One Cheer for NATO

The largest military NATO exercise since the end of the Cold War will start shortly in Norway. About 50.000 troops and 10.000 vehicles from all 29 NATO countries plus Sweden and Finland will commence ‘Trident Juncture 2018’ on October 25.

Before the actual exercise starts, there are already logistical tests. As the news release of NATO explains:

Over the next few days, 70 Foxhound, Husky and Landover vehicles will make the 2,000km journey from the Hook of Holland harbour through northern Europe to Norway. The UK convoy’s move through the Netherlands, Germany, Denmark and Sweden will test how efficiently soldiers and equipment can move between European countries. It will also test customs, border regulations and infrastructure’s ability to cope with rapid and heavy troop movements.

“Military mobility is vital, especially to reinforce in a crisis. That’s exactly why we exercise it,” said NATO spokesperson Oana Lungescu. “Over the past few years, NATO has made real progress in improving our ability to deploy troops quickly across Europe. We are overcoming legal hurdles and cutting red tape, including by working closely with the European Union. Looking ahead, we aim to further reduce border-crossing times (clearances within five days by the end of 2019), identify alternative supply routes, and exercise even more to practice military mobility.”

The exercise itself has an article 5 or collective defense scenario, training NATO’s crisis response ability. It will last about two weeks. “NATO is a defensive Alliance. We’re not looking for a fight, but we are committed to defense and deterrence. That’s what this exercise is all about: training to defend, and providing a deterrent effect, ready to respond to any threat from any direction at any time,” commanding officer Admiral Foggo underlined.

I think this exercise, with all NATO members, on this scale, in these uncertain times, deserves one cheer. It shows that the Alliance is still able and willing to get together, to show it is the most powerful military alliance on earth, and that it realizes it needs a lot of training to remain so.

There are still two cheers lacking. The second cheer is lacking because the partnership is still unbalanced. Despite increases in the defense budgets in some of the European NATO members (The Netherlands included), the main burden (also in relative numbers) still falls on the Americans. That is simply wrong. And it is also dangerous, because in current times, for example also with cyber warfare becoming ever more important, any shortage of budget is putting (future) lives at risk. The third cheer is lacking because anti-NATO rhetoric (on both sides of the Atlantic) will sow the seeds of doubt about the use and future of NATO. That is also simply wrong and dangerous. Whether it is Russia, or other powers, the West cannot afford to leave any current or future authoritarian ruler in any doubt about the military ties across the Atlantic, all the way to the Russian border. It is in the best interest of all NATO members, the US included.

Are Swedish University Tuitions Fees Really Free?

University tuition fees are always popular talking points in politics, media, and over family dinner tables: higher education is some kind of right; it’s life-changing for the individual and super-beneficial for society, thus governments ought to pay for them on economic as well as equity grounds (please read with sarcasm). In general, the arguments for entirely government-funded universities is popular way beyond the Bernie Sanders wing of American politics. It’s a heated debate in the UK and Australia, whose universities typically charge students tuition fees, and a no-brainer in most Scandinavian countries, whose universities have long had up-front tuition fees of zero.

Many people in the English-speaking world idolize Scandinavia, always selectively and always for the wrong reasons. One example is the university-aged cohort enviously drooling over Sweden’s generous support for students in higher education and, naturally, its tradition of not charging tuition fees even for top universities. These people are seldom as well informed about what it actually means – or that costs of attending university is probably lower in both England and Australia. Let me show you some vital differences between these three countries, and thereby shedding some much-needed light on the shallow debate over tution fees:

The entire idea with university education is that it pays off – not just socially, but economically – from the individual’s point of view: better jobs, higher lifetime earnings or lower risks of unemployment (there’s some dispute here, and insofar as it ever existed, the wage premium from a university degree has definitely shrunk over the last decades). The bottom line remains: if a university education increases your lifetime earnings and thus acts as an investment that yield individual benefits down the line, then individuals can appropriately and equitably finance that investment with debt. As an individual you have the financial means to pay back your loan with interest; as a lender, you have a market to earn money – neither of which is much different from, say, a small business borrowing money to invest and build-up his business. This is not controversial, and indeed naturally follows from the very common sense principle that those who enjoy the benefits ought to at least contribute towards its costs.

Another general reason for why we wouldn’t want to artificially price a service such as university education at zero is strictly economical; it bumps up demand above what is economically-warranted. University educations are scarce economic goods with all the properties we’re normally concerned about (has an opportunity cost in its use of rivalrous resources, with benefits accruing primarily to the individuals involved in the transaction), the use and distribution of which needs to be subject to the same market-test as every other good. Prices serve a socially-beneficial purpose, and that mechanism applies even in sectors people mistakenly believe to be public or social, access to which forms some kind of special “human right.”

From a political or social-justice point of view, such arguments tend to carry very little weight, which is why the funding-side matters so much. Because of debt-aversion or cultural reasons, lower socioeconomic stratas of societies tend not to go to university as much as progressives want them to – scrapping tuition fees thus seems like a benefit to those sectors of society. When the financing of those fees come out of general taxation however, they can easily turn regressive in their correct economic meaning, disproportionately benefiting those well off rather than the poor and under-privileged they intended to help:

The idea that graduates should make no contribution towards the tertiary education they will significantly benefit from it, while expecting the minimum wage hairdresser in Hull, or waiter in Wokingham to pick up the bill by paying higher taxes (or that their unborn children and grandchildren should have to pay them due to higher borrowing) is highly regressive.

Although not nearly enough people say it, university is not for everyone. The price tag confronts students, who perhaps would go to university to fulfill an expectation rather than for any wider economic or societal benefit, with a cost as well as a benefit of attending university.

Having said that, I suggest that attending university is probably more expensive in your utopian Sweden than in England or Australia. The two models these three countries have set up look very different at first: in Sweden the government pays the tuition and subsidies your studies; in England and Australia you have to take out debt in order to cover tuition fees. A cost is always bigger than no cost – how can I claim the reverse?

With the following provision: Australian and English students don’t have to pay back their debts until they earn above a certain income level (UK: £18,330; Australia: $55,874). That is, those students whose yearly earnings never reach these levels will have their university degree paid for by the government regardless. That means that the Scandinavian and Anglophone models are almost identical: no or low costs accrue for students today, in exchange for higher costs in the future provided you earn enough income. Clearly, paying additional income taxes when earning high incomes but not on low incomes (Sweden) or paying back my student debt to the government only if I earn high incomes rather than low (England, Australia) amounts to the same thing. Changing the label of a financial transfer from the individual to the government from “debt-repayment” to “tax” has very little meaning in reality.

In one way, the Aussie-English system is somewhat more efficient since it internalises costs to only those who benefited from the service rather than blanket taxing everyone above a certain income threshold: it allows high-income earners who did not reach such financial success from going to university to avoid paying the general penalty-tax on high-incomes that Swedish high-earners do.

Let me show the more technical aspect: In England, earning above £18,330 places you at a position in the 54th percentile, higher than the majority of income-earners. Similarly, in Australia, $55,874 places you above 52% of Aussie income-earners. For Sweden, with the highest marginal income taxes in the world, a similar statistics is trickier to estimate since there is no official cut-off point above which you need to repay it. Instead, I have to estimate the line at which you “start paying” the relevant tax. What line is then the correct one? Sweden has something like 14 different steps in its effective marginal tax schedule, ranging from 0% for monthly incomes below 18,900 SEK (~$2,070) to 69.8% for incomes above 660,000 SEK (~$72,350) or even 75% in estimations that include sales taxes of top-marginal taxes:


If we would place the income levels at which Australian and English students start paying back the cost of their university education, they’d both find themselves in the middle range facing a 45.8% effective marginal tax – suggesting that they would have greatly exceeded the income level at which Swedish students pay back their tuition fees. Moreover, the Australian threshold would exchange into 367,092 SEK as of today, for a position in the 81st percentile – that is higher than 81% of Swedish income-earners. The U.K., having a somewhat lower threshold, converts to 217,577 SEK and would place them in the 48th percentile, earning more than 48% of Swedish income-earners – we’re clearly not talking about very poor people here.

The fact that income-earners in Sweden face a much-elevated marginal tax schedule as well as the simplified calculations above do indicate that despite its level of tuition fees at zero, it is more expensive to attend university in Sweden than it is in England or Australia. Since Australia’s pay-back threshold is so high relative to the income distribution of Sweden (81%), it’s conceivably much cheaper for Australian students to attend university than for it is for Swedish students, even though the tuition list prices may differ (the American debate is much exaggerated precisely because so few people pay the universities’ official list prices).

Letting governments via general taxation completely fund universities is a regressive measure that probably hurts the poor more than it helps the rich. The solution to this is not some quota-scholarships-encourage-certain-groups-version but rather to a) increase and reinstate tuition fees where applicable or b) cut government funding to universities, or ideally get government out of the sector entirely.

That’s a progressive policy in respect to universities. Accepting that, however, would be anathema for most people in politics, left and right.

A Millennial’s New Perspective on Home Ownership

The last few years I’ve loudly protested that home ownership is overrated; it’s a bad investment plus lots of responsibility. And yet, this summer my fiance and I bought a 100 year old house on the south shore of Long Island.

Yes, I have lost my mind.

I basically stand by my earlier position, but with greater nuance. Owning a home is a complicated undertaking. But it’s given me a greater appreciation for the nuance involved in managing real estate.

Home ownership is a great big Gordian knot of inter-dependencies. It’s massive set of knowledge problems wrapped in externality problems.There’s a massive role for local knowledge which means policy makers’ attention should be less focused on things like home ownership rates, and more on guiding the right people into the right places to take advantage of that local knowledge.

With local knowledge comes local politics. I don’t know anything about local politics, but expect more posts about what’s going on in my town hall over the next few decades.

So what have I learned in this first month of home ownership?

  • There’s something to be said about pride in ownership

It’s still a real trip to turn on my lights in my kitchen so I can do my laundry in my laundry machines. I didn’t think I’d enjoy it this much. The endowment effect is real. One effect has been to increase my interest in contributing to local public goods via civic engagement and other routes.

I haven’t been to a town hall meeting yet, but I plan on going to one tomorrow. I suspect it will be awful. But I’m walking distance, so I’ll be a little bit drunk.

  • The real estate market has some serious frictions

This might be obvious, but it’s interesting. There are artificial and natural obstacles to the efficient use of real estate. Transaction costs are significant and property rights issues are hairy.

Buying a house is a complicated transaction and going through the process has really made clear to me how difficult it is to commodify land. Each piece of land has a unique location and history. Information asymmetries are substantial. The neighborhood you’re buying into is utterly out of your control. Put simply: Amazon won’t be selling real estate any time soon.

Part of the reason I’m happy with buying a house is that our rent had been increasing about $100/month/year. Land lords absolutely take advantage of real estate frictions to charge as much as they can. The alternative (which I chose) is to lock-in to a specific property.

  • The required knowledge to operate a home is significant and difficult to evaluate.

It takes a lot of knowledge to manage a house. If I were to take a wild guess (at this non-quantifiable variable), I’d say that between 5% and 50% of a homeowner’s brain is necessary to operate a house. Even if you bring in experts to do everything, evaluating those experts is a lot of work.

There are repairs and upgrades to make, and my formal education prepared me for exactly none of those projects. On the other hand, I’ve got the Internet. Without YouTube and Reddit I’d be a half dozen unlucky mistakes away from homelessness.

On the other other hand, I’ve learned a ton of stuff I’ve got no use for. Like how to grow asparagus (which it turns out it isn’t worth doing except out of boredom).

You can’t evaluate knowledge until it’s too late. And there’s more to learn than you ever will, so you have to make mistakes. It’s true of home ownership and it’s true of life more generally.

  • Gardening is a real trip.

In History of Economic Thought professor Gonzalez shared a story about two economists meeting in Switzerland during WWII. On showing his vegetable garden to the visiting economist, the visitor said “that’s not a very efficient way to grow food,” to which the gardener said, “yes, but it’s a very efficient way to grow utility.”

I’ve wanted to garden for some time, but the market for gardens is thin. So now I’m starting with almost no useful experience. My public stance has been that lawns are boring and dumb. But figuring out how to manage a little ecosystem ain’t easy. I now get why someone would just put in a lawn and be done with it.

At my old apartment complex the entire ecosystem was made of: humans, trees, lawns, cockroaches. I suspect the cockroaches did so well because all their competition was poisoned away. As an emergent order guy, I’m not really into that. But I get it now. In the same way the king wants everyone living in neat little taxable rows my life would be easier if I could just slash and burn all the complexity out of my yard.

Tl;dr: My biggest surprise as a new home owner is just how big a cognitive load owning a house is. You hear homeowners talk about how much work it can be, but I think it’s rare to hear someone talk about how much know-how is required.

Given the capacity to generate externalities, I’m a bit surprised that there isn’t more public policy devoted to issues of home ownership* (beyond subsidizing finance and increasing barriers to entry). I supposed I’ll learn a lot more about these issues as I learn about local politics.

*That isn’t to say I think it’s a good idea to get the government involved in trying to tell people how to go about the business of daily life. I think homeowners are (basically) doing fine left to their own devices.

Nixon to Moscow, slavery’s toll on the economy

My latest is up over at RealClearHistory. An excerpt:

Nixon’s anti-Communist credentials were so sound that he could spend political capital making inroads with Communist enemies. His actions were viewed as safe by the American electorate because, for better or worse, the public saw Nixon as somebody who would not betray American values at the negotiating table with the Soviets. Nixon’s hawkishness provided moral cover for America’s withdrawal from Vietnam, and its peaceful overtures to the two most powerful and aggressively anti-capitalist regimes in the world (China and the USSR).

Please, read the whole thing.

Vincent has a great review up on Robert Wright’s new book about slavery, too. It’s at EH.net, a website dedicated to economic history, and here is an excerpt:

All of these amount to the same core point, those who reap the private benefits of slavery are content with their gains even though they come at a larger social cost and they will work to find ways to drive a wider wedge between the two by shifting costs onto other parties. Hence, slavery as pollution.

More here.

Nightcap

  1. What is the cost of “tractable” economic models? Beatrice Cherrier, Undercover Historian
  2. Facts vs. hand-waving in economics Chris Dillow, Stumbling and Mumbling
  3. How factories changed the world Donald Sassoon, New Statesman
  4. Defending the Mughals became a way to defend colonial rule Blake Smith, the Wire