One thing investment analysts and LessWrong-style rationalists have in common is a habit of trying to get to the crux of disagreements. Analysts know that it's a waste of time to discuss the finer points of a company's relative valuation with someone whose thesis is that the company is temporarily over-earning or fraudulent, and rationalists know that it's pointless to talk about the tradeoff between affordable healthcare in the third world and shrimp welfare without first establishing whether or not the person you're talking to puts moral value on the suffering of shrimp, or whether or not they're a utilitarian in the first place.¹

In domains that don't select for this crux-finding-habit, you’ll find tedious debates where each side is focused on a completely different level of discussion—so they both feel like they're scoring points, but neither has much of an understanding of what the other side wants. This is partly a pragmatic decision: if you want to win, you focus the discussion on whatever your advantage is. It’s basically the individual-level version of popularism, where each party tries to make the election about whichever issue they're more trusted on.²

Figuring out the actual crux of disagreement is a bad way to package a campaign for voters, but it's a good way for individuals to get more out of policy discussions with people they disagree with. And since policies do affect how businesses operate, being able to get to the crux is a habit worth cultivating. We need to find which tradeoffs are worth discussing, which means avoiding a common stumbling block: debating the cost of policies, or asking how a policy will get paid for.

This is a healthy instinct, of course: a country that spends taxpayers' money without paying attention to what they're getting for it is a country that will impoverish itself. But there is a basically universal answer to "how will we pay for this?", and it's some combination of taxes, inflation, and deadweight loss. And that itself is a monetary abstraction layer on economic behavior; the real answer is that we pay for everything the government does in just two ways:

1. By consuming fewer goods and services because scarce resources are directed away from other activities and towards the one that the policy promotes. This is the answer for policies that are mostly non-economic but popular. The cost of a public park is whatever use the land would be put to if it were sold to the highest bidder.

2. Or, as a consequence of the policy, by having more goods and services available such that the policy pays for itself. This one can apply to public goods, but there's a debate about what counts as such a good and what the returns are—it's incoherent to ask if an additional $1 spent on education or healthcare produces at least $1 of aggregate improvement for the overall economy without specifying exactly what it's spent on.

This is obvious enough to be almost tautological, but it still has explanatory power. Why didn't massive deficits in 2009 push up inflation? Because there was plenty of spare capacity in the economy, so the market-clearing price of labor and capital was low—and while putting it to productive use did cost money, it also led to the creation of more goods and services; if price levels are price divided by output, you can have a case where increasing the numerator actually increases the denominator faster, and higher deficits actually push inflation down (at least temporarily).³

The cost debate is really tied to a broader distribution debate: if a given policy shifts resources within the economy, it will make some people relatively better-off and some people relatively worse-off. That's immediately visible. But it will also make some behaviors relatively more and less rewarding, with a long-term impact on GDP and broader measures of quality of life. In the very long run, the impact of policies is on what people do, not on what they get.

This is almost invisible over short periods, because the most important behavioral changes have compounding effects over long periods. But it’s very visible in the long run: the US has a set of policies that strongly encourage people to start companies that are built to grow, and the full effect of this has taken generations to play out. The immediate impact of Delaware's 1899 General Corporation Law was slightly more work for corporate lawyers in Delaware, but the long-term effect was jurisdictional competition, which Delaware ultimately won, over hosting large companies with complex structures and occasionally delightful legal needs. The specific lawyers who billed more or less than expected in 1900 as a consequence of these changes are all long dead, but if you'd surveyed people about the importance of Delaware corporate law reforms at the time, they probably would have been the ones with the strongest opinions.

This is still the case today: distribution effects are almost immediate, but incentive effects take time. If you reform student loans so that borrowing is limited based on the median future earnings of people who enroll in a particular program, the long-term effect is more petroleum engineering majors and fewer art history majors, but the most visible effect is that lots of people will need to change their majors or drop out of school. The people who really care about what expertise the American workforce will have in 2040 exist, but it's hard for them to care as much as someone who is faced with leaving their dream program and getting an office job instead. This leads to the somewhat frustrating outcome that we're all living with the incentives left over from debates over distribution that we no longer care about all that much.

Yet another messy area is terminology. It can be very fun to invert the mood affiliation in a debate and see how it sounds. For example, a cartel that monopolized several products recently stopped selling any of them to customers, demanding that these customers agree to a long-term price hike or do without. The FTC, naturally, is monitoring the situation—to make sure those customers (the movie studios) don't try to get away with anything.

Calling a labor union a cartel doesn't change anything about the economics of the situation; if they negotiate a better deal, actors and screenwriters will make more money and studios a bit less, and vice-versa. It also doesn't change anything to label other economic organizations as cartels; McDonald's franchisees, for example, all participate in a sort of voluntary cartel organization that monopolizes access to the McDonald's brand and uses its market power to negotiate better deals with suppliers. In fact, stripping away some of the language clarifies that the actual issue is, abstractly, that whenever intermediaries get an information advantage and closer customer relationship than their suppliers, they will take advantage of it, and it's perfectly reasonable that the extent to which they can do this ought to be a live political issue.

Conversely, any given writer or actor is not in a great negotiating position with respect to a studio that knows the streaming numbers and won't divulge them, and even a collective group is not necessarily at a net advantage. (If Disney's cash flow goes to zero during a drawn-out strike, they can issue bonds; if a screenwriter can no longer pay rent, SAG-AFTRA probably can't.)⁴

A fun recent example of a terminological debate with real-world consequences was Canada's tax on social media platforms that share news. Meta (disclosure: long) decided to stop allowing news articles to be shared by Canadian users, which meant that it was harder for Canadians to get information about wildfires through social media. A "tax" and a "fine" are, in economic terms, pretty similar. The real difference is the expected elasticity: a "fine" just means a tax set at some level to minimize the frequency of whatever’s being taxed. A tax is just a fine set at a level where it’s worth paying the fine. These have different moral connotations, but that’s because they end up reifying an empirical question ("What are the slopes of the supply and demand curves?") while disguising it as a moral judgment ("People should stop/keep doing this.") A government fining companies for disseminating news and then being surprised that news is harder to disseminate is more or less a joke; a government taxing something and then finding that the amount of it produced is less than expected is a common occurrence.

The real focus of all of this is reasoning about long-term tradeoffs. And tradeoffs are what makes something political in the first place. Different people have different values, priorities, even internal discount rates—being 5% worse-off today in exchange for being 10% better-off five years from now is not a trade everyone will take in all circumstances. Once something is cast in the language of tradeoffs, and both sides know what's being asked and what's being offered, they won't necessarily agree. But at least they'll know why.

Read More in The Diff

The Diff has touched on this kind of model in a few places:

• This piece ($) looks at how optimal pandemic policy changed after the introduction of the vaccine—with a focus on how we moved from a fat-tailed world of extreme risks towards one that was more normally distributed.

• Early in the pandemic, this one looks at banking during a crisis as a prisoner’s dilemma ($).

• GDPR had the immediate effect of creating lots of annoying popups, but the long-term effect of being a form of protectionism for European software companies ($).

• More recently, we looked at why some companies lobby to get regulated ($).

1. Ideally, one to two of these will look completely ridiculous: "How can you care that much about seafood?" versus "How can you waste even thirty seconds debating whether Dollar Trees margins have permanently reset lower in a world where 440 billion shrimp each year suffer from...?" There is a synthesis between these views, but realistically some people enjoy debating stocks for the fun of it, others enjoy taking first principles extremely seriously, and they select into discussions that feed on these respective interests.

2. This is a pretty simplified view, since parties don't make choices and individuals do. And the individuals making the relevant choices are not necessarily the ones you'd expect—someone who is actively running for office has to spend a lot of time raising money, hugging babies, remembering not to hug the donors and ask the babies for donations, etc., and simply doesn't have enough time to do that and also become an expert in comparative healthcare outcomes relative to spending across different countries, the spillover effects of domestic chip fabrication, Taiwanese views of Chinese views of Taiwanese sovereignty, etc. So staffers have outsized influence, and as David Shor, the champion of popularism, notes, these staffers are much more political and much more extreme than the voters they're trying to persuade.

3. How could this happen? One concrete example would be if a large amount of under-construction housing stopped being built because the developers ran into liquidity problems. If some policy directly or indirectly created enough demand to build those houses, the workers involved would be earning less per hour than they were at the peak, but the houses would get built—increasing the supply of housing and marginally lowering its cost.

4. It would be incredibly fun for labor unions to start issuing income share agreements in order to fund strikes. But the implicit social contract here is that unions get legal protections for activities that would otherwise be an antitrust problem, in exchange for not pursuing profit maximization at all costs.

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