What’s Wrong with Argentina?

A quick tour of the country tells the story very clearly.

When President Christina Fernandez de Kirchner initiated the nationalization and expropriation of the Argentine assets of YPF, an oil company mostly owned by Spanish interests, it came as no surprise to anyone who has visited the country recently or watched it closely. The theft was a predictable and consistent manifestation of the Kirchner personality and the character of the Argentine political class, and more of a return to business-as-usual for the country than a shock—and one which goes a long way toward explaining why Argentina is poor.

In January 1912, an impartial observer of Argentina and the United States would have trouble guessing which had a more promising future. Both enjoyed the low-hanging fruit of abundant, under-populated, available land. The Argentine pampas were as fecund, tillable, and flat as the American Midwest. Argentina had an extremely long coast-line ideal for exporting the consequent agricultural products. Immigrants from all over the world were rushing in. Argentina even had one major advantage over the States: It had never so heavily relied on slavery for agriculture. Thus, it had never experienced such a wrenching civil war, and was not destined for the racial strife and inequality that would be the major blotch on America’s future. By 1912, Argentina had even started to enjoy some soft power: The tango—which had originated in Buenos Aires’ slums—had just hit Paris, and would soon be the rage in New York and Finland. The capital was marketing itself as a fully European city transplanted directly into the Americas.

In January 2012, I caught a flight to Buenos Aires with a cheap Air Canada ticket, a psychological desperation for more sunlight than Boston would enjoy till May, and a vague curiosity about why Argentina, which had once so resembled the United States, was now so different. What had happened, in the intervening 100 years?

When I showed up at the apartment whose guest-room I had rented on AirBnB, the first things I noticed were the gold stud glimmering from my host’s right ear lobe and the framed, autographed picture of him hugging Ann Coulter displayed on his desk. My host (call him Jake), I soon confirmed, was a gay, right-wing American expatriate, who telecommuted daily to his New York marketing firm. I’m a runner, and running is how I get to know a new city. The best way to do this is usually to wind inward from the main body of water around which the city is based. So after small talk, I laced my New Balances and asked Jake to point me in the direction of the Rio de la Plata. “The Rio de la Plata?” he asked. “You don’t want to go there. There’s nothing to see,” he continued, his tone flat and casual, with barely a hint of mischief. “It’s just where the helicopters go to dump the bodies whenever we have a coup.”

(This kind of black non-humor is something a visitor must get used to. The next day, on a tour of el Teatro Colon, the major opera house, my group’s guide led us from the main theatre into a gilded hall just outside the choicest boxes. “Now this is where the really important stuff, what everyone really came to the opera for, would happen during the intermissions,” she said, her tone flat and casual, “the planning of assassinations, and so forth, among the Buenos Aires elite.”)

If you want a one-word answer to the question, ‘why isn’t Argentina rich?’ then your best bet is coups. Between 1930 (a year in which, two years after black Thursday, Argentina’s future may have looked even brighter than America’s) and 1976, Argentina suffered at least six. Up until 1930, Argentina’s per-capita-GDP had closely tracked those of countries like New Zealand, Australia, and Canada. But the next decades of constant political instability threw Argentina off track. The reason is basic: When a country is unstable, it is risky to make the long-term investments required for growth. When dictators use the economy to reward their friends and punish their enemies, markets can’t guide the structural evolution and modernization of the economy. Political revolutions, ironically, leave a country economically retrograde. By 2000, Argentina’s per-capita-GDP was about a quarter of that of Canada, New Zealand and Australia. It had largely missed the boat of the 20th century’s spectacular growth.

A quick run around Buenos Aires reveals much. In Palermo in late January, wealthy playboys with Spanish surnames and dyed-blond hair stepped out of private cars, returning from vacations abroad, and asked officious questions about the brand of your correspondent’s shirt. Meanwhile, on the walkways of the Puerto Madero, illegal Bolivian immigrants sipped Yerba Mate and caroused late into the night, shouting slurs at you correspondent as he ran by. Inequality yawns and gapes in this class-conscious city—the rich are showily rich, the poor are visibly poor, and the middle class is pretentious—which has historically proclaimed its commitments to socialism and unionism and its aversion to “Anglo-Saxon capitalism.” There is a kind of grasping at wealth in this country, and ostentation in its displays, precisely because wealth is transient, not reliable or dependable, and liable to unpredictable confiscations by the state.

My run eventually took me to the Casa Rosada, the executive mansion of “Don’t Cry For Me” fame, where I asked two college girls to document my arrival on my iPhone. But unlike college girls in the capitals of other developed countries, they were clueless with an iPhone camera, and left me with more accidental photos of themselves than of the Casa. It’s not easy to obtain an iPhone in the country at a reasonable price, thanks to onerous special taxes, and delayed regulatory approvals, on the devices that, several Argentines told me, were widely seen as retaliation for Apple’s refusal to source as much of its global supply chain in the country as the de Kirchner administration thought judicious.

After the run, I joined Jake and pals for a dinner at Juana M., supposedly one of the hipper restaurants in the old-money neighborhood of Recoleta. As we opened the menus, Jake said with some resentment, “Oh, es muy cara, muy cara” (“it’s very expensive”). But when I looked at the menu, and did the currency conversion, I thought Jake was crazy: One could get a large hunk of a world-renowned cow, a good Malbec, and a pretentious appetizer—plus, in econo-speak, the intangible consumption goods of original artwork and the social cachet of the place—for about $20. (The Argentine peso is incredibly cheap right now, because President Kirchner’s fouls have made foreign-exchange traders and Argentines eager to get their money out of pesos and into dollars as fast as possible.) Jake was a young professional, a decade out of college, with no dependents, receiving his salary in dollars from his New York firm. How was this meal muy cara for him? What was I missing?

In one word: inflation. Private estimates put Argentina’s annual inflation rate at somewhere around 25% (the government’s official number is closer to 10%, and it fires bureaucrats who disagree). The city’s restaurant menus list prices on removable rectangular stickers, which are replaced with upwardly-revised prices every couple months. Jake’s mistaken perception that the place was muy cara illustrates the basic problem with inflation: a constant surprise at how expensive things have become and a constant uncertainty about what things are really worth, that delay purchases and economic decisions in thousands of small ways that, in the aggregate, rot an economy from the inside. High inflation was the norm in Argentina for most of the 20th century, and was renewed in the 21st as Christina Fernandez de Kirchner steadily eroded the Argentine Central Bank’s independence, using its printing presses to reward friends and paper over the government’s growing debt.

None of this, of course, should discourage the prospective visitor. The Argentine peso’s loss is the dollar-holding tourist’s gain. And Argentina is lovely. The Spanish and Italian immigrants who settled the city in the early 20th century imprinted a festive culture, in which dinner is served at 10:30, young people head to the tango clubs after 1 a.m., and the work day starts at 11. The Welsh immigrants who were brought to settle the plains in the 19th century left behind red-headed girls who are freckled by their heritage and tanned by the climate, and, hence, peculiarly pretty. The capital city’s makeup is complicated still more by its German speakers, many of whom descended from Nazis who fled the continent in the later 40s; and also by South America’s largest Jewish community, largely descended from Jews who had fled the Germans a decade before. This potpourri has left a rich variety of neighborhoods and phenotypes, and a fascinating culture. The city’s architecture, its balconies, and its avenues are gorgeous; its parks and promenades are, too. Stereotypes about South-American warmth hold true. Young Argentines are uninhibited about making out in the public parks. Elderly Argentines are uninhibited in still dancing the samba through the well-preserved barrio of San Telmo. The city’s book-stores and kiosks still display a retro-Marxism, which is charming as long as you don’t think about its political consequences. In a strange way, the city’s aesthetic loveliness is almost underscored by the surreal contrast of its political dysfunction. The image of helicopters dumping bodies, left by the coups and dirty wars of the 1970s, into the Rio de la Plata, just beyond the high stone walls of the exquisite Recoleta Cemetery, was terrible and sublime.

I best saw what ails Argentina, however, on a weekend trip across the Rio de la Plata to Uruguay’s capital, Montevideo. The port from which the ferry to Montevideo left was swarming with police and their dogs. But there was no terror threat. The dogs were trained to smell out not bombs but cash. As Argentina’s currency has quickly deteriorated, and another state confiscation of wealth seems ever more likely, Argentines have become desperate to park their wealth overseas—and President Kirchner has become desperate to stop them. We passengers weren’t allowed to bring more than a few Argentine pesos or American dollars to Uruguay—our wallets were literally held open, the bills counted, before we could board.

At dinner that night, after arriving in Montevideo, I ended up in a debate with a chain smoker who had the rumpled-but-smart look of a journalist, and a Russian diplomat who was determined to pick a fight when he discovered that I was American and, worse, the Uruguayan journalist admired my home country.  The Russian diplomat (after lamenting history’s unfair misrepresentations of the Soviet Union) was also eager to let everyone who would listen know that he was “a very, very rich man.” His job at the embassy was just a sideshow. “I need the immunity for my real job”—selling Apple products to wealthy Argentine visitors to Montevideo, who didn’t want to put up with the delays, restrictions, and special taxes imposed on the products in Argentina. Mother Russia, it turned out, was capturing revenues on the iPhones that de Kirchner had practically driven out of Argentina. He also arbitraged in expensive Uruguayan real-estate, which Argentines bought solely to hedge against their own government’s inflation and confiscations. The diplomat-cum-smuggler finished by turning to the Observador editor: “I don’t think we’ve met, but I’m sure you’ve seen my car around here—the black Z4?”

Even as I tried to leave Argentina for home a few days later, the country’s economic dysfunction was vivid. When I arrived with packed bags at the Buenos Aires airport, I found the whole check-in lobby strewn with toilet paper, which caused an old man to slip onto the marble floor. (The toilet paper had been taken from the airport bathrooms, no doubt contributing to some uncomfortable layovers.) And the hall vibrated with obnoxiously loud drums and chants, coming from airport employees on strike, who marched back and forth across the lobby, drowning all of the announcements. Enough employees were working to run security, which was lax, and customs, which was aggressive. If the lengthy customs cards I had to fill, and the legal threats scrawled on them, were any indication, the Argentine government thought I had only visited the country to undermine its revenues from beef exports. (As a general rule, the aggressiveness of a country’s customs is a good metric of its overall level of economic dysfunction.)

Strikes are a regular feature of Argentine life. Municipal employees’ unions in Buenos Aires shut down the city’s transportation system fairly regularly—a pain for tourists and international businesspeople. Argentina’s public sector unions have been costly. They were largely responsible for Argentina’s latest economic disaster, its 2001 default. In that year, President Fernando de la Rua had attempted to cut public expenditures sufficient to satisfy the country’s creditors, but the public unions threw such a spectacular fit on the streets of Buenos Aires that the international bond markets decided that reform was politically impossible. Capital fled from Argentina; interest rates soared; and a decade of economic progress for the country was erased with humiliating and devastating default, which has left the country with punishingly high interest rates to this day.

The aggressiveness of Argentina’s unions is partly a by-product of its political culture—the retro Marxism seen in its bookstores, the still-lingering influence of the Perons, who made the unions into a political power base. But it’s also—and here’s where one sympathizes with the workers—a product of inflation. Because the Argentine government fabricates its inflation figures, public-sector workers’ real wages are constantly being eroded. As such, they need frequent pay hikes and contract renegotiations just to keep up with the Argentine Central Bank’s printing presses. Argentina’s various economic pathologies, then, are linked together in a vicious cycle.

As I arrived in Boston and taxied home, I thought I was maybe getting the picture of what made America different from Argentina: The customs officer who greeted me in my morning, red-eyed daze, was, for lack of a better word, a slacker. He didn’t actually care if I might be sneaking in a bit too much beef for resale in the States—the American beef industry, he seemed content to assume, could survive it. In the food court, the prices were exactly the same as at departure—and displayed in more or less permanent characters. The newspapers displayed at the Starbucks revealed that, yes, Congress was still stuck in gridlock, and, no, they still hadn’t done anything bold or surprising. At 9:15 a.m., as I taxied down Commonwealth Ave., rush-hour had largely passed because most Bostonians were already at work. The large Apple Store on Boylston St. testified that few Bostonians felt compelled to cross the Canadian border for their iPhones. The pedestrians in Boston were plainly (some might say poorly) dressed: The successful and wealthy lawyers and bankers here are pretty modest about it, knowing that they will slowly, steadily, and reliably accumulate wealth over long careers, if they just take care of their reputations. No need to grasp. Getting rich is slow, boring, ordinary business, and so the rich dress accordingly.

In short, life in Boston, as in most of America, looked relatively boring and predictable.

Argentina’s nationalization of YPF—which will be undertaken with support from all of the country’s major political parties and the cheers of the public—makes economic sense for the country in the short run, which is exactly why it is being undertaken. Argentina will reclaim national resources and their cash-flows. Only foreigners, mostly Spaniards, will get screwed. In the short run, it’s a free lunch for Argentina. The problem is, the seizure is also a return to the political and economic unpredictability that have ruined Argentina’s chances for prosperity over the past century. What foreigner will invest in the country now (and Argentina desperately needs such investment), having seen such a theft?

Maybe the thing that put America on a different path from Argentina over the past century wasn’t anything special or difficult or complex or cool, but simply the fact that life here is more boring and predictable. Maybe it was our simple, modest, and bourgeois virtues of honoring commitments, repaying debts, keeping prices stable, accepting democratic defeats, bloodlessly transitioning power, letting foreigners get rich off domestic resources (when so contractually entitled), and showing up at work on time. In the U.S., ordinary businesspeople enjoy reliable financing from boring banks; a relatively predictable legal environment that makes it easier to start businesses and hire people; freedom from fear of confiscation by the government; and a supply of nerdy and meritocratic employees, who worked hard through college because here, boring schoolwork and boring credentials, less than political connectedness, are the buy-ins to the elite. In short, what set American apart was partly how weak, divided, and listless our governance could be, and how mundane and slow and predictable life here consequently is.

De Kirchner’s seizure of YPF—its aggression, its surprise, its lawlessness, its confused and short-term economic logic—is emblematic of all the things that set Argentina apart from America in the 20th century. As such, it presages another century in which Argentina will miss out on the prosperity for which it was once was well positioned as the United States.


Slumming it

Devoted readers, you’re no doubt wondering where I’ve been. The truth is, I’ve been anxious to post, because my late readings have mostly been either boring textbooks that don’t leave much room for stimulating criticism or popular business books that I was bashful to be seen thumbing on the subway, much less blogging about—namely, Andrew Ross Sorkin’s Too Big to Fail and Roger Lowenstein’s When Genius Failed.

I started with Too Big to Fail, the wunderkind NYT financial journalist’s play-by-play of the collapse of Lehman and financial crisis from (mainly) August through November 2008. At that time, I was still in the phase of my life when ancient controversies in ontology seemed more urgent than looming global economic crises and I would have been viscerally opposed to reading the business section of a newspaper—so there were some really basic gaps in my knowledge of the financial crisis that I had to fill in, and this book served as an accessible narrative supplement to the more analytic Financial Crisis Inquiry Report. TBTF is a great act of journalism, but it wasn’t chock full of analytically interesting stuff. My big take-away from the whole 600 pages was a gestalt shift—i.e., a look at how financial markets move from the micro-view, inside board rooms, as opposed to from the macro-view of trend lines of graphs of asset prices. This is one of those truths that seems obvious when written down, but takes time to really internalize: A statement like “Markets pushed Asset X higher/lower in a renewed flight to/from risk,” is several levels of abstraction removed from the plain truth about the world. What has really happened when that has been reported is that one group of people, bound by various legal and other institutional constraints and social pressures, has agreed that it needs to buy more of Asset X; they have called up a bunch of other people with whom they happen to be on friendly terms and expressed said need; the two groups, bound by all kinds of reputational concerns, social sympathies, fears, opportunisms, ass-covering needs, and ignorances, have negotiated a price (which must be some amount higher than recent sale prices if that asset is now considered more desirable). From a micro-level we can call this “a deal” or “a trade”; from a macro-level we call it “a price change.” In other words, the simple curves we see in the newspaper the next day often conceal a great deal of discontinuity and the multiplicity of factors that influence people’s willingness to sell/buy any asset aside from price. And then the curves that we find in financial theory textbooks are still one degree of abstraction more beyond the level of abstraction in the newspaper. These curves are extremely useful theoretical constructs—but they are, again, not actually the truth about how the world works.

My understanding was that his has a lot of bearing on how the Lehman crisis happened. In summer 2008, Lehman still had a lot of valuable assets, tangible and intangible. So theoretically, there really should have been some outside, better-capitalized firm that could have really benefited from purchasing the investment bank at a low share price. If this had happened, if Lehman had been able to find a buyer at a price that reflected both the reality of its mistakes (entailing realistic markdowns on its mortgage-backed securities) and its potential, Lehman’s shareholders would have ended up a lot better off and so would the whole financial system/global economy. But what was reasonable in theory couldn’t happen in practice—because of those discontinuities that meant that it simply wasn’t the case that the “demand for Lehman curve” met the “supply of Lehman” curve at a particular price where a purchase would necessarily happen. Some of these discontinuities include: (1) Legal constrains: i.e., capital requirements (good things on the whole) meant that, even if buying all of Lehman’s assets would be a profitable proposition in the long run, many potential buyers that were already pushing their lower capital limit wouldn’t be able to absorb the short-run losses from, say, a run on its mortgage-backed assets;  (2) human status anxieties—a lot of deals founder on the “social issues” question of who should run the new, merged firm; (3) other, more admirable social anxieties—Dick Fuld not wanting to face the humiliation of selling of Lehman, in which no doubt many of his friends were shareholders, at a low price, even if that low price was the best he could get; (4) the self-sustaining madness of crowds–even e.g., financially savvy portfolio managers who knew that mortgage-backed securities had some value were limited from purchasing them even at very low prices because their own investors were caught up in a media-fueled panic over the very compound term “mortgage-backed,” and would, consequently, have made withdrawals; and (5) a million others I can’t list now.

If I can very broadly generalize, my big takeaway from Too Big to Fail, is that the reality of markets, particularly in times of crisis, is that they are very discontinuous, and we must take account of this.

More intellectually interesting to me was Roger Lowenstein’s When Genius Failed (which I was moved to read by all the references to the failure of Long Term Capital Management in Too Big to Fail) because the book, as I read it, gestures at a lot of commentary on economics, the philosophy of social science, and even theory of knowledge more generally. Indeed, I would say that this commentary is the most intellectually interesting part of the book, and also the book’s greatest flaw. From the very beginning, Lowenstein sets up a pretty tropeish economic cosmogony: He reminds us, three or four times per chapter, that Long-Term Capital Management was run by academics with theories that centered on the rationality of markets and led them to believe that all trading should be driven by models and risk could be measured scientifically. We hear constantly of their “naive” “faith” in markets and their models. Occasionally, some wise, old, experienced trader who trades from his gut is introduced as their alternative. And yes, as you could have predicted in advance, there really is a chapter called “The Human Factor.”

And, as you may gather from my tone, I think this cosmogony is idiotic. Every trade — indeed, every action in financial markets — entails a prediction about the future: A purchase is a prediction that the asset will go up in value, a short sale is a prediction that it will go down in value. And any good prediction about the future, in turn, requires an accurate (scientific) picture of the world as it is today, and an idea about how that will drive changes in the future. In other words, it requiers a theory of cause and effect — a model. So we all have, implicitly, models about how the world works; and we have nothing else to guide our choices that relate to the future. Some of us, like the academics at LTCM, render our models more rigorously and scientifically; others less so. Predictions that aren’t modeled are either (1) trivial (“people are getting nervous, so they’re going to go for Treasuries, and I can capture some of that value on the way up!”) or (2) not actually knowledge at all (“this asset’s just gotta turn around soon”). For every one old experienced gut trader who has been a success, there are many more who were unexceptional or ruined despite identical general ideas and feelings about markes — the successful one being distinguished solely by his luck. In short, if we find a “gut trader” who is successful, there is a much simpler explanation than ‘his wise rejection of the scientistic preoccupation with mathematical modeling’: luck.

So, to review: The economic cosmogony which places “academics” with “theories” and “faith” in the “rationality” of “markets” versus “gut” traders is idiotic. The only way to make rigorous, intelligent, and non-trivial predictions about markets is to use models and math.

So, what did Long-Term Capital Management get wrong? Well, I think a quote from John Maynard Keynes that Lowenstein pulled out for a chapter epigraph actually gets it right: “The market can remain irrational longer than you can remain solvent.”

In truth, LTCM was correct in its major predictions — bond spreads would have to decrease, eventually, because, well, investors had incentives to bring bond spreads together. And eventually, this prediction did come true, such that if LTCM had faced no constraints on its ability to hold its positions, it would have profited massively. So, again, the problem wasn’t that LTCM’s positions were wrong, or that markets were irrational, but that institutional constraints rendered LTCM insolvent in the short run, even while its positions were profitable in the long run. The main things that made this happen were: (1) unpredictable geopolitical stability caused, in part, by Boris Yeltsin’s alcoholism, (2) legal and institutional restraints such as margin requirements and capital requirements that drained the fund of cash and credit, even though it had a very persuasive argument that it must profit eventually, (3) other portfolio managers who were forced to abandon positions that they thought made sense, under pressure from withdrawals from their own, irrationally pessimistic investors and (4) other, predatory traders who saw how all of these together could bring LTCM down, and therefore bet against LTCM’s positions, making the fund’s downfall a self-fulfilling prophecy. To put it more plainly, LTCM faced a classic bank-run — a phenomenon which has been stopped in commercial banks due to the Federal Deposit Insurance Corporation, but which still afflicts the “shadow-banking” sector (as seen memorably during the recent financial crisis).

So, to really belabor the point, the problem with Long Term Capital Management, was not that “they believed that markets were rational and eventually always become more efficient” or “they relied on academic models and theories,” it was that they didn’t predict all of the freaky shit that could happen in the short run to prevent them from cashing in on positions that were rational in the long run. 

My main takeaway from all of this is that the big danger to economists is not that we assume that financial markets are rational. In the economic meaning of the word ‘rational’ – very smart – financial markets are very rational indeed. This is why, even though most of my friends are theoretically smart people, I am sure most would not make money by picking stocks – because any true and profitable idea they might have about particular stocks has already been had by thousands of traders who follow financial markets much more closely than they. The very basic claims about the efficiency and rationality of markets, however much they have been sneered at in recent years, are true.

The problems are that financial markets (1) are not continuous, (2) that market participants are constrained by institutional and legal factors, external to the market itself, that can force them to abandon positions that would be profitable over the long-term, and (3) the very classic, very basic problems of self-fulfilling panics and bank runs that afflicted commercial banks until the FDIC have still not been solved for the shadow-banking sector. The problem with Merton’s approach wasn’t (1) that it “naively” and wrongly “assumed” that markets were rational, or (2) that it was “scientistic” in relying on predictions from mathematically rigorous models. It was that the models didn’t properly the things outside of the market, and the way they can make markets behave not like markets in the short run.

“The short answer is, we can’t”

Yesterday, Jeffrey Liebman, a poverty-policy expert at the Kennedy School, gave a lunch and talk on “Jewish Ethics and the Social Safety Net.” He reviewed his research and the current hot questions in political science’s study of poverty, and talked about his own work in the Clinton and Obama administrations. Afterwards, a rabbi contextualized Liebman’s social scientific approach with a discussion of the Talmud’s ethical lessons on how to care for the poor. The rabbi also recounted the efforts of the Hebrew Immigrant Aid Society, active during late 19th and 20th century waves, whose case-workers helped Jewish immigrants through all the stages of learning English, finding housing, vetting job applications, etc. Liebman said that state social workers had once played a similar role for the U.S. population more broadly, but inadequate funding has now left a typical worker with some “300-plus” cases.

Beyond the broad review of research, Liebman mad a few very interesting points I want to recount and press on. He said that the best political leaders were usually those with very little political experience, because high-level political office inevitably entails long periods of social distance from ordinary people and their ordinary lives. Arkansas was “such a small community” that Governor Clinton was still compelled to interact with “people in trailer parks,” and this explained some of his charisma and policy intuition. Liebman recalled that he (Liebman) had fervently opposed and protested President Clinton’s 1996 welfare reform—he tore his Clinton bumper sticker from his car and left a protest-vote in the same year’s election. When welfare reform turned out to be a wild success, Liebman attributed Clinton’s superior intuition on the policy to his greater lifelong proximity to poor people. Liebman also felt that then-senator Obama’s only-two-years’-experience in the Senate should properly have been a selling point during his presidential campaign, because it meant he was more cognizant of the challenges ordinary people faced. (Obviously, a scholar for whom the salient issues are the global economy or foreign policy, rather than domestic poverty, would have a decidedly different attitude on the proper kinds of experience for a commander-in-chief.) Next, the main polemical point he argued was that economists today focus too much on the second-order, distortionary economic effects that social-insurance policies might have, and too little on the first-order benefits (i.e., the plain good of poor people having more income). Finally, he made a brief reference to “Social Impact Bonds”—a quintessentially Cameronian idea I am excited about, because it could allow more innovation and experimentation in social policy that could help us better discover what works, and which I hope to write about soon.

Domestic social policy isn’t my expertise, so, after his remarks, I asked a broader methodological question along these lines:

The research we talked about today focuses on measuring the direct impacts of specific anti-poverty interventions. But, if we wanted to evaluate social policy as a whole, we would need to think about broader cultural effects—i.e., how the policies might influence social mores and behaviors in good or bad ways over the long term. Clinton’s welfare reform was based on the idea that abuses of the welfare system had left many children in families where nobody had worked in three generations—and these kids grew up unfamiliar with the most basic norms of the working world, like showing up on time. Even more broadly, some very-libertarian types will argue that the welfare state as a whole displaces our feelings of direct, individual obligation to each other—i.e., groups like the Hebrew Immigrant Aid Society are less likely to come into being if everyone feels that aiding immigrants is the responsibility of the government. Some more left-leaning types argue that social-insurance policies have much, much broader economic benefits than first appear—i.e., if we all felt fully insured, we would be more willing to take entrepreneurial risks, or quit jobs for which we were poorly matched, in ways that would, in the long run, have enormous economic benefits.

So if it’s true that our social policies have these much broader, third-order or fourth-order cultural impacts, via their effects on social mores, then how can we measure that?

Liebman replied, “The short answer is, we can’t.” He agreed that the impacts on social mores were hugely important; the stunning success of Clinton’s reform, which had shocked him, he said, could only be explained by such a change in mores, “of people seeing their neighbors go to work, and starting to think that they could get work, too.” But usually, such aggregate effects were simply unmeasurable.

And Liebman is surely right. There’s simply no social scientific way to measure the answers to my questions. So what can we do? Well, one option is just to despair. Otherwise, since we can’t directly measure the effects, we can theorize, reasoning from premises instead of measuring outcomes. We could make a model of what human beings are like and how they make choices, and then input the social policy of interest into this model, and logically reason our way to its likely effects. This is the best we can do, but it isn’t scientific, and will still leave us with contentious disagreement. Different people will come to different conclusions according to their different premises—i.e., what theories of human nature and behavior they have. It is my sense that I am more pessimistic about social-welfare policies in general/more optimistic about market-oriented reforms (depending on how you prefer to put it) than Liebman, and that this is probably because my view on human nature is, relative to his, more (1) cynical and (2) focused on social learning and adaptation.

Cynicism about human nature leads one to suspect that welfare procurements will inevitably be taken advantage of not just by welfare recipients, but also by the white-collar professionals who run the agencies (or those who litigate them), whose own incentives are to expand their own bureaucracies. (Such taking-advantage, of course, does not by itself argue against welfare; it’s just one cost in a much bigger cost-benefit analysis.) A belief in human adaptability (to think that we humans, who now spend our days in spreadsheets, were once hunter-gatherers, with virtually the same genes!) leads one to think that people could exhibit remarkable ingenuity and tenacity in finding and making work if they were given the right incentives (i.e., less direct welfare transfers and more earned income tax credits). It also suggests that people will find clever ways to rationalize staying on the dole if given that option, so that the “tough love” of kicking people off the dole can often truly be a good thing for them. And a focus on social learning should make one very worried about the prospects of children growing up in neighborhoods in which many adults do not work, and the feedback loops and third-order cultural effects that could, as a result, cause problems even many generations down the line.

I’d argue that it is much better for a child (after age 8 or so) to grow up in Hypothetical Neighborhood #1, where all the parents work and none are home to supervise children until 8pm, rather than in Hypothetical Neighborhood #2, where all the kids get plenty of supervision from parents who are layabouts (for lack of a better word). Because we are social animals, and kids in particular are learning machines, kids from HN#1 will inevitably pick up the norms of the professional world and what it requires for success, like future-orientation, delayed gratification, respectful and non-aggressive behavior, etc. They will see entrance into the professional world as an inviolable expectation, and act more or less accordingly, even with 5 unsupervised hours after school.

With all due appreciation to my parents and their saintly devotion to all four of their children (even to the point of, no doubt, carefully reading this blog post), it’s unlikely that their attendance at my soccer games or procurements of tutors were needed for my relative success in life (‘success’ here defined by modest standards of anti-poverty policy—i.e. making it into white collar life with no criminal record). More important than their special gestures was simply who they were. Their lavish attention no doubt contributed to my happiness and security and admission to very-very-top-tier colleges. But even without their special, active efforts, I probably still would have gotten into top-30 colleges, simply as a result of absorbing the mores and ambitions and habits of thought of an educated, upper-middle class household in an educated, upper-middle class neighborhood and school district, including learning to delay gratification and think about college from a very early age. Kids learn much more from their parents’, siblings’, and peers’ examples than from the first’s instructions and other efforts.

(This is, incidentally, why I get half-miffed when people say that the upper-middle class’s preponderance at elite universities is attributable to the privilege of “expensive test prep tutors.” The problem is, this places the locus of privilege way too late, and thus wildly understates the privilege that children of the affluent and educated have. In fact, we are privileged practically from conception, absorbing superior nutrition and less brain-stunting stress hormones and more vocabulary and better grammar from our mothers even in utero, and absorbing the behaviors, speech-patterns, mores, and ambitions necessary for ‘success’ from the moment we are born. And these have feedback loops and second-order effects, too—we go into kindergarten better prepared, and are identified as ‘gifted’ by our teachers, and accordingly encouraged and rewarded, which teaches us to like learning and school, which makes us study more to become even more ‘gifted’ and receive accordingly more encouragement and rewards, etc., ad nauseum/ad-making-partner-at-the-firm. And just the opposite feedback loops, driven by vicious cycles of discouragement, alienation from learning, more writing-off by teachers, etc., works on the less privileged. If we want to talk about upper-middle class privilege and the reproduction of inequality, we need to, at the very least, talk about what a child learns from her parents in the first three years of her life—and even what she gets in utero. “Expensive test prep tutors” are utterly trivial by comparison.)

This all is why I’m sort of skeptical of Liebman’s approach. He focuses on studying the immediate effects of very particular interventions, because he thinks “the short answer is, we can’t” measure the broader cultural impacts, but it seems to be me that culture and mores are so deep and powerful that changes in them—whether for ill or good—will completely overwhelm the impact of these smaller policy interventions.

There’s no one obvious policy takeaway from all this. Progressives could take this as proof that we need radically more redistribution and social insurance, so all mothers can afford good nutrition and low stress during pregnancy, to disrupt the reproduction of inequality. Conservatives could take this as proof that the long-term social effects of allowing some parents to avoid the working world and subsequent feedback loops must, over the long run, outweigh the benefits of any welfare. In my view, in extremely broad generalization, it seems the only non-cruel way to structure welfare, in a way that accounts for my view of human nature, would entail (1) a small guaranteed minimum income (i.e., literally just a $10,000 handout to everyone in the U.S. every year; because this would be taken out of taxes, the average taxpayer would break even on this policy, but it is important that it be given to everyone, lest it become a disincentive to pursuing employment), (2) very large earned-income tax credits, both to increase the poor’s incentive to work, and to make it easier for employers to hire the low-skilled, (3) very large child-tax credits, to relieve poor mothers of some of their stress, and (4) a reduction of the welfare bureaucracy and other constraints on the liquidity of labor markets almost everywhere else. Oh yeah, and, also, America really, really needs to fix health care, for the sake of both the poor who don’t have it and the middle-class, which has seen all of its productivity gains over the past decades disappear into paying for it. (This all is, obviously, not going to happen.)

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One self-critical note: I am vulnerable to the critique that I have no right to write about poverty policy, especially because I am taking a position which some may characterize as insufficiently sympathetic to the poor. The fact that I have never experienced poverty, or even really known a poor person, is an anti-credential for me on this and other policy issues. But the vast majority of bloggers and policy thinkers who take positions opposite mine, which are (unfairly, in my view) held as more sympathetic to the poor, are similar to me in those respects. We are all biased by our own backgrounds. Partly for reasons highlighted above, every society’s ‘intellectuals’ are disproportionately children of privilege, which biases every society’s intellectual life in predictable ways. But, being citizens of a democracy, we are all nonetheless, regardless of our backgrounds, obligated to come to some conclusion on matters of social policy. The thing to do, then, is to reason as best we can, in good faith, and draw our conclusions—but hold those conclusions tentatively, modestly, and preliminarily. And so I do. My critics must take issue with my reasoning, rather than with my self.