Tag: externalities

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.

We’re All State Capacity Libertarians Now

Tyler Cowen kicked off this year with a heavily discussed blog post defining what he calls “State Capacity Libertarianism“.

I didn’t get it.

Cowen described a moderate libertarianism while adding the nebulous concept of “state capacity”, in particular noting that a capable or powerful state was different from a tyrannical state. I read the words, but I assumed he was describing a “left libertarianism“, where a typical position might be to push for the government to collect efficient taxes, and then distribute those to everyone via a basic income, and avoid otherwise messing in the economy. I’m open to engaging with something like that, but I didn’t grok how Cowen’s take was different or what this view offered.

And then there was the worst pandemic we’ve seen in the 21st century. Huge swaths of the American economy have been shut down, and this disease is still likely to kill the equivalent of an entire year’s worth of influenza fatalities in a single month. Pandemics are an obvious market failure scenario, with difficult to control externalities, and thus we have state institutions to deal with this and pick up the slack. They failed.

Policy Failures

I looked up my first tweet about COVID-19 (back then it was just novel coronavirus or nCoV). It was on January 30 in a reply to Robert Wiblin. My first standalone tweet was a few days later:

Now, I wasn’t warning people that this would be bad or telling people to start prepping. But it was certainly something occupying my mind, as I tweeted about it a dozen times in February. I did start mildly stockpiling food and household items starting in mid-February. Ultimately, I consider my actions to be a failure. I didn’t short the market (although I didn’t buy any index funds either), I didn’t warn enough of my close friends and family to start gathering supplies, and I didn’t advocate loudly for changes in government policy. I was partially concerned about looking alarmist, which in retrospect was a really silly thing to be concerned about.

Nonetheless, this blog is a hobby. I have a day job which isn’t concerned about government policy. My question is about the people whose day job is pandemic preparedness. If an anonymous blogger with a few hundred twitter followers can be concerned about a possible pandemic, then where were the people who are paid specifically to deal with this eventuality?

Why didn’t the CDC and FDA start a program to quickly approve new COVID testing in mid-February instead of mid-March? In an exponential growth situation, that is a long time. Why didn’t they start pushing hospitals to create new isolation wards in February? Why didn’t the CDC start putting together lists of events it strongly urged local governments to cancel when the first case appeared at local hospitals? Why did the NBA have to unilaterally suspend its season only after a player was diagnosed in March? Why was there confusion between who was in charge and what steps should be taken?

Beyond lack of distancing and lockdowns, there were several other failures. Firstly, the CDC created their own test which differed from previously used ones in the world. It was shipped to public labs around the country and…didn’t work. The FDA compounded the problem, disallowing any tests except the one the CDC had created. The University of Washington virology lab was able to create their own test and applied to the FDA for approval. The FDA said it couldn’t approve the test until the lab had demonstrated it wouldn’t return false positives for other dangerous coronaviruses. Perhaps this would be a good idea in more normal circumstances, but it was an asinine requirement if you were trying to head off a pandemic where every day saw exponential growth in a virus spreading across the country. The lab started using the test through a research loophole, but the story gets crazier:

Still, Greninger complied. He called the CDC to inquire about getting some genetic material from a sample of SARS. The CDC, Greninger says, politely turned him down: the genetic material of the extremely contagious and deadly SARS virus was highly restricted.

“That’s when I thought, ‘Huh, maybe the FDA and the CDC haven’t talked about this at all,’” […] “I realized, Oh, wow, this is going to take a while, it’s going to take several weeks.”

By this point, there were already over 50 confirmed cases of COVID-19 in the United States and still, nobody but the CDC was permitted to conduct testing.

It was on February 28th, a full 8 days after the UW virology lab had applied for their test to the FDA, that the agency finally allowed other tests besides the CDC’s. Of course, most other labs hadn’t started making a test yet. What a disaster.

What’s interesting to me about the testing fiasco was its independence from President Trump. I think Trump is a bad leader, incompetent, unintelligent, a bad judge of character, and has terrible policies, but ultimately the point of a capable bureaucracy would be to have experts on hand with the proper plans in place to implement them regardless of political leaders. We shouldn’t have to recreate all the accumulated knowledge of the government every time there is a new president. Here, Congress had created agencies to oversee health and pandemic responses, the scenario arose…and then those agencies actively made things worse.

Of course, we can’t allow President Trump off the hook. He decided to dismantle the NSC pandemic response team which Susan Rice had set up, combining it into a single directorate with arms control, weapons of mass destruction terrorism, and global health. The president is entitled to manage the National Security Council bureaucracy as he wants, as it’s part of the EOP. It was claimed that there was too much bloat leftover from Obama’s NSC, and so this should have streamlined communication, which may have sounded reasonable. Nonetheless, whatever changes Trump implemented were a colossal failure. Managing the CDC, FDA, FEMA, and National Institute of Allergy and Infectious Diseases to coordinate in a pandemic is crucial, and it did not occur until weeks after it should have. We should ask if the NSC, which varies from president to president, should even have this coordination power or if Congress should implement a more permanent response hierarchy.

Moreover, the president himself downplayed concerns about the virus the entire month of February, and even promised that 15 cases would soon be down to “close to zero”. This is an idiotic statement but is not unexpected. Trump has long ignored expert advice, lied to the public, and spoken erratically about how his administration will execute at his direction. The difference is that while the first 3 years of his presidency had few crises that weren’t self created, a pandemic actually requires decision making and policy implementation. Trump claimed that he would surround himself with good managers, and yet his White House has been plagued with scandals, including one that resulted in his impeachment. Ultimately, Trump is responsible for the leaders of the agencies that failed so spectacularly to manage this crisis. When asked about the testing fiasco, Trump said “I don’t take responsibility at all”.

Finally, the Obama administration had even created a “pandemic playbook”, a 69 page document you can review at this link which details decision making rubrics, key agencies that need to be consulted, and which questions need to be asked. It’s apparently unclear if senior leaders at government agencies even knew the playbook existed.

“State Capacity”

The typical consequentialist libertarian critique runs something like “the government doing things is bad because the state has poor incentives”. However, with this pandemic, we have instances where the state did too much, like where the FDA got in the way of scaling life-saving testing, but also where the state did too little, like coordinating responses of expert state agencies, or providing guidelines to local governments. A consequentialist libertarian critique would have a hard time dealing with these two failure types, and as somewhat of a consequentialist libertarian, I didn’t understand Cowen’s “state capacity libertarianism” until I was faced with these current government failures.

In a pandemic, every individual and company wants to continue working and consuming as much as possible, but each action also endangers non-parties to the transaction (e.g. other grocery shoppers or attendees at a basketball game). Here was a role for government to play, and yet it completely failed in that role. While a more typical libertarianism might treat the state as a necessary evil from which helpful action is capricious and rare, state capacity libertarianism suggests there is an expected duty for the state to play where there are negative externalities like the spread of a pandemic. The government’s failure here should thus be taken more seriously under state capacity libertarianism.

This also opens up a discussion about “state management” that previously I have often avoided. For example, it’s quite onerous to file taxes in the United States. Some libertarians argue that this is actually a good thing, and in fact making these state interactions difficult helps to convey to citizens how useless the state is, and they will thus be supportive in making the state smaller. Other libertarians might argue that added difficulty in the form of coerced taxation is adding additional rights violations on top of an already immoral action. A state capacity libertarian approach wouldn’t have this confusion; in this view, taxes ought to be collected in the most economically efficient way possible (land value tax or Pigouvian externality taxes would be a good start), and that method should be carried out competently and easily by the state. The IRS would just calculate your Pigouvian externality tax and send you a bill without requiring each citizen to compile their own information, spend hundreds on tax advice and then be punished when the amount is incorrect.

Relatedly, the management ability of electoral candidates sometimes comes up, and I think I may have even argued in the past that if congress or the president are less capable, then they would pass fewer laws. If most laws are net negative, then perhaps this incompetence would be good. However, elected officials do not just pass laws, they impact how government services are carried out. When a high risk, externality-laden scenario arises, like a pandemic, the management aspect of governance rises in importance.

Many presidents, especially Trump, have campaigned on the idea that they are good managers. Until now, I mostly shrugged at these claims, since governing is most often about policy and posturing than actual management. Yet the rare scenarios where management is required have outsized impacts; having fire insurance doesn’t matter until you actually have a fire, but then it matters a great deal. If we are concerned about catastrophic risk, then government management is a vital skill to be evaluated. State capacity libertarianism strongly favors evaluating this skill.

Libertarian Critiques Remain

Finally, we should quickly cover that a strong libertarian critique of government intervention into markets remains. Private property based markets with competition have much better incentives for rapid development and innovation. The FDA’s intervention to thwart testing probably killed thousands, especially compared to an alternate world where additional testing kits were explicitly allowed beginning in mid-February. Libertarians have been criticizing FDA policy on slow drug approval for decades though, and COVID patients will not be the FDA’s only victims this year.

And that’s not the only place where the state is dangerous: the War on Drugs, for example, has resulted in the deaths of hundreds of thousands as prohibition empowers organized crime, makes drugs more dangerous, incarcerates people for non-violent crimes, creates more violent interactions between citizens and police forces, and on and on. U.S. government policy has also resulted in long-lasting deadly wars in the Middle East with little to no concrete benefits for the U.S. globally, and I’m sure your local libertarian could continue on with a very long list.

This pandemic places into stark realization that government both needs to get out of the way in some areas to save lives, and also competently carry out the tasks only it can do. A Cowenian marriage of state capacity and libertarianism is the way forward.