Tangles of pathology Trilemmas are always fun. Let’s do one. You may pick two, but no more than two, of the following:

• Liberalism
• Inequality
• Nonpathology

By “liberalism”, I mean a social order in which people are free to do as they please and live as they wish, in which everyone is formally enfranchised by a political process justified in terms of consent of the governed and equality of opportunity.

By “inequality”, I mean high dispersion of economic outcomes between individuals over full lifetimes. [1]

By “nonpathology”, I mean the absence of a sizable underclass within which institutions of social cohesion — families (nuclear and extended), civic and religious organizations — function poorly or at best patchily, in which conflict and violence are frequent and economic outcomes are poor. From the inside, a pathologized underclass perceives itself as simultaneously dysfunctional and victimized. From the outside, it is viewed culturally and/or morally deficient, and perhaps inferior genetically. Whatever its causes and whomever is to blame, pathology itself is a real phenomenon, not just a matter of false perception by dominant groups.

This trilemma is not a logical necessity. It is possible to imagine a liberal society that is very unequal, in which rich and poor alike make the best of their circumstances without clumping into culturally distinct groupings, in which shared procedural norms render the society politically stable despite profound quality of life differences between winners and losers. But I think empirically, no such thing has existed in the world, and that no such thing ever will given how humans actually behave.

It’s easy to find examples of societies with any two of liberalism, inequality, and nonpathology. You can have inequality in feudal or caste-based societies without pathology. The high castes may well perceive the low castes as inferior, and the low castes may regret their circumstances. But with the hierarchy sustained by overt force and a dominant ideology of staying in place, there is no need for pathology. Families and religious organizations in the lower castes might be strong, there may be little internal conflict, and no perception inside or outside the low status group that they are violating the norms of their society. There are simply overt and customary relations of domination and subordination. This was the situation of slaves in the American South prior to emancipation. They faced an unhappy and unjust circumstance, but a straightforward one. Whatever instabilities of family life or institutional deficiencies slaves endured were overtly forced upon them, and cannot reasonably be attributed to pathologies of the community, particularly given the experience of early Reconstruction. (More on this below.)

Contemporary Nordic countries do a fair job of combining liberalism and nonpathology. But that is only possible because they constitute unusually equal societies.

The United States today, of course, chooses liberalism and inequality, and so, I claim, it cannot survive without pathology. Why not? In a liberal society, humans segregate into groups based on economic circumstance. Economic losers become geographically and socially concentrated, and are not persuaded by the gloats of economic winners that outcomes were procedurally fair and should be quietly accepted. Unequal outcomes are persistent. As an empirical matter we know there is never very much rank-order economic mobility in unequal societies (nor should we expect or even wish that there would be). That should not be surprising, because the habits and skills and connections and resources that predict economic success will be disproportionately available within the self-segregated communities of winners. So, even if we stipulate for some hypothetical first generation that outcomes were procedurally fair, outcomes for future generations will be very strongly biased towards class continuity. Equality of opportunity cannot coexist with inequality of outcome unless the political community forcibly and illiberally integrates winners and losers (and perhaps not even then). But an absence of equality of opportunity is incompatible with the political basis of liberal society. If numerous losers are enfranchised and well-organized, they will seek and achieve redress (redistribution of social and economic goods and/or forced integration), or else the society must drop its pretense of liberalism and disenfranchise the losers, or at least concede the emptiness of any claim to legitimacy based on equality of opportunity.

Pathology permits a circumvention of this dilemma. It enables a reconciliation of equal opportunity with persistently skewed outcomes by claiming that persistent losers simply fail to seize the opportunities before them, as a result of their individual and communal deficiencies. Conflict within and between communities and the chaos of everyday life reduce the likelihood that even a very numerous pathologized underclass will effectively dispute the question politically. Conflict and “broken institutions” also serve as ipso facto explanations for sub-par outcomes. If the losers are sufficiently pathologized, it is possible to reconcile a liberal society with severe inequality. If they are not, the contradictions become difficult to paper over.

This may seem a very functional and teleological, some might even say conspiratorial, account of social pathology. It’s one thing to argue that it would be convenient, from an amoral social stability perspective, for the losers in an unequal society to behave in ways that appear from the perspective of winners to be pathological and that prevent losers from organizing to press a case the might upset the status quo. It’s another thing entirely to assert that so convenient a pathology would actually arise. After all, humans flourish when they belong to stable families, when they participate in civic and professional organizations, and when their communities are not riven by conflict and violence. Why would the combination of liberalism, inequality, and pathology be stable, when the underclass community could simply opt out of behaving pathologically?

Individual communities can opt out. Some do. But unless those communities embrace norms that eschew conventional socioeconomic pecking orders and/or political engagement with the larger polity (e.g. the Amish), it is entirely unstable for those nonpathological communities to remain underclass in a liberal polity. Suppose there were a community constituted of stable, traditional families. Its members were diligent, forward-looking, and hardworking, pursued education and responded to labor market incentives. And suppose this community was politically engaged, pressing its perspective and interests in government at all levels. In a liberal polity, it is just not supportable for such a community to remain a socioeconomic underclass. One of two things may happen: the community may press its case with the liberal establishment, identify barriers to the success of its members and work politically to overcome them, and eventually integrate into the affluent “middle class”. But if all underclass communities were to succeed in this way, there could be no underclass at all, there would be a massive decrease in inequality. Nonpathology requires equality. Alternatively, if severe inequality is going to continue, then there must remain some sizable contingent of people who are socioeconomic losers, who will as a matter of economic necessity become segregated into less-desirable neighborhoods, who will come to form new communities with social identities, which must be pathological for their poverty to be stable. Particular communities can opt out of pathology, but it is a fallacy of composition to suggest that that all communities can opt out of pathology in a polity that will remain both liberal and unequal.

If a society is, at a certain moment in time, deeply unequal, then pathology among the poor is required if status quo winners are to preserve their place, which, under sufficient dispersion of circumstance, can become a nearly existential concern for them. Consider the perspective of a liberal and well-intentioned member of the wealthy ruling elite of a poor, developing country. To “live as ordinary citizens live” would entail renouncing civilized life as she understands it. It would entail becoming a kind of barbarian. I don’t think the perspective of elites in less extreme but still unequal developed countries is all that different. Liberal elites need not and do not set about intentionally manufacturing pathology. They simply manage the arrangement of political and social institutions with a shared, tacit, and perfectly natural understanding that their own reduction to barbarism would count as a bad policy outcome and should be avoided. The set of policy arrangements consistent with this red line just happens to be disjoint from the set of arrangements under which there would not exist pathologized communities. Elite non-barabarism depends upon inequality, upon a highly skewed distribution of consumption and of the insurance embedded in financial claims, which must have justification. Elite non-barbarism may also depend very directly on the availability of cheap, low-skill labor. Liberal elites may be perfectly sincere in their handwringing at the state of the pathologized poor, laudable in their desire to “discover solutions”. Consider The Brookings Institution. But, under the constraints elites tacitly place on the solution space, the problems really are insoluble. The best a liberal policy apparatus can do is to resort to a kind of clientism in which the pathology of the underclass is handwrung and bemoaned, but nevertheless acknowledged as the cause and justification for continued disparity. Instruction (however futile) and a stigmatized means-tested “safety net” are sufficient to signal elites’ good intentions to themselves and absolve them of any need to revise their self-perceptions as civilized and liberal.

If pathology is necessary, it is also easy to get. Self-serving (mis)perceptions of pathology by elites of a poor community become self-fulfilling. Elites fearful of a “pathological” community will be more cautious about collaborating with their members economically, or hiring them. Privately, employers will subject members of the allegedly pathological community to more monitoring, impose more severe punishments based on less stringent evidence than they would upon members of communities that they trust. Publicly, concern over a community’s perceived pathology will translate to more intensive policing and laws or norms that de facto give authorities a freer hand among communities perceived to be pathological. Holding behavior constant, police attention creates crime, and a prevalence of high crime is ipso facto evidence of pathology. Of course, as pathology develops, behavior may not remain constant. Intensive monitoring (public and private) and the “positives” resulting from extra scrutiny justify ever more invasive monitoring and interference by authorities, which leads the monitored communities to very reasonably distrust formal authority. Cautiousness among employers contributes to economic precarity within the monitored community. Communities that distrust formal authority are like tiny failed statelets. Informal protection rackets arise to fill roles that formal authority no longer can. If no hegemon arises then these protection rackets become competitive and violent — “gangs!” — which constitute yet more clear evidence of pathology to outsiders. Economic precarity and employment disadvantage render informal and illicit economic activity disproportionately attractive, leading mechanically to more crime and sometimes quite directly to pathology, because some activities are illicit for a reason (e.g. heroin use). The mix of economic precarity and urban density loosens male attachment to families, a fact which has been observed not only recently and here but over centuries and everywhere, which increases poverty among women and children and engenders cross-generational pathology. Poverty itself becomes pathology within communities unable to pool risk beyond direct, also-poor acquaintances. Behavior that is perfectly rational for the atomized poor — acquiescence to unpleasant tradeoffs under conditions of crisis — appear pathological to affluent people who “would never make those choices” because they would never face those circumstances.

About a year ago, there was a rather extraordinary conversation between Ta-Nehisi Coates and Jonathan Chait. [1, 2, 3, 4, 5, 6, 7, 8, 9, 10] At a certain point, Chait argues that the experience of white supremacy and brutality would naturally have left “a cultural residue” that might explain what some contemporary observers view as pathology. Coates responds:

What about the idea that white supremacy necessarily “bred a cultural residue that itself became an impediment to success”? Chait believes that it’s “bizarre” to think otherwise. I think it’s bizarre that he doesn’t bother to see if his argument is actually true. Oppression might well produce a culture of failure. It might also produce a warrior spirit and a deep commitment to attaining the very things which had been so often withheld from you. There is no need for theorizing. The answers are knowable.

There certainly is no era more oppressive for black people than their 250 years of enslavement in this country. Slavery encompassed not just forced labor, but a ban on black literacy, the vending of black children, the regular rape of black women, and the lack of legal standing for black marriage. Like Chait, 19th-century Northern white reformers coming South after the Civil War expected to find “a cultural residue that itself became an impediment to success.”

In his masterful history, Reconstruction, the historian Eric Foner recounts the experience of the progressives who came to the South as teachers in black schools. The reformers “had little previous contact with blacks” and their views were largely cribbed from Uncle Tom’s Cabin. They thus believed blacks to be culturally degraded and lacking in family instincts, prone to lie and steal, and generally opposed to self-reliance:

Few Northerners involved in black education could rise above the conviction that slavery had produced a “degraded” people, in dire need of instruction in frugality, temperance, honesty, and the dignity of labor … In classrooms, alphabet drills and multiplication tables alternated with exhortations to piety, cleanliness, and punctuality.

In short, white progressives coming South expected to find a black community suffering the effects of not just oppression but its “cultural residue.”

Here is what they actually found:

During the Civil War, John Eaton, who, like many whites, believed that slavery had destroyed the sense of family obligation, was astonished by the eagerness with which former slaves in contraband camps legalized their marriage bonds. The same pattern was repeated when the Freedmen’s Bureau and state governments made it possible to register and solemnize slave unions. Many families, in addition, adopted the children of deceased relatives and friends, rather than see them apprenticed to white masters or placed in Freedmen’s Bureau orphanages.

By 1870, a large majority of blacks lived in two-parent family households, a fact that can be gleaned from the manuscript census returns but also “quite incidentally” from the Congressional Ku Klux Klan hearings, which recorded countless instances of victims assaulted in their homes, “the husband and wife in bed, and … their little children beside them.”

This, I think, is a biting takedown of one theory of social pathology, that it arises as a sort of community-psychological reaction to trauma, an explanation that is simultaneously exculpatory and infantilizing. The “tangle of pathology” that Daniel Patrick Moynihan famously attributed to the black community did not refer to people newly freed from brutal chattel slavery in the late 1860s. It did not refer even to people in the near-contemporary Jim Crow South, people overtly subjugated by state power and threatened with cross-burnings and lynchings. No, the Moynihan report referred specifically to “urban ghettos”, mostly in the liberal North. The black community endured, in poverty and oppression but largely without “pathology”, precisely where it remained oppressed most overtly. For a brief period during Reconstruction, the contradictions between imported liberalism, non-negotiable inequality, and a not-all-at-pathological community of freedman flared uncomfortably bright. But before long (after, Coates points out, literal coupsagainst the new liberal order), the South reverted to the balance it had always chosen, sacrificing liberalism for overt domination which permitted both inequality and a black community that lived “decently” according to prevailing norms but was kept unapologetically in its place.

Social pathology may be pathological for specific affected communities, but it is adaptive for the societies in which it arises. Like markets, pathology constitutes a functional solution to the problem of reconciling the necessity of social control with liberalism, which disavows many overt forms of coercion. A liberal society is a market society, because if identifiable authorities aren’t going to tell people what to do and force them, if necessary, to act, then a faceless, quasinatural market must do so. A liberal, unequal society “suffers from social pathology”, because the communities into which its losers collect must be pathological to remain so unequal. No claims are made here about causality. It is possible that some communities of people are, genetically or by virtue of some preexisting circumstance, prone to pathology, and pathology engenders inequality. It is possible that dispersion of economic outcomes is in some sense “prior”, and then absence of pathology becomes inconsistent with important social stability goals. Our trilemma is an equilibrium constraint, not a narrative. Whichever way you like to tell the story, a liberal society whose social arrangements would be badly upset by egalitarian outcomes must have pathology to sustain its underclass. The less consistent the requirements of civilized life among elites are with egalitarian outcomes, the greater the scale of pathology required to support the dispersion. That, fundamentally, is what all the handwringing in books like Coming Apart andOur Kids is about.

Once again I present the post unedited.

“Quantitative Easing” — economics jargon for central banks issuing a fixed quantity of base money to buy some stuff — has been much in the news this week. On Wednesday, US Federal Reserve completed a gradual “taper” of its program to exchange new base money for US government and agency debt. Two days later, the Bank of Japan unexpectedly expanded its QE program, to the dramatic approval of equity markets. I have long been of two minds regarding QE. On the one hand, I think most of the developed world has fallen into a “hard money” trap, in which we are prioritizing protection of existing nominal assets over measures that would boost real economic activity but would put the existing stock of assets at risk. My preferred policy instrument is “helicopter drops”, defined as cash transfers from the fisc or central bank to the general public, see e.g. David Beckworth, or me, or many many others. But, as a near-term political matter, helicopter drops have not been on the table. Support for easier money has meant support for QE, as that has been the only choice. So, with an uncomfortable shrug, I guess I’m supportive of QE. I don’t think the Fed ought to have quit now, when wage growth is anemic and inflation subdued and NGDP has not recovered the trend it was violently shaken from six years ago. But my support for QE is very much like the support I typically give US politicians. I pull the lever for the really-pretty-awful to stave off something-much-worse, and hate both myself and the political system for doing so.

Why is QE really pretty awful, by my lights, even as it is better than the available alternatives? First, there is a question of effectiveness. Ben Bernanke famously quipped, “The problem with QE is that it works in practice, but it doesn’t work in theory.” If it worked really well in practice, you might say “who cares?” But, unsurprisingly given its theoretical nonvigor, the uncertain channels it works by seem to be subtle and second order. Under current “liquidity trap” conditions, where the money and government debt swapped during QE offer similar term-adjusted returns, a very modest stimulus (in my view) has required the Q of E to be astonishingly large. The Fed’s balance sheet is now more than five times its size when the “Great Recession” began in late 2007, yet economic activity has remained subdued throughout. I suspect activity would have been even more subdued in the absence of QE, but the current experience is hardly a testament to the technique’s awesomeness.

I really dislike QE because I have theories about how it actually does work. I think the main channel through which QE has effects is via asset prices. To the degree that QE is taken as a signal of central banks “ease”, it communicates information about the course of future interest rates (especially when paired with “forward guidance”). Prolonging expectations of near-zero short rates reduces the discount rate and increases the value of longer duration assets. This “discount rate” effect is augmented by a portfolio balance effect, where private sector agents reluctant (perhaps by institutional mandate) to hold much cash bid up the prices of the assets they prefer to hold (often equities and riskier debt). Finally, there is a momentum effect. To the degree that QE succeeds at supporting and increasing asset prices, it creates a history that gets incorporated into future behavior. Hyperrationally, modern-portfolio-theory estimates of optimal asset-class weights come to reflect the good experience. Humanly, momentum assets quickly become conventional to hold, and managers who fail to bow to that lose prestige, clients, even careers. So QE is good for asset prices, particularly financial assets and houses, and rising asset prices can be stimulative of the economy via “wealth effects”. As assetholders get richer on paper, they spend more money, contributing to aggregate demand. As debtors become less underwater, they become less thrifty and prone to deleveraging. Financial asset prices are also the inverse of long-term interest rates, so high asset prices can contribute to demand by reducing “hurdle rates” for borrowing and investing. Lower long term interest rates also reduce interest costs to existing borrowers (who refinance) or people who would have borrowed anyway, enabling them spend on other things rather than make payments to people who mostly save their marginal dollar. Whether the channel is wealth effects, cheaper funds for new investment or consumption, or cost relief to existing debtors, QE only works if it makes asset prices rise, and it is only conducted while it makes those prices rise in real and not just nominal terms.

In the same way that you might put Andrew Jackson‘s face on a Federal Reserve Note, you might describe QE as the most “Kaleckian” form of monetary stimulus, after this passage:

Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.

Replace “state of confidence” in the quote with its now ubiquitous proxy — asset prices — and you can see why a QE-only approach to demand stimulus embeds a troubling political economy. The only way to improve the circumstances of the un- or precariously employed is to first make the rich richer. The poor become human shields for the rich: if we let the price of stocks or houses drop, you are all out of a job. A high relative price of housing versus other goods, a high number of the S&P 500 stock index, carry no immutable connection to the welfare or employment of the poor. We have constructed that connection by constraining our choices. Deconstructing that connection would be profoundly threatening, to elites across political lines, quite possibly even to you dear reader.

A few weeks back there was a big kerfuffle over whether QE increases inequality. The right answers to that question are, it depends on your counterfactual, and it depends on your measure of inequality. Relative to a sensible policy of helicopter drops or even conventional (and conventionally corrupt) fiscal policy, QE has dramatically increased inequality for no benefit at all. Relative to a counterfactual of no QE and no alternative demand stimulus, QE probablydecreased inequality towards the middle and bottom of the distribution but increased top inequality. But who cares, because in that counterfactual we’d all be in an acute depression and that’s not so nice either. QE survives in American politics the same way almost all other policies that help the weak survive. It mines a coincidence of interest between the poor (as refracted through their earnest but not remotely poor champions) and much wealthier and more powerful groups. Just like Walmart is willing to stump for food stamps, financial assetholders are prone to support QE.

There are alternatives to QE. On the fiscal-ish side, there are my preferred cash transfers, or a jobs guarantee, or old-fashioned government spending. (We really could use some better infrastructure, and more of the cool stuff WPA used to build.) On the monetary-ish side, we could choose to pursue a higher inflation target or an NGDP level path (either of which would, like QE, require supporting nominal asset prices but would also risk impairment of their purchasing power). That we don’t do any of these things is a conundrum, but it is not the sort of conundrum that staring at economic models will resolve.

I fear we may be caught in a kind of trap. QE may be addictive in a way that will be painful to shake but debilitating to keep. Much better potential economies may be characterized by higher interest rates and lower prices of housing and financial assets. But transitions from the current equilibrium to a better one would be politically difficult. Falling asset prices are not often welcomed by policymakers, and absent additional means of demand stimulus, would likely provoke a real-economy recession that would harm the poor and precariously employed. Austrian-ish claims that we must let a recession “run its course” will be countered, and should be countered, on grounds that a speculative theory of economic rebalancing cannot justify certain misery of indefinite duration for the most vulnerable among us. We will go right back to QE, secular stagnation, and all of that, to the relief of both homeowners, financial assetholders, and the most precariously employed, while the real economy continues to underperform. If you are Austrian-ish (as I sometimes have been, and would like to be again), if you think that central banks have ruined capital pricing with sugar, then, perhaps uncomfortably, you ought to advocate means of protecting the “least of these” that are not washed through capital asset prices or tangled with humiliating bureaucracy. Hayek’s advocacy of a minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself may not have been just a squishy expression of human feeling or a philosophical claim about democratic legitimacy. It may have also have reflected a tactical intuition, that crony capitalism is a ransom won with a knife at the throat of vulnerable people. It is always for the delivery guy, and never for the banker, that the banks are bailed out. It is always for the working mother of three, and never for the equity-compensated CEO, that another round of QE is started.