bureaucracy as lovely as the process of bovine digestion, or sausage production.

It all starts, in Easterly’s words, like this:

Adebe somehow communicates his desires to “civil society representatives” and/or non-governmental organizations (NGOs), who allegedly articulate his needs through the government of Ethiopia (itself dominated by one minority ethnic group) to the international donors. The national government solicits a “poverty reduction support credit” (PRSC) from the World Bank and a Poverty Reduction and Growth Facility (PRGF) from the International Monetary Fund (IMF) … To get loans from the IMF and World Bank, the government completes a satisfactory poverty reduction strategy paper (PRSP), in consultation with civil society, NGOs, and other donors and creditors. The government prepares the PRSP in light of the fourteen-point Comprehensive Development Framework (CDF) of the World Bank . . .

That’s just the kick-off. Then there are more meetings, more bureaucratic hurdles to jump, more reports to file, and many, many more acronyms. The matter of Adebe’s pothole—as provincial as it may seem—turns out to be a massive international affair involving highly paid suits in posh Washington suites.

Easterly continues:

If the international lenders and donors approve the PRSP and release new funds to the national government, then government will allocate the money in accordance with the NDP, ADLI, CRSP, MTEF, CDF, PRGF, PRSC, and PRSP, after which the money will pass through the provincial governments and the district governments, and the district government may or may not repair the pothole in front of the poor person’s house.

Adebe might as well just pray.

The process isn’t cheap, either. The cost of paper-shuffling alone could have fixed Adebe’s pothole many times over. Easterly notes that “it takes $3521 in aid to raise a poor person’s income by $3.65 a year.”

However, it remains quite true that a few extra dollars is worth a lot more to most people on earth than it is worth to you. So you should give, but in a focused way. You should give directly to good causes with a minimum of bureaucracy where your money is likely to have a big effect. Last year I gave to the Fistula Foundation. A very small amount of money can help heal a women with a horrifying injury. (See how you feel when you just read about a fistula, and then think about what it must be like to have one.) I plan to give to them again this year.

Megan McCardle brings to our attention what I think is another good opportunity for giving. One of Megan's former U of Chicago classmates has set up an educational fund to support the tuition of elementary school students in s single school in his remote hometown village in China. Apparently, $40 is enough to send a kid to school for an entire year. Liang Qiao, who set up the fund, promises that 100% of the money will go to the kids. The kicker is that Liangqiao is dying rapidly of cancer. His lifelong dream was to set up an education fund is his village, which he had intended to do on his own. But since he is going to die soon, he's asking for our help.

This is an excellent way to spend your money. Investing in the human capital of children in a poor but high-growth country like China is a very good bet. Money given by a local to a single local school is likely to have a concentrated effect with little waste. And dying men, unlike the World Bank, aren't likely to skim off the top. I am going to send $40. How about you? Will you send a kid to school this year?

(The donation is not tax-deductible, but you're bigger than that. And if the informality and non-institutional nature of this makes you wary, keep in mind that it is the informal and non-institutional nature of this that is likely to make it effective. If you feel tentative, drop me a line and I'll forward you the email Megan forwarded to me.)