What can't be bought

And everything else that should be

Photo by Oziel Gómez on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that is proudly neoliberal but concedes that some markets are a little icky.

The market for intimacy

As an economist, I try to not pass judgement on any market. If a good or service is bought and sold, I generally assume that the transaction improves the welfare of the buyer and seller and that it is a net positive. Of course, if a transaction causes harm, that is a different story. A market for murder-for-hire is clearly wrong. Or other, still bad but less directly harmful, externalities that arise from certain transactions should be regulated.

But my time doing research in brothels challenged my most-markets-are-great view. The main commodity being bought and sold there was not sex, it was intimacy—or a sense of being known and cared for. The most expensive service was something called the Girlfriend Experience (GFE as it is known in the industry). It was expensive not only because of high demand but because it takes a lot of mental energy to pretend to be someone’s girlfriend, especially a girlfriend who has no emotional needs of her own, never makes any demands, and hangs onto your every word. But is that really being a girlfriend, since intimacy is about the work, vulnerability, and mutuality? Once it becomes an explicit commodity, does intimacy take on a different meaning? Does it prevent some people from finding true intimacy in their lives, because GFE feels easier and less risky? In the long run, does that make the buyer of GFE worse off?

I thought a lot about these questions during my time in the Nevada brothels. At the time, these questions did not seem so important because GFE is a niche market. It is also expensive ($1000 an hour) and carries a social taboo, so the scope is pretty limited. AI may change all of this. Relationship bots essentially offer GFE (except the physical part) at a fraction of the cost and with no constraints on time or availability. That means the market for intimacy may take off in the next few years.

Will that make people ultimately worse off? I am not sure. I met customers in the brothel who did benefit from GFE. Maybe they were incapable of real intimacy but still lonely. Maybe they had a physical or mental disability. Or some found the service therapeutic and went on to have real relationships. Maybe AI relationship bots can do the same.

This just shows that regulating AI will be harder than we think.

Card-carrying neoliberal and proud of it

I keep reading essays about the emerging “new Washington consensus” because the old one failed. Did it fail? That claim is often presented with no evidence, other than our collective misery. But it seems to be that neoliberalism has fulfilled its promise, and then some. I am not arguing there haven’t been some very bad economic outcomes in the last 35 or so years. But would another set of principles have worked any better?

In my Bloomberg column today, I argue that neoliberalism is a great success, and it is responsible for one of the most prosperous economic eras in history—a pretty bold take, but the decline in poverty, rise in life expectancy, and increase in living standards are pretty spectacular.

What do I mean by neoliberalism? It means many things to many people—it has become synonymous with die-hard devotion to markets—but it is really just accepting that policies introduce trade-offs, prices convey important information, governments aren’t great at picking winners, and free trade is the closest thing we’ve got to a free lunch. And this has largely been proven true. That does not mean everything is perfect. Opening trade to a country as large as China that has so much cheap labor has caused displacement, and policymakers should have done more for the affected communities. And we learned during the pandemic that we are maybe too dependent on China, though we should not be dependent on any one country, including ourselves. But still, the benefits by far outweigh the costs—we can now appreciate how great things like 40 years of low inflation were.

At the Manhattan Institute conference last week, I explained how the new consensus operates under the assumption that there are no trade-offs or costs to their favored policies. It seems to assume that debt is costless, less trade makes us stronger, and industrial policy does not create distortions.

I guess we have become a victim of our own success and will have to relearn the lessons of the past.

Now is the time to reform pension accounting

There are some benefits to the higher rate environment. One is that it creates an opportunity to get public pensions back on track—or on track for the first time. Their accounting practices are a disgrace. They use their expected rate of return as the discount rate to value their liabilities. That means they can, and are encouraged to, invest in the riskiest asset possible to make their costs look smaller (no wonder private markets are so popular).

We financial economists have been shouting about this for decades. But when rates were zero, using a treasury or muni-bond to discount liabilities would have been a fiscal disaster. States and municipalities were using seven or so, which is much higher than zero. The sudden change, while correct, would have been too much. But now rates are higher, and we can get the pensions on track. I wrote about how for the Manhattan institute.

We also need to standardize measurement and how contributions are calculated. And if states do all this, they can issue tax-advantaged pension bonds—because, well, this will be expensive. Though it does not actually mean they will have more debt, it just makes more transparent the debt they already have.

Until next time, Pension Geeks!

Allison