economics

Don’t Worry About Immigrants Flooding the Labor Market

I was listening to Batya Ungar-Sargon on the Fifth Column the other day and realized we had fundamentally different models of how the modern American economy works. This post is exploration of how I think we ought to model the economy without much math.

Batya’s argument against immigration is that an influx of foreign workers increases the supply of labor, thereby driving down wages of the people already here. Her position singles out low-wage workers, suggesting that illegal immigrants take jobs from low-skilled domestic laborers, depressing their wages. However, this view is problematic for several reasons and fails to account for the nuances of the modern American economy.

First, as a side note, we could prioritize an immigration policy that tries to attract highly skilled instead of low-skilled workers! The Institute for Progress has a whole interactive tool on how to do this. But the last time there was a Republican President, Trump actually reduced legal high skilled immigration.

But more importantly, the American economy is not a fixed pie where low-skilled immigrants simply compete with Americans for a limited number of jobs. Consider a worker from Honduras. In their home country, employment opportunities may be limited, with jobs primarily in agriculture, local services, or perhaps managing a hotel catering to foreign tourists. However, if that same worker were to immigrate to the United States, their productivity would increase significantly, even if performing the same job.

The United States is an advanced, technologically sophisticated economy with a vast accumulation of capital and expertise across various sectors. By operating within this economic environment, workers gain access to cutting-edge technology, sophisticated management systems, and an abundance of resources that enhance their productivity. For instance, a hotel manager in the United States would likely oversee operations catering to business clients from major corporations, leveraging management software, efficient business processes, and integrated systems to optimize efficiency and service quality. Most American hotels require very few people to run them because there is so much automation already deployed. The same worker, performing the same role but within the context of the American economy, would become exponentially more productive due to the surrounding technological infrastructure and capital resources.

This phenomenon is not limited to the hospitality industry; it extends across the entire economy. The United States is a knowledge-based, service-oriented economy, where workers can be highly productive by leveraging the accumulated expertise, human capital, and technological advancements embedded within American companies and institutions.

You can see this dynamic if you take the Cobb-Douglas production function, which is a fairly simple model of outputs as a function of labor (L), Capital (K), and total factor productivity (A):

Total Factor Productivity or TFP represents technology, knowledge, and accumulated innovation that isn’t directly attributable to adding more labor or machines and buildings. In the US, TFP and capital components of this function are remarkably high, suggesting that the economy is labor-constrained. Adding even a small amount of labor can lead to substantial increases in productivity due to the abundance of capital and technological resources available.

And we see this concretely in the fact that Americans are paid so highly. Immigrants come to the US and see massive pay raises because they are now embedded in a economy with highly advanced knowledge, processes, technology, and automation. The American economy is adept at integrating labor and equipping workers with the knowledge and tools necessary to become highly productive contributors.

Furthermore, immigrants not only contribute to the labor supply but also represent a source of consumer demand. By purchasing housing, goods, and services, they stimulate economic activity and create opportunities for further businesses and workers across various sectors. Immigrants need to buy houses, groceries, haircuts, and cars too.

Of course, that doesn’t mean we should necessarily just throw open the gates to all immigration immediately; the fact that there are large benefits does not mean there are no costs. It takes time for new workers to be integrated into any economy and for their spending to be accounted for in new supply for everything they are buying. If new workers are concentrated in a specific industry, it can take time for that industry to expand to accommodate the new labor market. Thus, we can suggest specific policies that would lessen immigration impacts that are concentrated on specific people or industries.

For example, we should make the labor market as dynamic as possible. Hiring and firing should be relatively easy. Public sector unions that protect poor performers make it their services worse and make it harder to higher good talent. Also, healthcare should not be tied to your job. This would make any specific job relationship less critical for workers since switching jobs doesn’t mean switching providers. It also reduces the cost and overhead for employers to hire new workers, especially for low wage workers where healthcare would be a significant fraction of total compensation. We can also have regulations that require immigrants to live in different areas of the country. The US is a vast economy with 54 metro areas with over a million people, and over a 100 with populations over 500,000. That’s a lot of local economies we could spread immigrants out over to avoid huge shocks to the housing markets if immigrants concentrated on specific cities. As far as specific industries, many other countries have specific point based systems to target immigrants with key skills. The U.S. largely does not do this, and we ought to.

In summary, the belief that immigrants depress wages and displace native workers is the result of a direct failure to understand fundamentally the dynamic and efficiency of the American economy. The United States is a highly advanced, knowledge-based economy that can effectively leverage additional labor by integrating it with its vast capital resources and technological sophistication. Rather than viewing immigration as a threat to the working class, it should be recognized as a potential source of economic growth and productivity enhancement, particularly in a labor-constrained environment. When there are drawbacks, our goal is to figure out how best to minimize them in order to fuel the economy and make America grow.

Observations on Parenting

I’ve recently added a new member to my family and become a first time parent! Here are some scattered thoughts and observations I’ve had about the experience. Beware all are basically projections of my existing biases as seen through a new experience.

Policy does not seem to take into account externalities of children. This is really the umbrella observation guiding many of these points. In a market economy, you pay for someone else’s time via wages. If there’s a new industry that forms from the advance of technology (say software engineer or YouTube creator), you can convince people to provide that labor in the new industry by paying them, and other industries will need to adjust to deal with more demand on the labor pool. They must either reduce output, offer better wages, or advance the productivity of their remaining workers. In this way, the labor pool for a given industry can expand or shrink based on the market forces of that industry, with some lag for education requirements.

However, you can’t change the whole pot of labor with market forces except in specific circumstances. Immigration is one of those, but we’ll set that aside for now. Let’s focus on population growth through new babies. Of course, adding a worker to the economy doesn’t just add to the supply side; new workers also buy things! You may think these cancel out, but I’m doubtful. As Adam Smith observed, the division of labor increases productivity and the more people you have, the larger economy you have and the larger the degree of division of labor and extent of the market, leading to super-linear productivity gains.

But just because some jobs’ wages go up doesn’t mean there are more babies being born; there’s no market feedback mechanism for this! You pay the worker once they are old enough to work; you don’t pay their parents to raise them! This results in a missing positive externality. The invisible hand is willing to pay for more workers to work in America’s massively productive economic engine (which we can see through huge immigration pressures). But there’s no market mechanism to pay parents to provide more workers! Thus the expensive costs are born by the family raising kids and the benefits accrue to the economy broadly, a classic positive externality problem.

Matthew Yglesias adds a related argument in One Billion Americans that is specific to the U.S.; there are positive spillover effects from having a large market in the U.S. which is fueled by an integrated largely free market encompassing hundreds of millions of productive workers. The U.S. economy, because of its size, dominates global commerce as companies seek to sell in the American market, which in turn exports U.S. cultural products and values of liberalism.

However, despite these economic and nationalistic benefits, failing fertility rates and deadlocks on immigration mean U.S. policy hasn’t really prioritized population growth. Assuming they should, it’s interesting to see from a parental perspective how U.S. policy impacts the decision to have children. Largely, it seems they work in the wrong direction.

The Baumol Effect is real. The Baumol Effect or Baumol’s Cost Disease is the rise of wages in jobs that have not seen increased labor productivity simply because of the rising salaries in other jobs. For most of the economy, jobs continually become massively more productive through the huge engine of a free market economy investing in new technology and capital. You expect to see rising wages for jobs in that industry since the workers are now more productive even as the overall cost of goods produced can continue to fall. For example, agriculture used to take up the vast majority of labor in the economy but is now a very small part, yet food is more plentiful than ever because mechanization and logistics is so advanced.

But some jobs have seen little labor productivity improvement, notably childcare; we don’t have robots or software that can take care of babies. So that labor needs to be done by parents or hired out via nannies or daycare. But today nannies, daycare workers, and especially parents have many more productive things to do in the economy because of the advanced capabilities and technology of the market. So the opportunity cost of taking care of children is massive. Being a new parent, you feel this viscerally. One week you are at a high paying intense job automating workloads and trying to streamline business processes that handle billions of dollars a year, and the next week you can’t get any sleep because you have to change diapers.

To be clear, I’m not complaining! Parental leave is actually a nice break despite the lack of sleep. But the cost to e.g. my employer and the economy broadly is almost hilarious. And yet, clearly there’s an incentive mismatch since collectively, the economy benefits if there are more children born in the long-run due to children’s eventual contributions to the economy and to innovation.

One could imagine a policy to try and encourage people to have children at a younger age when the opportunity cost to the economy is lower (since less experienced workers are probably less productive). But of course, the most likely to take advantage of this policy are probably people whose opportunity costs are lower anyway (the least productive workers), which means the benefits are skewed towards the members of the economy least needing this. Moreover, targeting any government policy directly at high earners is going to be an impossible political ask anyway.

Build more homes. One of the first things we realized is that we needed more space. However, our current job situation means we aren’t likely to stay in our current city for very long and so we had opted against buying a house when we had the option a few times given closing costs. There’s also some benefit I find from renting from a corporate run apartment complex with an always on-call maintenance staff. I’m sure at some point I’ll be more interested in DIY type repairs but not right now.

However, there’s not many options for people with children or especially multiple children who would like to live in an apartment. And my city is more affordable than most. This is of course just a small reflection of the overall housing overregulation we are imposing on the entire English-speaking world. The U.S. is actually more affordable than Canada, the U.K., or New Zealand in many cases, yet the U.S. could be so much better. The most frustrating part of this is that it would cost local governments literally nothing to allow more housing to be built. In fact, governments would likely see revenues rise as land value would be improved. Private actors are completely willing to provide desperately needed supply all up and down the market, but local governments have been coopted by literally landed interest groups to keep a lid on housing supply to monopolize already built housing.

It’s evil, it’s expensive, it saps growth, extracts rents for people who are not contributing to the economy, it violates property rights, and also as a smaller side-effect, it makes it harder to have a family! These are awful policy impacts and we should choose to do better.

Preeclampsia is pretty common. Preeclampsia is a condition that can occur during pregnancy characterized by high blood pressure and signs of damage to other organ systems, most often the liver and kidneys. It usually begins after 20 weeks of gestation. The exact cause is not known, but it is thought to be related to problems with the placenta, and it occurs between 5-8% of pregnancies.

I had the misfortune of having to see this firsthand and it was quite scary. Ultimately it led significant symptoms requiring an earlier than expected induced delivery and my child having to be in the NICU for over a week. Everyone is doing well now, but this seems like a major policy problem if we take as given that there are massive spillover effects to having more children. No one would get on a plane if there was a 5% chance of a serious complication requiring experts to be consulted just to land the plane. I’m not an expert on NIH funding categories, but it doesn’t appear that preeclampsia is a major priority. If long term economic growth matters and thus spillover effects from population growth matter, should this cause area be higher?

Artificial wombs would be amazing. The follow up to the last point: there are promising technologies that would solve the problem of preeclampsia and many others. Pregnancy sucks. It’s physically taxing, it can make women feel miserable for months, and there are serious risks of complications. If we can replace natural gestation with artificial wombs, we can likely reduce risks to both baby and mother and just make having children less stressful. It also means there’s less drag on the economy because women don’t have to trade off being in physical discomfort at work for several months or taking that time off.

A year ago ago when a tweet went viral talking about artificial wombs, there was a strange pushback I saw from people claiming it wasn’t “natural”. I investigated some of these claims the best I could on Twitter, but the argument really made about as much sense as you’d expect. “Natural” to me means dying from smallpox and dysentery. There’s nothing good or beautiful about dying in the state of nature. Preventing horrific and common complications for women giving birth in the 21st century is a no-brainer.

Emily Oster is really helpful. Emily Oster is an economist and author who publishes on parenting. Her books are written for non-academics and summarize the current findings for childcare and pregnancy. Her work makes it really clear what the data indicates on what’s important or not. She’s controversial because her interpretation of the data on drinking during pregnancy is that a drink or two a week during pregnancy does not have much negative effect. This is against the recommendation of most doctors in the U.S.

I haven’t actually heard any doctors cite specific studies to refute Oster’s position, but honestly, I’m of the position that alcohol is probably just bad for you regardless even if in moderate amounts the negative effects are small. I often go weeks without drinking anyway, so cutting down some more isn’t particularly difficult. So feel free to be more cautious than Oster on this point, but I don’t think it negates the overall benefits of her work.

Each chapter contains a nice summary of the key points, so if a couple weeks later you can’t remember the takeaways, its easy to look them up quickly and trigger the rest of your memory of the chapters. The only real concern is that her books are somewhat short and so I’ve found it important to have other child-rearing and pregnancy books available for more specific questions. However, Oster also has a LLM trained on her books and newsletter where you can ask specific parenting questions and it will find the citations related to your question and summarize an answer.

Grading 2019 Predictions

I make predictions every year to put empirical tests on my model of the world. I tend to do a lot of predictions, in order to get a larger dataset, and at the end of the year, I grade them. These were made last year in March. I’ve placed levels of confidence for each prediction with the odds I would bet on those outcomes in the vein of Bryan Caplan. I’ve created a chart at the end to show my calibration versus perfect calibration.

Trump Approval Rating end of year <50% (Gallup): 95% ✔️
~~Trump Approval Rating end of year <45% (Gallup): 90%~~ (was 45% exactly)
~~Trump Approval Rating end of year < 40% (Gallup): 70%~~
US will not get involved in any new major war with death toll of > 100 US soldiers: 60% ✔️
No single terrorist attack in the USA will kill > 100 people: 95% ✔️
The UK will not leave the EU this year: 80% ✔️
North Korea will still be controlled by the Kim dynasty: 95% ✔️
North Korea will not conduct a nuclear test this year: 60% ✔️
~~North Korea will not conduct a missile test this year: 60%~~ They conducted 10, with several launching many missiles
North Korea will not agree to give up nuclear weapons entirely, contingent on US troops staying in the Korean peninsula: 99% ✔️
North Korea will not agree to give up nuclear weapons as a result of any negotiations: 90% ✔️
Yemeni civil war will still be happening: 70% ✔️
S&P 500 2019 >10% growth (from 2506 on Jan 1): 60% ✔️
~~S&P 500 will be between 2400 and 3100: 80% (80% confidence interval)~~ was 3231
Unemployment rate December 2019 < 6%: 80% ✔️
Unemployment rate December 2019 < 5%: 70% ✔️
WTI Crude Oil price up by 10% (from $45.41): 70% ✔️
Price of Bitcoin in dollars up over the year (Coinbase – 3823 Jan 1): 70% ✔️ was $7163
Price of Bitcoin < $8,000 (does not double): 60% ✔️
Price of Bitcoin > $1900 (does not lose half value): 70% ✔️
Price of Bitcoin < $12,000 (does not triple): 70% ✔️
Drivechain opcodes not soft-forked into Bitcoin: 80% ✔️
No drivechains soft-forked into existence: 99% ✔️
US government does not make Bitcoin ownership or exchange illegal: 95% ✔️
Self-driving cars will not be available this year for general purchase: 95% ✔️
Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99% ✔️
I will not be able to buy trips on self-driving cars from Uber/Lyft/Waymo in a location I am living: 95% ✔️
I will not be able to order groceries on self-driving cars in a location I am living: 90% ✔️
I will not be able to buy a trip on a self-driving car from Uber/Lyft/Waymo without a backup employee in the car anywhere in the US: 80% ✔️ This is tough. You can get self driving cars in Phoenix, but only if you’re part of the Waymo beta and so far they are free, so no “buying”.
The artificial general intelligence alignment problem will not be seen as the most important problem facing humanity: 99% ✔️
Humans will not be in lunar orbit in 2019: 99% ✔️
SpaceX Falcon Heavy rocket will launch again this year: 90% ✔️
~~SpaceX will bring humans to low earth orbit: 60%~~
SpaceX will test the “Starship” mock up this year: 70% ✔️ (pretty sure I just meant this giant water tower thing, not a real launch)
Mexican government does not pay for wall: 99% ✔️ (lol)
Border wall construction not complete by end of 2019: 99% ✔️ (some construction occurred, mostly replacing existing wall)
National Debt increases by >$1 trillion (from
$21,943,897,000,000): 90% ✔️ (was $23.201 trillion on Jan 1 2020)
There will not be a significant decrease in trade barriers between US and China from pre-2017 tariff levels: 90% ✔️
Democratic RCP front runner will not be Bernie Sanders: 80% ✔️ (front runner on Jan 1 was Biden)
Democratic RCP front runner will not be Kamala Harris: 80% ✔️
Democratic RCP front runner will not be Beto O’Rourke: 80% ✔️
Trump not removed from office or resign: 95% ✔️
~~Trump not impeached: 70%~~ I was not expecting this
~~No CRISPR edited babies will be born: 80%~~ (it turns out the researcher responsible for the two 2018 CRISPR edited babies had already treated a third unborn child in 2018 when the story broke. Apparently the third baby was born in 2019 if you carefully read Xinhua, so technically this prediction is wrong, although I meant no other researcher would do anything. Remember to properly word your predictions!)
No full year US government budget will be passed (only several months spending): 90% ✔️ (they basically only do continuing resolutions now)
Some tariffs raised: 90% ✔️ (like a bunch)
Trump administration does not file a lawsuit against any news organization for defamation: 90% ✔️

I got 4 of 6 predictions correct at 60% confidence
I got 7 of 9 predictions correct at 70% confidence
I got 7 of 9 predictions correct at 80% confidence
I got 8 of 9 predictions correct at 90% confidence
I got 7 of 7 predictions correct at 95% confidence
I got 6 of 6 predictions correct at 99% confidence

Overall, not bad at all, and we should note that from last year’s grading, my 60% confidence predictions have tended to be overconfident. I only had 6 of those predictions this year, so actually 66% is the closest I could have been to perfect calibration. 70% also ended up being a bit overconfident, but a single additional missed prediction here would have dropped me down to 66% as well. Had I moved one of my correct 70% predictions to 80%, I would have been perfectly calibrated.

Combining this data and data from last year gives:

I got 11 of 15 predictions correct (73%) at 60% confidence
I got 14 of 20 predictions correct (70%) at 70% confidence
I got 14 of 17 predictions correct (82%) at 80% confidence
I got 14 of 15 predictions correct (93%) at 90% confidence
I got 16 of 17 predictions correct (94%) at 95% confidence
I got 10 of 10 predictions correct (100%) at 99% confidence

In 2018, as I noted in the post last year, I should have made some of my 60% predictions at a higher confidence, but other than that, these predictions are remarkably well calibrated if I do say so myself.

I hope to post my 2020 predictions soon.

A Twitter Digression on Trade and China

This week I saw an absolutely horrendous take on Twitter by Chris Arnade and felt compelled to discuss it. This is partially because the positions are incorrect, but also because his discussion itself was in bad faith and actively worsens our dialogue. Are there bad takes on Twitter every minute? Yes, but hey, I saw this one.

Here is the thread:

https://twitter.com/Chris_arnade/status/1181524435163058176

First, let’s start with the object-level fact that hundreds of millions of people were lifted out of poverty in China. The intentions of the advocates of free trade isn’t relevant to this fact, what’s relevant is whether a particular policy improved the well being and life expectancy of millions of people. This is equivalent to claiming Jonas Salk was only in it for the name recognition, and therefore, we shouldn’t have used the polio vaccine.

Next, Arnade is simply wrong about the intentions of his political opponents, claiming they only support free trade because of greed. He then obfuscates the target of his accusations by using the ever popular term “elites”. Free traders have been talking about the moral benefits of trade forever. Friedman wrote Capitalism and Freedom in 1962, 10 years before Nixon’s visit to China, and The Economist was founded to repeal the Corn Laws in 1843. Saying Milton Friedman was defending free trade just to make money off of China’s market liberalizations decades later is just lazy argumentation.

So Arnade is wrong about their intentions, but are these even the “elites”? As far as I can tell Chris doesn’t have a good definition of elites. I noted in the past:

Tagging @EconTalker @Chris_arnade. The final discussion of faith also seemed incorrect. I don't know how Chris defines elites, but income doesn't predict church attendance that well. https://t.co/lQ06tBXz8X
— JSM 🏗️ (@postlibertarian) July 25, 2019

He claimed on his interview on EconTalk, that while elites are abandoning faith, it remains an important aspect of life to more everyday people. This divide is not borne out by the data. Income doesn’t predict church attendance, and according to Gallup, the difference in church attendance between college educated and non-college educated is within the margin of error. If you want things that predict church membership, you should use age (young people are less religious) or political ideology (those identifying as “conservative” are far more likely to go to church than those calling themselves “liberal”).

If Arnade doesn’t have a good definition of elites, then it seems pretty duplicitous to then claim “elites” have any particular position since we can’t identify who he is talking about. Even if such a group existed, surely there would be many different positions and ideas within this group. Not for Chris though, everyone in this group is one in the same. And it seems especially malicious to then claim that not only does this group with no definition exist, but they have specific stated incorrect claims! In fact, Arnade has identified these claims from an imaginary group as fake and then reveals the “true” beliefs which are, of course, simply greed. This is not just a strawman, ladies and gentleman, but indeed strawwomen and strawchildren too.

It’s plausible that someone could have disagreements with free traders, but just ignoring their arguments and claiming they’re only after money is a terrible way to learn and improve our understandings of the world. We should be engaging with each other’s ideas sincerely, not attributing hidden values to people we disagree with. I guess I find this especially upsetting because EconTalk, Russ Roberts’ podcast, does such a good job of emphasizing those values of charity and understanding, and Arnade was recently a guest on that podcast. To see someone who was treated very charitably turn around and be so underhanded on Twitter is quite disappointing.

Let’s return to China. Arnade discusses a “deal” where the U.S. allowed human rights abuses hoping that democracy would follow. I know of no one who has ever said that. In fact, the opposite occurred: the Cultural Revolution killed 500,000 people, ending in 1976 and following the Great Leap Forward which killed some 18 million people in the lowest estimates. Since trade liberalizations began, nothing on that scale has occurred again.

The interest in China from Nixon was as a tool in the Cold War against the Soviet Union. Democracy was really not the goal. Moreover, the U.S. didn’t dictate to China to liberalize its economy, the market liberalizations were largely from within Deng Xiaoping’s government. In fact, I’m not really sure the U.S. would even be able to extract human rights improvements through protectionist policies. What is the model we would base it on? Cuba? Iran? North Korea? Venezuela? All have become wonderful bastions of human rights following American sanctions.

Also, I should bring up the simple libertarian critique that even if you have the perfect policy, the perfect knowledge of exactly how a foreign government will react to sanctions and trade agreement details, government is not an impartial executor of policy. Democratic forces and interest groups will always mutate policy as it passes through government, and it will not be implemented in the idealized fashion you might like. For example, what does the phrase “U.S. foreign policy human rights record” conjure up?

It’s true that China has not become a democracy, while many foreign policy types certainly believed it could happen, particularly in the 90s. Chris seems to think he predicted this outcome (not cited). Suppose you knew this, would you change policy? In a choice between a poorer China without democracy and a richer China without democracy, it seems we should choose the richer one because, you know, we want good things for all humans, not just people who live in the same country as us.

Finally, let’s get to the economics here. There is no “us” who “exported our factories”. Individual firms make decisions in a complex economy. And those decisions have been that as a percentage of the total, manufacturing jobs peaked in the 40s prior to the establishment of the People’s Republic of China:

Arnade seems to understand that as he cites the recent scandal in the NBA where the Houston Rockets GM tweeted in support of the Hong Kong protesters, and quickly deleted it under a firestorm. Yet, Arnade switches between U.S. trade policy, governed by Congress (allegedly), and private firms making profit maximizing decisions without bothering to differentiate them.

It’s unclear exactly how Arnade wanted U.S. policy to intervene to stop private firms from making their own decisions. He cites an upcoming book, but provides no details. He also cites anti-labor policy, and I have heard similar discussions from economist Noah Smith, and many others associated with the new neoliberal movement. My problem is that given all the weird deceitfulness and strawmanning, I have no reason to trust Chris when we finally get to the policy discussion. I agree with him that the NBA or Blizzard caving to the Chinese government is a bad thing, but saying more robust industrial policy would have changed that is a non-sequitur.

Moreover, there are still tons of benefits from trade with China. The smartphone revolution changed the way we interacted with the world, and mostly in good ways I believe. This happened in part because of Chinese manufacturing allowing anyone to buy a highly complex piece of technology for cheap. On the other hand, technologies we have a dimmer view on today, like social media, are entirely U.S. grown.

There are problems in the world today, but we need to improve our level of dialogue if we want to solve them. Refusing to engage with well known arguments that critique your position and instead going on uncharitable Twitter threads is something we should avoid.

The Immigration Tariff in 500 Words

Immigration liberalization is one of the policies this blog has described as highest impact. It could have massive benefits to both immigrants and native born citizens in the United States and other developed countries. Immigration bypasses the need to solve the extremely difficult problem of “building good institutions” which is a mercurial and sparsely solved goal in development. By moving people directly to societies where good institutions already exist, we don’t have to make them. OpenBorders.info also suggests free movement of people could double world GDP, with smaller migration seeing proportionally smaller but still substantial growth.

The United States is uniquely positioned to absorb immigration. It is the largest developed country by both population and GDP by significant margins (developed country referring to either OECD member or country with HDI > 0.8). By nominal GDP the US economy remains the largest in the world, and by PPP it is second only to China. Unlike China, the US is the only large country with a large foreign born population, and indeed the US has the largest foreign born population in the world at over 46 million. The US also has a long history of immigration contributing to its excellent position as an immigration destination.

Given this blogs inclination towards the benefits of markets, self determination, and individual rights, our default position should be in support of more liberalized immigration. Current immigration policy is geared towards family connections despite much of the potential benefits of immigration stemming from economics. The U.S. also takes in less immigrants as a percentage of its population than other developed nations, despite the previously mentioned advantages the U.S. has in absorbing immigration.

Originating from economist Gary Becker, an immigration tariff would allow prospective immigrants to pay a tax or fee to enter the country and work. We have a somewhat similar although highly limited current system with H-1B visas which are sponsored by companies for employees. Expanding this and accounting for age and level of education, Congress could create a tariff schedule for various immigrants based on potential costs and tax revenue from these immigrants. They could also simply sell off additional green cards after the current legal green card approaches were filled in the current year. The Cato paper linked goes into more detail.

The benefits of any such system would be to guarantee that immigrants with the skills and ability to work productively in the United States would be able to do so, with additional monetary compensation provided up front to the U.S. to avoid any potential risk of those immigrants becoming a net cost on society. This would see benefits in terms of additional labor, entrepreneurship, and economic growth.

The issue with this approach is that immigration is a highly divisive political issue. Republicans would be unlikely to embrace this proposal due to their base’s opposition to apparently all immigration. Democrats may be more interested, but may balk at the notion of people “buying” their way to the front of the line.

2019 Predictions

I’ve made predictions for the past several years, and here are my predictions for 2019, a bit late. I’ve noticed that when discussing politics or difficult subjects with other people with whom I have strong differences, a possible avenue of understanding is to make a prediction about the world with odds. Most people don’t accept these bets or predictions, which I think are one of the best ways to test different models of the world against each other. Nonetheless, I think it’s personally beneficial to list predictions and accompanying odds each year to see test my model of the world.

Trump Approval Rating end of year <50% (Gallup): 95%
Trump Approval Rating end of year <45% (Gallup): 90%
Trump Approval Rating end of year < 40% (Gallup): 70%
US will not get involved in any new major war with death toll of > 100 US soldiers: 60%
No single terrorist attack in the USA will kill > 100 people: 95%
The UK will not leave the EU this year: 80%
North Korea will still be controlled by the Kim dynasty: 95%
North Korea will not conduct a nuclear test this year: 60%
North Korea will not conduct a missile test this year: 60%
North Korea will not agree to give up nuclear weapons entirely, contingent on US troops staying in the Korean peninsula: 99%.
North Korea will not agree to give up nuclear weapons as a result of any negotiations: 90%
Yemeni civil war will still be happening: 70%
S&P 500 2019 >10% growth (from 2506 on Jan 1): 60%
S&P 500 will be between 2400 and 3100: 80% (80% confidence interval)
Unemployment rate December 2019 < 6%: 80%
Unemployment rate December 2019 < 5%: 70%
WTI Crude Oil price up by 10% (from $45.41): 70%
Price of Bitcoin in dollars up over the year (Coinbase – 3823 Jan 1): 70%
Price of Bitcoin < $8,000 (does not double): 60%
Price of Bitcoin > $1900 (does not lose half value): 70%
Price of Bitcoin < $12,000 (does not triple): 70%
Drivechain opcodes not soft-forked into Bitcoin: 80%
No drivechains soft-forked into existence: 99%
US government does not make Bitcoin ownership or exchange illegal: 95%
Self-driving cars will not be available this year for general purchase: 95%
Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99%
I will not be able to buy trips on self-driving cars from Uber/Lyft/Waymo in a location I am living: 95%
I will not be able to order groceries on self-driving cars in a location I am living: 90%
I will not be able to buy a trip on a self-driving car from Uber/Lyft/Waymo without a backup employee in the car anywhere in the US: 80%
The artificial general intelligence alignment problem will not be seen as the most important problem facing humanity: 99%
Humans will not be in lunar orbit in 2018: 99%
SpaceX Falcon Heavy rocket will launch again this year: 90%
SpaceX will bring humans to low earth orbit: 60%
SpaceX will test the “Starship” mock up this year: 70%
Mexican government does not pay for wall: 99% (lol)
Border wall construction not complete by end of 2018: 99%
National Debt increases by >$1 trillion (from
$21,943,897,000,000): 90%
There will not be a significant decrease in trade barriers between US and China from pre-2017 tariff levels: 90%
Democratic RCP front runner will not be Bernie Sanders: 80%
Democratic RCP front runner will not be Kamala Harris: 80%
Democratic RCP front runner will not be Beto O’Rourke: 80%
Trump not removed from office or resign: 95%
Trump not impeached: 70%
No CRISPR edited babies will be born: 80%
No full year US government budget will be passed (only several months spending): 90%
Some tariffs raised: 90%
Trump administration does not file a lawsuit against any news organization for defamation: 90%

I’d like to comment on every prediction, but I’m afraid it would take too much time. The predictions I find most interesting are whether the UK will leave the EU. I’m going by what predictions markets say, but I’m not really sure it will play out with only a few weeks to go and no deal. I’m also quite interested in the Democratic Presidential primary race, but I’m afraid the nomination will be trending towards someone pretty left wing. I’m also interested in whether Trump will be removed from office. I put the chances of Trump being impeached at 30% to stay in line with prediction markets, but my gut is that I should put that chance even lower.

Bitcoin and Energy: Everything is Actually OK

I found many arguments that Bitcoin wastes energy to be lacking, so I decided to write up this post. However, it’s gotten pretty technical, so be warned.

TL;DR:

Bitcoin is an economic activity like any other, and thus it has associated input costs that are paid for by its users. Its costs just happen to be very clear and singular (electricity)
I go over several technical ways we could change the Bitcoin protocol to achieve Pareto improvements and why I don’t think they would work, or work only marginally.
I discuss how Bitcoin counterintuitively may help renewable energy rather than just rack up carbon emissions.

Economically Efficient

I’m defining “wasteful” as economically inefficient.

First, why I think referring to Bitcoin’s energy consumption in terms of economic efficiency makes sense.

Bitcoin mining is economic activity. It provides the service of securing and running the Bitcoin network. Like all economic services, there are costs associated with providing it. Reddit is a website that provides the service of an online forum and discussion, and it has associated costs. Some people don’t use Reddit or find that Reddit is a time sink, they might say that Reddit is “wasteful”, after all, they don’t use it, and they could think of better things to do with the resources. In another example, some people might be uninterested in baseball and thus believe that the New York Yankees are a waste of resources. They use space for their stadium, training facilities, and offices, they use energy to run those facilities, and they use advertising space to promote their organization where more useful things could be advertised, like charity. I think this usage of “wasteful” is fine for both Bitcoin and the New York Yankees, but this seems to be more an argument about preferences or about Bitcoin being a bad thing that exists in the world regardless of its resource use. There’s nothing really economically inefficient with Reddit’s existence or the existence of the Yankees; people want the services those organizations provide, they provide them, and they fund it through ads on a website or ticket sales to baseball games.

Bitcoin mining provides something that literally didn’t exist before 2009; the ability to send digital value across the internet with no third parties, or at least no specific third parties. This is technically impressive and apparently highly valuable. To do this, the Bitcoin network had to solve all the problems normally solved by the banking and payment system, including how to prove authentication when sending money, how to check you actually have the money you are sending, how to avoid double spending, how to achieve consensus on the current state of the network and transactions, and how to survive malicious attacks on the network, all without state support, or in fact any third party of any kind. This is remarkable, and to provide this difficult service securely, the network relies on Proof-of-work by miners. Just like the New York Yankees, Bitcoin’s services aren’t used by everyone, yet they still have costs associated with with providing their services, used by many around the world. This work done by miners isn’t wasted any more than the Yankees’ investment in staff, facilities, or their brand.

So how do Bitcoin “consumers” pay for their service? Each transaction has a fee associated with it, which is given as a reward to miners for including the transaction into the next “block” or batch of transactions. Additionally, the protocol slowly adds new Bitcoin into the system by including a block reward for the miner who finds that block. Thus each block has a reward for the miner, which is what Bitcoin users are “paying” to miners to keep the network safe.

In fact, this is where articles that discuss how much energy Bitcoin is using come from: they are taking the current market value of the block reward (12.5 Bitcoin @ $5000/Bitcoin today) and multiplying that out for a year. One block every 10 minutes and 525,960 minutes in a year means 52,596 blocks worth a total block reward of $3.3 billion a year and probably more with transaction fees. Bitcoin mining is competitive; you only get the block reward if you solve the hashing problem first. Consequently, margins are tight. That means there are big incentives to only use the most efficient hardware (efficient in terms of hashes/kilowatt hour) and the cheapest electricity. Depending on your estimate of what miners are paying for electricity, you can divide 8 cents a kilowatt hour or whatever into the ~$3.5 billion to get a these massive energy estimates. Of course, we should note we don’t really know what percent of earnings goes into R&D for ASIC design and manufacturing costs, rent, etc.

But in my view, it doesn’t really matter; all of these costs are paid for by Bitcoin users in order to use the network. The energy input into the Bitcoin network is determined by the block reward and price of Bitcoin; if Bitcoin and Bitcoin transactions are in demand, the block reward is higher, and miners spend more resources on energy and chip manufacturing. If the demand is lower, they spend less. It’s analogous to people who pay to go to Yankees games; if the demand is higher and fans are willing to pay more for tickets, the Yankees can spend that on advertising, improving the stadium, or getting better players, etc.

Technical Improvement Proposals

Next, technical counterarguments would demonstrate that this ability to send value across the internet with no third party can be done for cheaper than is currently available with Bitcoin. I will now go over the best arguments I know of.

No Block Reward

Currently, miners complete work through hashing to solve a difficult problem. The problem can only be completed with brute force, meaning you just need to run as many hashes as possible to solve the problem. The way this is done today is with specialized hardware and electricity as noted above. However, it is a protocol design that Bitcoins are added to the network with each block that is mined (and this is a pretty useful idea for bootstrapping a digital currency when none existed). We can quickly imagine a cryptocurrency that is identical to Bitcoin except no new coins are added, the ~17 million that currently exist are the grand total. Each block only gets transaction fees rewarded to the miners.

It seems in this case that we have recreated all the value of the Bitcoin network for users, but have reduced the input of electricity on the cost side. Ignoring the usefulness of the block reward for bootstrapping Bitcoin, isn’t this an efficiency gain?

It depends on how liquid and efficient the Bitcoin/dollar exchange market is. If Bitcoin was unexpectedly changed so that no more coins were created, the market cap of Bitcoin (total units of account * exchange rate per unit) would soar, by the net present value of all future coins that are no longer going to be produced. It’s hard to say exactly what that is, but it’s about 3.6 million coins, with the majority produced in the next 10 years. The value would be at least a few billion dollars, maybe as high as $10 billion depending on the discount rate. The current market cap is about $87 billion so that’s not a huge percent increase in price, but it’d be notable. That means if transaction fees in Bitcoin remained constant, in dollars they’d increase by a similar amount forever, unlike the fixed block reward which decreases over time.

In an efficient market, we’d expect this increase in transaction costs due to the higher market price of Bitcoin to exactly offset the reduction in block reward. In other words, current Bitcoin holders are “paying” for the block reward though a reduction in net present value of Bitcoins they hold today. Simply removing the block reward doesn’t change that, it just moves value around.

However, markets may not be that efficient. Dollar/Bitcoin exchanges seem relatively liquid, but they are certainly less liquid than traditional stocks. Additionally, I’m not sure you can borrow money from an exchange to invest in Bitcoin, which is also a sign of an underdeveloped market. So we can imagine a hypothetical world where the Bitcoin protocol originally had much smaller block rewards or had reduced its block reward more quickly. In this world, it’s possible we could achieve a net decrease in total energy expended even with a likely higher price. However, I’m not sure we could know which direction the market inefficiencies would go; perhaps the price of Bitcoin would “stick” higher, meaning higher priced transactions outweigh the reduced block reward.

A final point to be made for this counterargument; transaction costs don’t have to remain constant in Bitcoin terms in this hypothetical. If Bitcoin prices go up, transaction costs might remain the same in constant dollars since users will probably continue to demand transaction space on the blockchain at the same level as before. We do however, have empirical evidence that transaction fees in dollars have correlated with the dollar/Bitcoin exchange rate, and even perhaps in pure Bitcoin terms.

If this argument is true (and so far I don’t believe it is), it should also be noted that it would imply Bitcoin will get more efficient over time as it moves towards smaller block rewards.

Inefficiencies Due to Fixed Bitcoin Protocol Constants (Block Size)

In a theoretical free and efficient market, consumers demand goods with downsloping demand curves, producers supply the good with upward sloping supply curves. Where the curves meet, there is a market clearing price and quantity. In Bitcoin, consumers demand transactions (or transaction space) on the blockchain, but producers don’t produce blockchain space; they produce hashrate, or perhaps “security”. The transaction space is fixed by protocol.

This means that total transaction fees could theoretically be lower if the fixed transaction space (i.e. block size) was changed. This would be determined by the slope of the demand curve for Bitcoin transactions. A shallower slope would mean shifting the supply curve to the right will increase the value of total transaction fees, even if each individual fee drops. A steeper one would mean total transaction fees could drop. It’s been pretty common for Bitcoin blocks to be less than the maximum for the past year, so I’m skeptical that a larger block size would lead to a drop in total transaction fees, and I suspect even if it there was a drop, I don’t think it would be massive in magnitude. Nonetheless, I think this is an argument that Bitcoin could achieve the same ends and be slightly less wasteful, but it needs more empirical evidence.

Proof-of-Stake

This section is a reiteration of Paul Sztorc’s “Nothing is Cheaper Than Proof of Work”.

Suppose instead of hashing and Proof of Work, new transaction fees went to current holders of Bitcoin. This “Proof-of-Stake” would demonstrate commitment to the blockchain’s success not through investment of mining hardware but rather direct demonstration of stake in the blockchain through ownership of the currency.

Firstly, I still have some doubts that this allocation of new currency can actually be done without any actual work. Casper (Ethereum’s proposed Proof of Stake system) requires some calculation as to which random number to pick, which determines which staked coins get the transaction fees. It would be highly valuable to affect that calculation, and it seems optimistic to suggest there will be no way to influence it. But Ethereum isn’t my specialty, so I’ll concede it’s actually possible despite it not existing today.

In Bitcoin, miners spend the equivalent of the block reward and transaction fees every 10 minutes in order to compete and be in the best position to obtain that reward. In Proof-of-Stake, Validators still have to deposit coins to be staked. They risk these coins, because if they misbehave and disagree with other Validators, they can lose them. The amount deposited determines likelihood of receiving the transaction fees, and so these are just a form of “bonds”. Returns to bonds are analogous to returns to mining resources. Value locked up in bonds could have been used in other more productive parts of the economy. The opportunity cost isn’t as externally obvious as the electricity used in Bitcoin mining, but it is nonetheless there and it is identical. Locking up value in validation bonds isn’t a permanent thing, whereas investing time, money, ASICs, R&D, and electricity in Bitcoin mining cements that value into silicon and heat which can only be used for one thing. Thus the returns to mining are going to be higher on a per percentage basis to account for the increased risk.

We already pointed out that the cost of Bitcoin mining is a consequence of the block reward. The block reward if Bitcoin switched to a Proof-of-Stake system would still be the same. But because buying validation bonds isn’t as risky as tying up resources permanently into silicon and electricity, there will be significantly more resources tied up in Proof-of-Stake for any given level of block reward/transaction fees (because the market will keep putting more until the rate of return reaches the market rate for the given risk level). There is thus no free lunch with Proof-of-Stake; users of Bitcoin are auctioning off a block reward/block transaction fees worth of value every 10 minutes, and so a competitive market will form to always provide that value at that opportunity cost, whether that cost is through validation bonds or mining.

My view here is agnostic on whether PoS is a “better” system than PoW, just that PoS doesn’t eliminate the mining cost from the system.

“Useful Work”

What if you used Bitcoin mining to do “useful work”? One counterpoint is that mining is already useful work, since Bitcoin users are paying billions of dollars for it a year. Another is that using Bitcoin for some useful work wouldn’t change anything if miners can capture the benefit of the useful work. For example, using mining rigs for heating in the winter allows you to profit more. But this is equivalent to an increase in mining ASIC efficiency which happens all the time. The network uses this extra efficiency to increase the hashrate, the difficulty level adjusts (the network aims to always have a new block average every 10 minutes) and we are back to where we were, same energy used, but now with a higher hashrate.

However, what about useful work that was a positive externality? For example, finding prime numbers? Assuming away all the difficulties with this specific example, like how hashes are much easier to check than prime numbers, if the work resulted in a true positive externality public good, like information becoming public, then that has to be an efficiency gain.

It should be noted that the work can’t be too useful because if it’s profitable enough where any single individual could benefit given the cost to mine, then lots of people would start mining for the benefit of the work itself. In which case, this would be treated again like an increase in efficiency with the difficulty level increasing significantly until the marginal cost of mining again equaled the total marginal revenue of both block reward/transaction costs and the public good. But assuming it’s not usually profitable, the benefits could be so spread out across society that there is no way for an individual to benefit, yet there benefit at the societal level. I just don’t see “finding prime numbers” as fulfilling that value, but I’m open to other suggestions. Given the current value of mining is over $3.5 billion a year, I think the useful work would have to have a value that’s a significant fraction of that to matter in terms of efficiency gain.

Carbon Emissions, Regulatory Arbitrage, and Renewal Energy

Bitcoin mining is location independent. That means it will only be undertaken in locations where the input values are cheapest in the world. We don’t actually know where Bitcoin mining is done, but we have some guesses based on information in blocks mined by companies and where the coins are deposited (see this article). The majority is certainly in China due to proximity of the world’s computer manufacturing base there. Miners in other countries would have to wait for mining material to be shipped to them, which could be out of date by the time it gets there. Eventually, we would expect diminishing returns to slow the rate of improvements in ASICs, which would allow non-Chinese miners to utilize mining equipment before it becomes antiquated. That means they could use their locally low price of electricity to their advantage.

That also means that the Bitcoin network could be optimizing for polluting energy, like fossil fuels that are incorrectly priced (i.e. lack of carbon tax). A country that creates a carbon tax would make fossil fuel energy more expensive, and Bitcoin miners there unprofitable, so they might switch to a country without a carbon tax, thus polluting more. This is a regulatory arbitrage and is an efficiency loss.

However, there are caveats to this argument. One is that many countries, including the ones with the most Bitcoin miners, China and the U.S., never had carbon taxes. Bitcoin blew up there because of their technical advancement and network effects of their tech economies (hardware and software respectively). If they were to implement carbon taxes, and miners then left, that would be an inefficiency brought about by Bitcoin.

Another caveat is that Bitcoin is highly efficient in finding the cheapest energy sources. Many renewable sources of energy are very cheap on a per kilowatt hour basis, and so Bitcoin has actually acted as an incentive for expanding renewable energy (see Morocco).

Bitcoin’s monetary existence, unstable though it is, provides a floor underneath which states can no longer mismanage their currency, or else those states risk their population turning to Bitcoin instead. Similarly, Bitcoin mining’s existence means that there is a floor under which local energy prices won’t be able to drop. This is good, as locally cheap (not globally cheap!) energy means that demand is lower relative to supply in a given area, but it’s too expensive to build transmission lines to other areas where energy is more in need. Compared to a world without Bitcoin mining, mining creates value from cheap local energy which can then be transported digitally. The beneficiaries are the users of Bitcoin who get a payment network that literally didn’t exist before. It is paid for with locally cheap energy around the world that had excess supply. There are also secondary effects as users and miners are better off and the wealth effect on their behavior will be to increase some spending, some of which should enrich people who live in already energy expensive areas. This means some people in expensive energy areas will see a cheaper relative cost of energy.

Final Notes

A couple other arguments that I hear a lot but I don’t consider to be challenges to this view.

Bitcoin mining leads to centralization. This is true empirically, but not an argument that it’s wasteful, just that it’s bad for Bitcoin.
Bitcoin uses a lot of energy. This is basically the argument I’m opposing and it is very common. I’m not saying Bitcoin doesn’t use a lot of energy, I’m saying it provides a service and has associated costs and expenses.
Bitcoin has no use cases. The empirical evidence seems to contradict this, as billions of dollars of Bitcoin transactions happen every day. If you need some more discussion on what Bitcoin is used for, check out my previous post on the subject, or check out this useful page from the EFF on how payment service providers can be used to censor free speech.

Things Mars Can Export

Imagine an economy on Mars or the Moon. Some people move there, excited about the chance to live on the new frontier of human development. They set up shop and start providing services and goods to each other. They’ll need jobs like metallurgist, construction worker, physicist, farmer, material scientist, physician, etc. The technician with the 3D printer will trade with the computer repairwoman who will trade with the doctor who will trade with the solar panel producer. Certainly very early colonies won’t do much trading and work more as a cohesive unit, with specific team members and job duties, running as a ship’s crew or military base more than a small town. But eventually once the outpost becomes big enough, trade will occur.

What will they use for money? Well, it’s not the point of this post, but I’d like to take a moment for speculation anyway. It’s possible that the centralized group that creates the space colony will see this problem ahead of time and establish their own currency. But it wouldn’t take much for someone to introduce a simple Bitcoin fork to create their own blockchain. Such a currency would only require an application running on a computer, something the colony would likely have lots of. I’ve written before that Bitcoin isn’t that great of a currency at present, but it does have benefits if your local currency is already pretty bad, see Venezuela. On Earth it functions as a floor beneath which local currencies can no longer do worse than. However, on Mars, the local currency would have a lot of uncertainty surrounding it. Maybe a bank has been set up, but why would people trust the bank? It doesn’t have a long history of trustworthy monetary policy like some Earth central banks do.

Suppose SpaceX sets up a Martian colony and creates a bank to hold everyone’s dollars. It’s too long to wait to ping back to Earth (average message/reply round trip is 6-40 minutes) to transfer Earth currency, so you’re left with trusting SpaceX’s bank that they won’t mismanage the currency, even though SpaceX doesn’t have any experience managing currency. Well, what if some enterprising people come over with a “MarsCoin” clone of Bitcoin, running a blockchain on Mars? You can send the code to Earth for audit, then run the code yourself on a local network of servers. If the block time is lower than it takes for a return ping to Earth (almost always true even if you’re using the 10 minute blocks of Bitcoin, which could be shortened), then you have a decentralized, trusted currency that’s much simpler than relying on distant Earth institutions or unproven Martian ones. Of course, then you need a special interplanetary blockchain to move currency between Earth and Mars with a very slow block speed, but we’re getting off on a tangent.

We have established that there will be a way to trade on Mars and between Mars and Earth. Mars will obviously have things it needs to buy from Earth, like difficult to manufacture parts, engineering and consulting services, and likely entertainment. But what will they be able to export to Earth? A country that can only import goods probably can’t sustain itself, unless there was positive immigration. We can thus treat reasons to immigrate to Mars as part of the answer to what Mars can export. I have compiled a list of possible ways the Martian economy can maintain a stable exchange rate with Earth.

Science

Science is the clear primary export of Mars today. As Robert Zubrin states in this excellent video, we believe Mars had liquid water on its surface for a long time, perhaps a billion years. On Earth, life showed up much sooner than a billion years after liquid water appeared. If we go to Mars and find evidence of life, that would help prove that the development of life is pretty common in the universe. On the other hand, if we don’t find much evidence of life, that could help point out that life isn’t very common on in the universe. Evidence of current or past life, could also help us determine whether all life is similar to that of life on Earth, using DNA to create amino acids and so on. These questions are “…real science. This is fundamental questions that thinking men and women have wondered about for thousands of years.”

From an economic standpoint, it’s clear that scientists on Earth are willing to pay billions of dollars for this data. They might send their own scientists to Mars, which would count as positive immigration, or they might hire Martians to conduct the science for them, but it’s clear that scientific interest in Mars is worth billions. It’s also worth mentioning that other celestial bodies would also have this benefit, the Moon likely less so than Mars, and Jupiter’s moons perhaps similarly valuable.

Tourism

Space tourism also seems like an important industry for a space colony, although perhaps not Mars. Andy Weir’s Artemis takes place on the Moon and space tourism is an important export industry. Tourists visit the Apollo 11 landing site and jump around at 1/6 Earth gravity. It seems likely that similar tourism might function on Mars, although there are serious limits. For example, the trip to Mars takes months, would occur in essentially zero-g, and usually is only done one way every two years. Large rooms with windows would seem both vital for any tourism industry and highly impractical without radiation shielding. Vacationing for a week on Mars wouldn’t be practical, unlike taking a week or two week vacation to the Moon. Perhaps a two year long sabbatical would appeal to some people, but probably not most. A more efficient transportation system, such as an ion drive ship between the planets might reduce the travel time or allow for interplanetary travel even when the planets are not close in their orbits. But until then, tourism is likely to be very limited.

Martian Souvenirs

If tourism is limited, perhaps actual Martian rocks will be more highly valued. Those might be much simpler to ship to a mass audience on Earth. Given the monopoly Martians would have on this industry, they could theoretically charge a hefty markup. This is, of course, in addition to the scientific relevance the rocks would have. On the less positive side, there may be regulatory issues for bringing alien rocks to Earth. Fears of alien bacteria that could kill everyone on Earth might cause prohibitions. Such a threat seems unlikely, but import bans are often irrational.

Reduced Launch Costs

Of all the rocky places in the solar system to launch a rocket, the surface of Venus with its Earth-like gravity, sulfuric acid rain, and insane heat, is probably the worst one. But Earth is a close second. Rocket launches must accelerate out of the “gravity well” of wherever their launch site is and then expend the energy needed to get to their target transfer orbit. Escaping the gravity well is very difficult on Earth’s surface. The Apollo program required very little fuel to get off the Moon’s surface because the gravity was so reduced (and the Moon has no atmosphere). Thus, the energy needed to get off of other rocky surfaces in the solar system is much less than Earth. Mars also orbits further out from the sun, which means you also need less energy to get to a transfer orbit to the asteroid belt or outer solar system. Thus, one economic benefit would be to offer Mars as a cheaper launching point for outer solar system exploration.

However, if you need to first bring an entire rocket and fuel to Mars before departing for your eventual target, you’re better off just leaving from Earth directly without dipping into the shallower, but still significant Martian gravity well. For this to be valuable, you’d need to be able to build the rocket on Mars, which seems much further off than the other ideas discussed here, or you’d have to create the fuel on Mars. This may be possible; SpaceX’ plan is to use the carbon dioxide in the Martian atmosphere and water ice on or near the surface to produce methane and oxygen as rocket fuel. One might also be able to find an asteroid or comet with water ice, carbon dioxide, or even methane, and bring it into orbit around Mars or the Moon, avoiding having to accelerate it into and out of Earth’s gravity well. Rocket manufacturing could then use a combination of terrestrial, martian, or lunar parts and fuel, supplemented by materials already in orbit, or even manufacturing plants in orbit. This could be sustainable in the long term. Asteroid mining would be extremely lucrative, with perhaps tens of billions of dollars in potential profit. If an asteroid mining company believed Mars, or the Moon could save them launch costs, they would likely purchase property, bring equipment and employees, and thus improve the Martian trade balance.

Natural Resources

Mars also has an abundance of natural resources in various compounds where they may be more common than on Earth. These include halogens, organic compounds, and deuterium. The extent and speed at which these will become useful to export from Mars are unclear, but they may eventually be useful as a source closer to the outer solar system than Earth, due to the reduced launch costs. Editing note: I decided to add this as separate category later after discussing this post.

On-Site Entertainment Production

This is another odd case, but it may be more immediately plausible than launching exploratory rockets from Mars. The low gravity of Mars or the Moon would allow for a different type of videography, with actors that actually weigh less able to jump large distances. This could be literal as for science fiction films that need to take place in low gravity, or perhaps more creative and unusual projects that endeavor to take advantage of this location in ways we have not yet conceived of. Again, however, the Moon may be a more accessible location than Mars, given the length and difficulty of travel.

Medicine

From what we know about the human body in lower gravity environments, the health effects are largely negative. There may be the possibility that osteoarthritis would be improved by living in a low-g environment, but anyone who has that problem would likely be old and might suffer from other problems. However, the severity of injuries from falls would likely be much less in low-g environments, and perhaps high blood pressure would be less of an issue. Nonetheless osteoporosis is known to get worse in zero-g, and so astronauts are forced to do weightlifting regimens in space to try and maintain their bone density. It’s possible that if the osteoporosis could be combated, people who suffer from osteoarthritis might live more comfortable retirements on Mars or the Moon. They could likely never return to Earth though, as their heart and muscles would have become significantly weaker and would likely give out upon return to Earth. We need more research on the human body under low-gravity conditions to see what the long term medical effects are.

Law and Society

This is much more likely to be a reason for positive immigration than for exports. People who currently live under legal systems on Earth may be interested in moving to a different legal system not currently available on Earth. They may even want to start their own society. That is not currently possible on Earth, as states claim almost all land on Earth. Moving to Mars due to its nonexistent or only slightly existent legal system would bring with it a variety or related goals and ideas, such as chance to shape the cultural future of Mars. One can see the related desires of immigrants who moved to the Americas from Europe in the 18th and 19th centuries (and earlier, I suppose). This would also include people who wanted to live on the edge of human exploration or contribute to the project of humanity reaching other celestial bodies, and perhaps eventually other stars.

There are of course limits here as well. Any existing Martian colony would have its own law and rules that might be just as restrictive as Earth, especially given the harsh conditions and lack of natural resources on Mars. To create a legal system and society on Mars, any group would require a massive amount of resources, equipment, and specialized knowledge, essentially creating a whole new colony. Could such a move possibly be cheaper than simply establishing a place on Earth? It’s hard to say. The problem on Earth is not just money and resources, but confronting states who have access to military power.

Capital Flows

It should be pointed out for completeness’ sake that of course Mars could potentially export nothing, but still expand their economy as Martians did productive work for each other. Then could borrow money from Earth, invest it, and Earthers would see a positive return. This would counter the negative pressure on the Martian exchange rate from exports. If Martian investments were failing though, then Martian currency would likely become pretty worthless to Earthers, and they’d likely stop selling goods to Mars. We should thus note a financial crisis could be quite problematic!

Conclusion

Mars has a variety of goods it can export, although the only immediately available ones are likely Science, Society, and perhaps space rock souvenirs. Others may eventually become economically useful, but will likely take some time.

Picture: Public Domain Image, Global mosaic of 102 Viking 1 Orbiter images of Mars taken on orbit 1,334, 22 February 1980. NASA

Netflix, Entrepreneurship, and the Case for Economic Freedom

How would you go about convincing a free market skeptic of the benefits of economic freedom, as opposed to a tightly regulated or even a command economy? A common approach is to discuss productivity gains from free market systems, which reward higher efficiency production as consumers purchase the best and least expensive products. Competition between firms pushes companies to find efficiencies and new production methods.

One might also point out that it’s possible to divide the question of taxation and distribution from that of free market pricing and competition; in other words, if the market skeptic is concerned about the effects of a free market on the unskilled or the handicapped, it’s possible to have a robust safety net and tax system that is built on the most efficient taxes and welfare payments (land value tax, consumption tax, and direct cash grants).

However, today I want to focus on a more amorphous part of the free market, entrepreneurship. The Library of Economics and Liberty has an excellent encyclopedia style article on entrepreneurship written by Russel S. Sobel. He defines an entrepreneur as

…someone who organizes, manages, and assumes the risks of a business or enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering new ways of combining resources. When the market value generated by this new combination of resources is greater than the market value these resources can generate elsewhere individually or in some other combination, the entrepreneur makes a profit.

Sobel also discusses the approaches of economists Joseph Schumpeter and Israel Kirzner in describing entrepreneurs. Schumpeter is famous for his theory of “creative destruction”, where entrepreneurs are the primary agents of disruption, upending the status quo and altering the market, leaving competitors behind. Kirzner focuses on the aspects of discovery that entrepreneurs perform, as they seek new markets, new processes, and new business models.

We should note that entrepreneurs don’t assume all risks. If their projects fail and the business operates at a loss, they lose their investments. However, if worker jobs are lost not due to performance but poor management, workers might be laid off, which is a risk workers assume, not the entrepreneur. Nonetheless, entrepreneurs likely take on more cumulatively, risking their job and also capital investment. Entrepreneurs are usually thought of in terms of small business owners or startups, but I’d argue many of the roles of an entrepreneur can be undertaken by larger companies. Maybe a publicly traded company cannot, by definition, have an entrepreneur, but if there are still market discovery and disruption operations that the company undertakes due to the search for untapped profit, that’s good enough for our purposes today.

So far, we’ve discussed that entrepreneurs search for market opportunities, new ways of doing business, and undertake risks, but what does this have to do with economic freedom? The benefits of entrepreneurship can be difficult to notice. Sobel uses the examples of Bill Gates and Microsoft which at the very least took over virtually (ha!) the entire personal computer market, and I’d argue created a large new market that hadn’t existed before. However, we don’t know what tomorrow’s entrepreneurs will come up with, and that’s the most vital point. Someone has to envision the new product or service, develop it into something that can be sold, create an organization capable of producing it, and then execute on those plans before the market reacts. If it was well known what needed to be done, it wouldn’t be innovative, and it would already be happening. Entrepreneurs need the freedom to operate, to create new ventures, and to attempt new processes and approaches.

Contrasting with state-run economies or state-owned enterprises, the benefits entrepreneurs bring to a free market economy are pretty straightforward; government enterprises aren’t going to be as profit focused because they don’t reap the benefits of any increase in efficiency. Command economies or highly regulated industries may have price controls imposed on them, and so innovation does not occur because there is no opportunity to do so. Political incentives might also overrule efficiency improvements, and since the state has a hard time going bankrupt, poor rules can hamstring organizations for years. My local DMV still refuses to accept credit cards.

Other forms of economic freedom are more subtle; regulation is a broad form of curtailing economic behavior, although certainly not always for bad purposes. Nonetheless, many well intentioned rules reduce the benefits of innovation or were in fact written with the help of powerful actors looking to keep out competition. Licensing can be especially destructive to innovation; Uber controversially solved this by ignoring licensing laws in many cities until they were too popular to be outlawed (results pending). Taxi licensing had allowed the taxi industry to remain relatively complacent, with poor service, product quality, and ease of use. Uber saw an opportunity to exploit the market with new technology and transformed the industry.

Finally, it’s worth mentioning that a strong defense of property rights is vital for the entrepreneurial process to occur; people will not take risks on new ventures if their asset can be seized at will by the government, or if the currency that transactions are conducted in could lose it’s value overnight (looking at you cryptocurrencies).

Now I’d like to walk through an example of the benefits of entrepreneurship. Netflix was established in 1997 to take advantage of the brand new DVD format for movies. The DVD format was introduced on March 21, 1997, and Netflix was formed by August. That’s an impressively quick turn around. At the time, the most common ways to see entertainment at home was to watch TV shows as they aired, watch movies that had been cut up for TV with commercials when a cable station played them, rent movies from Blockbuster if they had it in stock, or buy the VHS tape of a film.

DVDs had a lot of benefits over VHS when they came out, such as skipping directly to certain scenes, no rewinding, and often better durability than VHS tapes. But Netflix saw that DVDs offered something else: no prior storage format was small enough to be cheaply mailed and large enough to hold an entire film. They foresaw a new method of home rental, and indeed, once DVD players became cheaper in 2001, Netflix took off. They dominated the mail subscription movie rental space, essentially creating a market where none had existed. Unlike movie rental stores, Netflix had a larger catalog and no late fees. Blockbuster was probably in the best position to take advantage of the new DVD technology; they had a pre-existing distribution network for their stores, and they had a customer base interested in movies. Yet Blockbuster peaked in the mid-2000s and filed for bankruptcy in 2010, a victim of Netflix’ creative destruction.

It’s worth mentioning a couple things about Blockbuster. In 2004, they attempted a hostile takeover of competitor Hollywood Video. They abandoned the deal in 2005 citing the FTC would probably block it. Yet both companies were either gone or bankrupt by 2010! The myopia of seeing a merger of Blockbuster and Hollywood Video as threatening to consumers when both companies would be essentially gone in five years underscores the points made here about the value of innovation and entrepreneurship. The state couldn’t look ahead and see that the industry consolidation they were concerned about would have shorter lifespans than many currently airing TV shows. Blockbuster’s competitors were actually Netflix, Redbox, and streaming video–even YouTube, which was founded in 2005 as well. Blockbuster itself made poor management decisions, opting for short term profitability over long term investment for a new industry. They eventually did create an online DVD rental subscription business similar to Netflix, but it was so poorly run, it either lost money or was too expensive to attract customers.

Yet customers did not suffer from this poor management! The entrepreneurship of Netflix filled the void before it even appeared. Netflix leveraged its online presence to profile its users with data, creating personalized recommendations in the mid-2000s, years before Facebook even started running ads. Netflix also saw that the future was streaming video, and noting the success of YouTube, they began including a streaming service with their DVD subscription in 2007. At the time, virtually no one had the bandwidth to watch movies in high quality on their computers, and essentially no technology existed to stream it to TVs. Yet, by 2011, Ars Technica was reporting that Netflix was responsible for about 30% of all North America peak internet traffic.

Netflix had accumulated many streaming titles, but was aware that as the importance of streaming grew, many publishers would be unwilling to renew their contracts, or raise prices. They might even face new streaming competition from content owners (like Hulu). Consequently, Netflix started to invest in original content in 2011, something essentially unheard of for rental/streaming company, by buying the rights to make House of Cards, a political drama, for $100 million. In 2013, it premiered and went on to obtain 5 Primetime Emmy nominations for Outstanding Drama Series from 2013-2017. Other shows, such as Orange is the New Black, the various MCU Defenders series, Bojack Horseman, and Narcos have all been fairly successful. By this year, Netflix’ original programming pieces are in the hundreds if we count all seasons, original films, documentaries, comedy specials, and more. The Economist reports that Netflix will make more TV content than any television network this year, and release 80 movies, more than any Hollywood studio. Warner Brothers, the largest studio, will release just 26, admittedly most with much larger budgets. The critique that Hollywood doesn’t have original ideas is only true if you forget that Netflix is the largest player in Hollywood.

The foresight here for Netflix to to see and invest in the benefits of DVDs in providing by-mail home entertainment, to see streaming as the next iteration of entertainment consumption, and to see that any streaming service will require original content, when none of those markets had yet existed, is the foundation of entrepreneurial benefits. The ability to see where the market will be and adapt your organization to meet those needs in pursuit of profit is the dynamism of the market economy. Other companies’ failures are immediate market feedback on their inability to adapt. It’s not to say that a free market automatically takes advantage of all opportunities that present themselves; sometimes technology has made a new concept viable but no one is able to take advantage of it for some time because of lack of creativity. I also don’t intend to state that large corporations love competition and innovation; on the contrary, they are often trying to remove any competition through any means necessary. Out-competing another company results in better products for consumers; constructing barriers to entry so that consumers don’t have a choice does not.

Finally, given the benefits of entrepreneurship, we should note that it has been declining in the US. Why? It could be due to better economies of scale due to technology, it could be increased regulation has made it harder to form new businesses, it could be reduced labor force participation, or several other theories. Tyler Cowen has discussed this phenomenon in his 2017 book, The Complacent Class. He views it as a possible response to risk avoidance that accompanies increased wealth. Regardless, the questions of why entrepreneurship is declining, and what tradeoffs are involved in the level of dynamism of the economy are the important questions to ask. Dynamic markets are valuable tools to create ideas and innovation that cannot be predicted. Yet lack of clear future benefits should not be counted against the value of economic freedom.

Weird Stateless Healthcare Solutions

Most developed countries have significant involvement in the healthcare market. I have written previously that it’s pretty clear down-sloping demand curves exist in healthcare, and thus we could realize efficiency gains in healthcare if a healthcare pricing system existed where patients could compare procedures and stand to benefit from getting them done for less money. This would not necessarily preclude government intervention. For example, Medicare could offer to pay its rate for various procedures directly to the patient who could then look at several hospitals, go to the one with the best deal and pocket the difference.

However, I’m going to explore a much more difficult thesis, that a completely free market in healthcare could exist outside of state intervention entirely. Nothing should be taken from the following to imply I think such a system is “good”. I have free market inclinations, and so I think some liberalization of healthcare markets would be good, but changes discussed in this post are highly radical. Any such scenario is unlikely in the future unless an unexpected event occurs, such as a global geopolitical destabilization never before seen, or a mass adoption of a cryptocurrency as the reserve currency, rendering taxes on transactions (and thus strong central states) obsolete. In other words, it seems unlikely a healthcare market with no state intervention would be something purposefully implemented. Nonetheless, I think this is an interesting thought experiment to consider, and it may help point us to where the market is least able to provide solutions and thus where government might be most helpful.

Supply Side

Most of this will be a discussion from the patient’s side, but first let’s discuss some of the implications of the supply side. With less government, there are going to be a lot fewer restrictions. That means licensing will still be important (and in fact medical licensing is largely done by non state groups), it just won’t be state enforced. Just for fun, this would be a great application of digital signatures in an area we don’t use them today. Your doctor’s office could have a simple sign indicating all the doctors in the office have been licensed by the governing medical agency, with an accompanying QR code encoding a digital signature from the licensing agency, signing the names of the doctors or something similar. You could then scan the QR code with your phone, using a generic app, or perhaps one you can download from the medical agency, and it would check the signature against the agency’s public key to ensure it was them who issued it. This is similar to how website security works today, just used in real life.

Other things worth mentioning on the supply side is that certificates of need, which today prevent hospitals from being built unless the government allows it (yes this is really a thing), would optimally not be an issue. Additionally, with price pressure from individuals actually interested in price, medical providers would have to compete on price, meaning they would need to offer good services at competitive cost to gain an edge in the market, something they don’t do now. This is an extension of my previous post that downward sloping demand curves exist in medicine. Since they do, and if prices existed, costs would be driven down because patients prefer to spend less money if they can.

Individual Annual Insurance

We’ll now start with an average adult buying healthcare. This is going to be closest in distance to arguments about healthcare today, so the ideas I’m going to suggest aren’t too radical, and you may have even heard them before. In a free market, an average person can probably buy a lot of their procedures, consultations, and check-ups on the market. Perhaps they will buy catastrophic insurance coverage in case something large happens.

Individual insurance could take several forms. It could include catastrophic care, more comprehensive coverage, or perhaps something closer to the HMO model, where you pay a network of healthcare providers a fixed amount for a fully managed healthcare service. There are interesting questions regarding how the market would deal with insurance pools. One is how it would deal with healthy patients who do not buy insurance, an issue Obamacare is seeing today, and a related problem of where insurers could just reject patients with pre-existing conditions. I’m going to get to that in the next section.

What is worth thinking about, and about which I remain uncertain, would be to what extent civil society insurance groups would spring up. Right now, people often get their insurance through their employer, but I suspect many people would gladly take more cash from their employer in our hypothetical free market system, and then buy insurance themselves. They could buy it individually, but perhaps they would join a pool, not necessarily through their employer, but perhaps through other civil society groups, such as church groups, unions, political groups, etc. I imagine tablet wielding Libertarian Party recruiters offering membership benefits of joining the party insurance pool, as long as you promise to keep up with the libertarian reading list. These pools might be able to buy healthcare in bulk from specific providers, which might be cheaper, but that again separates patients from the price system, which is what is causing so much difficulty in the first place. The one clear benefit is that you could switch insurance purchasers much easier than you could through a job.

This is one possible equilibrium for annual healthcare markets, but it doesn’t take into account long term factors outside of a single year. Let’s explore that.

Individual Multi-Year Approaches

Suppose you buy catastrophic insurance on the market for a single year. There is a significant issue you could run into, namely a catastrophic injury or a diagnosis of a chronic illness. Now, when you return to buy insurance for the next year, the free market I’ve been bragging about creates an incentive for the insurance company to charge you much more or refuse to cover you. Not to worry, there’s a market solution here: you were just under-insured.

What is needed is a long term insurance policy that offers as a reward the option to buy insurance for years at a given rate, rather than actual coverage. This is a re-insurance market. This could be purchased early on and last for years, more similar to life insurance than health insurance.

Re-insurance is also a useful policy for allowing healthy people who don’t want to bother with insurance the ability to buy into the market. Today, many younger people aren’t joining Obamacare exchanges because they feel the coverage is too high for what they want to pay. Re-insurance could offer them the ability to buy insurance later if needed, but skip the higher premiums for now as long as they’re ok with no coverage. On the other hand, perhaps this wouldn’t be needed as they could purchase lower coverage insurance plans more appropriate to their risk level.

The question insurance is solving generally is how best to spread risk. The way we are looking to spread risk today is through involvement of more people. The long-term re-insurance solution mentioned here applies the principle of spreading risk over longer periods of time. Government’s approach is theoretically to spread risk across time and people, just unfortunately under the management of a sprawling organization that doesn’t have an incentive to manage it well. The interaction between risk spreading between time and people will be difficult to predict in a free market. Individuals won’t just be allowed to join an insurance pool opportunistically, as that would punish the people who paid in over the long term. Perhaps non-monetary trades would exist to allow opportunistic joiners (e.g. Mormons allow you to join their insurance pool if you convert, and yes this is creepy), although they can be hard to enforce. Other options might include packaging (your dues cover several services including insurance, but perhaps also advertising for the group or funding a rec center), or paying in over several years before being allowed access to the insurance pool.

One could also imagine a different strategy for charities, such as health NGOs that instead of offering only free primary care to the needy, they also buy transferable re-insurance options. When someone comes in with an infection, they can provide free care, but when someone comes in with a chronic illness, the charity can transfer one of their re-insurance options which would allow the patient to buy affordable coverage for the long term.

It’s also worth noting that while annual insurance policies in this regime don’t really have an incentive to get you to go for preventative healthcare (since if your doctor finds something, they have to pay for it, while you might switch to a different provider next year), long term re-insurance plans would actually pay you to obtain preventative care to catch something early since they are on the hook for long term costs if you wait.

So far, a patient actually has a lot of choices in this hypothetical system; they should be able to compare and measure different procedures and providers for various healthcare services; these providers could have different licensing regimes, and be less supply restricted resulting in lower costs. Competition on price should also drive down costs and drive up patient benefits. Unexpected expenses that are still too expensive could be covered by insurance policies purchased by patients. Various levels of coverage could be offered, including long-term re-insurance options to buy coverage at a set price. These could be combined with insurance pools to spread risk further both among different people and longer periods of time.

Insurance Information and Genetics

While patients want to spread risk, insurers don’t face the same incentives. They will get as much information as they can about a patient in this hypothetical world to charge them for risky behaviors. We could, of course, go back another layer and talk about “hobby insurance” or something like that; motorcyclists have higher health insurance premiums or something, so when people are young and don’t know what activities they will engage in later, they buy some insurance that covers them if they get into a dangerous hobby. However, this doesn’t work that well, as these risks are much more agent-driven than others; people can know they want to get into mountain-climbing or motorcycles, so they may buy the “hobby insurance” knowing they are going to do dangerous hobbies, which immediately provides a payoff. There are some ways around this; maybe you can only get coverage for several years in the future if you are still doing that hobby, and you take the full risk now.

Overall this isn’t very satisfactory, and that’s because we are thinking about this backwards. Setting aside things we can’t control, like genetics, engaging in dangerous hobbies voluntarily seems like something we would want to respond to incentives. After all, we are restricting this by definition to things the patient can control. The analogy is that the state wants us to be healthier especially if the state is covering our medical bills. But when the state haphazardly tries to promote healthy things or safe driving, it feels quite coercive and frustrating. The insurance solution is to just charge people more for risky behaviors. Sidestepping the libertarian-Marxist debate about coercion, this outcome doesn’t seem that bad from a consequentialist perspective. Motorcyclists get injured, which costs resources in our health system, even this free market health system we are describing. If fewer people did dangerous activities, there would be fewer resources needed to fix their medical problems, which means those could be used elsewhere.

This type of thinking seems much more unfair if we expand it to include other things such as being overweight, or being sexually active. In today’s world, it seems likely insurance companies would consider being sexually active to increase risk or health costs, not to mention likely cost discrimination against gay men. I’m not sure there is a good solution to this. There will also be debates between insurers and customers on what counts as “controllable”. We can hope that the market will efficiently figure out what can be insured against (things that are not controllable), and offer insurance accordingly. This will most certainly be unsatisfactory to people caught in the system without as much coverage as they would like.

On the topic of things you definitely can’t control, genetic factors affect health, and it seems in this unregulated environment, customers will be forced to take genetic tests in order to be offered coverage. Of course, what is needed here is a form of “genetic insurance”. But when exactly would you buy that? Your genes are part of you already! There is no time you can buy insurance to avoid risk of a state that you’re already in. Well, it turns out there is still a good time to buy it, and that’s before you’re conceived. Parents can purchase “genetic insurance” for future children. In all likelihood, it would probably be combined with long-term chronic health insurance as well, as chronic problems could arise because of genetics. There may be different approaches to this, as you’d want the insurer holding the other end of the policy to be able to pay out potentially many decades into the future.

Finally, the pre-conception insurance piece would probably include pregnancy related complications as well. Or perhaps that will remain the domain of the health coverage of the mother. Exactly where it falls though is important for understanding the incentives which can be quite disturbing; since parents are looking to gain coverage for various genetic problems, insurance companies may calculate that it’s cheaper to pay for abortions of fetuses that are diagnosed with very expensive genetic problems. Pregnancies themselves can cause lots of complications though, so perhaps companies won’t want to have women go through lots of pregnancies. However, this depends on whether the same company is covering the mother and the child. If they don’t have the correctly aligned incentive, they could offer discounts to mothers who put their lives at risk. In an efficient market, the mother’s insurance company would compensate them for not doing that, so it would work out. Of course, markets are never as efficient as we would like.

Conclusion

I’ve constructed a complex series of possible insurance schemes, however I suspect an individual could roll most of them into a single long term life/health/genetic insurance policy initiated as early as possible, preferably by their parents before they’re even conceived. There’s a chance this approach will be too risk inclusive, and it will end up being a re-insurance scheme, but that’s really up to the market to decide. The main point is that insurance schemes can be constructed to properly shift risk around and avoid catastrophic and unplanned health issues. There are some lingering risks about how best to utilize risk pools or how to deal with insurance companies that go bankrupt, but generally speaking, there seems to be a framework for a free market solution to exist.

Nonetheless, the ability of insurance companies to use every possible way to gather information about you means that there will be a real “tax” on freedom to live our lives the way we want. I suspect from a consequentialist perspective, there is a lot to gain here, like people having financial incentives to exercise more, drink less, do fewer drugs (since drug laws probably won’t be enforce). On the other hand, from a libertarian ideal, having to pay for more expensive insurance because you drink a lot or have lots of sex seems patently unfree. Yet, this seems better in many ways than how government might deal with risky behaviors: bans, massive public relations campaigns that might not work, or simply doing nothing and letting the problem build. Social solutions, like public shaming for risky or different hobbies also seems fairly aggressive and unfree. Perhaps this is an acceptable middle ground where risk averse people are compensated by risk takers through the method of insurance.

There are serious issues though. The most obvious is that many people would have trouble buying insurance, especially if anything needs to be paid ahead of time, or all at once. In response, many would probably forego insurance altogether. This would result in poorer health outcomes and more expensive costs in the long run. The solution here, if the state were available, would be something like government transfer payments, or health credits.

Another issue is that people are poor planners. If cultural norms were changed such that everyone purchased some insurance plan when having children, that would probably help the situation. With today’s technology, they probably wouldn’t even need to do it prior to conception because genetic data on fetuses in the womb is scarce apart from diagnosing trisomies (like Down Syndrome). Of course, this stateless healthcare system would only come about through serious upheaval as mentioned in the intro. The “correct” social norms surrounding this new insurance model may not properly take hold, as tons of social norms will be overthrown. Even though it would probably help fix other issues we see today like mothers who can’t afford pre-natal care (since long term insurance companies would be heavily invested in making sure the pregnancy goes well), hoping social norms are correct seems optimistic.

Finally, the takeaways are that insurance is a pretty powerful tool, and where government could perhaps be most useful is in fixing income problems so that those with few means can participate in the market. The system described here is radical, and probably not something anyone but the most radical libertarians would choose to move society towards. At the same time, it also shows that there is room for significant improvements in insurance incentives even while keeping the high amount of government involvement in the healthcare market today.

Tag: economics

Don’t Worry About Immigrants Flooding the Labor Market

Observations on Parenting

Grading 2019 Predictions

A Twitter Digression on Trade and China

The Immigration Tariff in 500 Words

Further Reading

2019 Predictions

Bitcoin and Energy: Everything is Actually OK

TL;DR:

Economically Efficient

Technical Improvement Proposals

No Block Reward

Inefficiencies Due to Fixed Bitcoin Protocol Constants (Block Size)

Proof-of-Stake

“Useful Work”

Carbon Emissions, Regulatory Arbitrage, and Renewal Energy

Final Notes

Things Mars Can Export

Science

Tourism

Martian Souvenirs

Reduced Launch Costs

Natural Resources

On-Site Entertainment Production

Medicine

Law and Society

Capital Flows

Conclusion

Netflix, Entrepreneurship, and the Case for Economic Freedom

Weird Stateless Healthcare Solutions

Supply Side

Individual Annual Insurance

Individual Multi-Year Approaches

Insurance Information and Genetics

Conclusion