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Posts Tagged ‘Inequality’

Writing a column every day is a recipe for making an occasional mistake.

Sometimes the errors are minor, such as when I put Tucson in New Mexico rather than Arizona.

And sometimes they are less trivial, such as when I mischaracterized subsidies for the Postal Service or when I incorrectly criticized the Committee for a Responsible Federal Budget.

In an event, I always try to acknowledge and fix my mistakes.

And that’s why I want to write today about Oxfam. Early last year, I wrote a column criticizing the group’s statist orientation, asserting in my title that the group was a leftist joke instead of a real charity.

Time to correct the record. But I want to begin by noting that my title was only partly wrong. Oxfam is very much a left-wing organization. In prior columns, I’ve shared critiques of the group’s statist ideology from Tim Carney, Marian Tupy, and Tony Travers.

And before I get to the part about fixing my mistake, I want to augment this list by sharing the views of two more experts. We’ll start with some excerpts from a column in the Wall Street Journal by David Henderson.

Oxfam recently published a 76-page report, “Reward Work, Not Wealth,” that advocates taxing the rich to reduce inequality and help the poor. …There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off.

Needless to say, Oxfam prefer the approach that gives more power and money to government.

Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude. …The document’s title, “Reward Work, Not Wealth,” is strange: Wealth is one of the main rewards for productive work. High taxes on wealth and the wealthy reduce the incentive to produce.

And Oxfam, to its credit, understands that confiscatory taxes will require a global tax cartel.

…the report…effectively advocates…the creation of a tax cartel. Since capital is extremely mobile and will go where it is lightly taxed—witness the corporate “inversions” of American companies—the report suggests “a new generation of international tax reforms.” Negotiating tax rates would take place under the aegis of “a new global tax body that ensures all countries participate on an equal footing.”

Reading Henderson’s column, we have additional confirmation that Oxfam is a run-of-the-mill statist organization that myopically believes in class warfare.

So you might think the group is no different that other leftists groups such as the United Nations or the Organization for Economic Cooperation and Development. Or no different than politicians such as Barack Obama or Hillary Clinton.

But Oxfam also has a reputation for beclowning itself with shoddy analysis.

Johan Norberg mocked the group’s ideology-over-results approach when he noted that Oxfam is distressed about an era of “neoliberalism” in the world (meaning, in this case, the European definition of pro-market classical liberalism), yet that’s also the period of time when the poor enjoyed huge gains.

For what it’s worth, I wrote a study 17 years ago debunking some of Oxfam’s sloppy work.

And here’s some of what Tim Worstall just wrote for the U.K.’s Adam Smith Institute.

Buried in Oxfam’s latest report about how disastrously unequal the world is we’ve got an assumption which is so breathtakingly foolish as to kill off any belief in the sense or sensibility of the organisation’s mindset. They’re trying to insist that the minimum wage in a place should be very much higher than GDP per capita in that same place. …the garment trade in Bangladesh…minimum wage there is…5,000 taka a month, or £50. …Yes, a low sum and most assuredly we’d all like it to be much higher. But Oxfam’s claim is that this should be a living wage of more like £250 a month (perhaps $250). Something which simply cannot happen. GDP per capita in Bangladesh is some $1,500 a year or so. We cannot have a minimum wage twice that. This would be the same claim as insisting that the UK minimum wage should be $80,000 a year (say, £60,000). …It’s a demand based upon the most aggressively stupid misunderstanding of what ails Bangladesh, isn’t it? ……to get this so wrong seriously calls into doubt Oxfam’s right to anything more than a contemptuous sneer. …Sorry folks, but Oxfam is deluded.

Tim concludes with some very wise words.

Bangladesh’s problem is not global inequality, the thing Oxfam is whining about, it’s Bangladesh’s poverty. …The cure for poverty is economic growth, the very thing which has reduced that global absolute poverty from 40% of all humans to under 10% in just these past three decades of that very neoliberal globalisation.

Now it’s finally time for my correction. When I wrote last year that Oxfam was “not a real charity,” I was merely implying that the group was a bad charity since it advocated policies that hurt poor people.

But thanks to new revelations about Oxfam’s involvement in horrific sex-crimes scandals, I’ve learned it doesn’t deserved to be called a charity of any kind. Check out these excerpts from a CNN report.

Oxfam’s deputy chief executive has resigned amid a growing sex crimes scandal involving the organization’s aid workers in Haiti and Chad. …Oxfam announced the resignation after a meeting with UK government officials Monday, at which it had fought to keep millions of pounds in public funding. …Oxfam received about £32 million (about $44 million) from the government last financial year, according to public records.

And the money from British taxpayers is just the tip of the iceberg.

Here’s a shocking bit of information from the conclusion of  David Henderson’s column.

Oxfam’s annual budget exceeds $1 billion, and it gets almost half of that from governments and the United Nations. So maybe it’s time for a new name. Oxgov.

Almost half of its budget from taxpayers?!? At best, that makes them a government contractor rather than a charity.

I’ll conclude with two points.

  • First, I think Oxfam should lose public funding. But not because some of its employees engaged in sexual predation. Yes, that’s bad, but I certainly don’t think sex abuse was ever part of the organization’s mission. Instead, it should lose funding because taxpayer money should not go to leftist organizations that advocate for bigger government (the same argument I use, by the way, when urging an end to OECD handouts).
  • Second, instead of telling people that “Oxfam is a letist joke rather than a real charity,” I’ll have to changes the second part of the sentence. Maybe “Oxfam is a leftist joke and it mooches from taxpayers.” I’m not sure that rolls off the tongue gracefully, so I’m open to other suggestions.

P.S. You probably won’t be surprised to learn that the International Monetary Fund partners with Oxfam. I guess the old saying is right that birds of feather flock together.

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The left’s fixation on reducing inequality is misguided. If they really care about the poor, they instead should focus on reducing poverty.

And that means pushing for more growth. We know from U.S. evidence and global evidence that better economic performance is the effective way to boost living standards for the less fortunate (I also recommend a look at the data from China).

Unfortunately, many folks on the left pursue policies that undermine prosperity and actually exacerbate inequality. I put together some examples back in 2015, and now it’s time to expand that list.

A report from the left-leaning Brookings Institution looks at how regulations protect – and enrich – the top 1 percent.

The real cause of elite inequality is the lack of open access and market competition in elite investment and labor markets. To bring the elite down to size, we need to make them compete. …people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill… Using microdata from the Census Bureau, I find that the “gratuitous pay” premium in certain industries has increased dramatically since 1980. …The accredited investor…rules contribute to inequality by giving the richest investors privileged access to the best investment strategies. …If the law was changed to allow mutual funds to offer hedge fund portfolios, hundreds of billions of dollars would be transferred annually from super-rich hedge fund managers and investment bankers to ordinary investors, and even low-income workers with retirement plans. …politicians and intellectuals often champion market competition—but what they mean by that is competition among low-paid service workers, production workers, or computer programmers who face competition from trade and immigration, while elite professionals sit behind a protectionist wall. …For lawyers, doctors, and dentists— three of the most over-represented occupations in the top 1 percent—state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay.

Matt Ridley, a columnist fo the U.K.-based Times, writes about the pernicious impact of cronyism, licensing, and industrial policy.

The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. …Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. …Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them. …Our current “industrial strategy” for energy — to subsidise offshore wind, solar, biomass and nuclear — is responsible for the fact that domestic electricity prices are the seventh highest… Domestic electricity bills are a higher proportion of household budgets for the poor than for the rich, so this policy is regressive; doubly so, because the wind and solar subsidies mostly go to the rich. 

Let’s consider health policy. Folks on the left favor the healthcare exclusion in the tax code because government supposedly should play a role in encouraging health insurance. What’s the impact of this policy? Well, let’s peruse a Robert Samuelson column on health policy and inequality, which is based on a study from the Mercatus Center.

…add health care to the causes of growing wage inequality in America. There’s a largely unknown paradox at work. Companies that try to provide roughly equal health insurance plans for their workers — as many do — end up making wage and salary inequality worse. …It’s simple arithmetic… Paying for expensive health insurance squeezes what’s left for wage and salary raises. Economic inequality increases, because health insurance typically represents a larger share of total compensation for lower-paid than higher-paid workers. Their wages are squeezed the most. …Even though the company raised its compensation package by 5 percent for all workers, the wage and salary gap between the best- and worst- paid workers widened. Pursuing one type of equality (health coverage) inadvertently worsened another type of inequality (wages and incomes). …From 1992 to 2010, about half the increase in wage and salary inequality is explained by rising health costs.

We’ll close with a new study by an economist at the University of Michigan for the National Bureau of Economic Research.

The three major reforms that I will analyze are: (1) the state income tax introduction, (2) the introduction of withholding, bundled with the introduction of third-party reporting, and (3) the intergovernmental agreement between the federal and the state governments for coordinating auditing practices. …the introduction of the income tax raised the Atkinson inequality index by 0.015, which is about 7 percent of the sample mean, statistically significant at the 1 percent level. …The income tax introduction raised the Gini coefficient by 0.014, which is about 3 percent, significant at the 5 percent level. …All of the three reforms raised the Theil index in a statistically significant way, at least at the 5 percent level. The introduction of the income tax and of the withholding raised it by about 0.06… In other words, the fact that the only effect that these reforms had in common was raising the revenues from income tax and making the government bigger and the private sector smaller, suggest that a bigger government, at least in the recent history, had the effect of higher inequality.

Here’s a chart from Professor Troiano’s research. Note how the rich got richer at the point (“0”) the income tax was implemented.

And here’s a look at what happened to various measures of inequality. Again, pay attention to the point (“0”) where the income tax was imposed.

Writing for PJ Media, Simon Constable discusses some implications of the NBER report.

Income taxes don’t reduce income inequality. Instead they do quite the opposite, according to December-dated analysis published by the National Bureau of Economic Research. The paper looked at three major 20th century U.S. tax reforms and found that they did nothing to decrease income inequality and everything to increase it. …Why did income inequality increase when that wasn’t the goal of the reforms? …bigger government ends up retarding the private sector and reducing the size of the wealth pie. Naturally, the poorer come out worst in such a situation, while the well-heeled can get top tier advice to dodge the tax bullet. Hence, the rich get richer and the poor stay skint. …Nobody who believes in liberty, or public choice theory, will be surprised to learn that higher taxes lead to more inequality,” says Robert E. Wright, professor of political economy at Augustana University in South Dakota. The problem is that the elites in any society, including the U.S., control the government and they quite naturally take care of themselves first, he says.

The bottom line is that our statist friends claim that they’re shooting at the rich, but the poor tend to suffer the most damage.

If you want more evidence, look at what happened to income for various groups during the pro-free market era of the 1980s and 1990s compared to what’s happened so far this century.

P.S. The most twisted look at inequality was produced by the IMF, which implied that radically lower living standards would be acceptable if everyone was more equally poor.

P.P.S. The most satirical look at inequality comes from David Azerrad.

P.P.P.S. The most insightful comment on inequality comes from Johan Norberg, who reminds us that we should be upset by unfairness, not inequality.

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Inequality is now a major dividing line in the world of public policy.

Supporters of limited government think it’s not a big issue and instead focus on the policies that are most likely to generate growth. Simply stated, they tend not to care if some people get richer faster than other people get richer (assuming, of course, that income is honestly earned and not the result of cronyism).

Folks on the left, by contrast, think inequality is inherently bad. It’s almost as if they think that the economy is a fixed pie and that a big slice for the “rich” necessarily means smaller slices for the rest of us. They favor lots of redistribution via punitive taxes and an expansive welfare state.

When talking to such people, my first priority is getting them to understand that it’s possible for an economy to grow and for all income groups to benefit. I explain how even small differences in long-run growth make a big difference over just a few decades and that it is very misguided to impose policies that will discourage growth by penalizing the rich and discouraging the poor.

I sometimes wonder how vigorously to present my argument. Is it actually true, as Thatcher and Churchill argued, that leftists are willing to hurt poor people if that’s what is necessary to hurt rich people by a greater amount?

Seems implausible, so when I recently noticed this amusing humor on Reddit‘s libertarian page, I was not going to share it. After all, it presumes that our friends on the left genuinely would prefer equal levels of poverty rather than unequal levels of prosperity.

But, after reading a new study from the International Monetary Fund, I’m wondering if I’m underestimating the left’s fixation with inequality and the amount of economic damage they’re willing to inflict to achiever greater equality of outcomes.

Here are some introductory passages to explain the goal of the research.

…it is worth reemphasizing some lessons from the “old masters” in economics who addressed this topic a few decades ago—including Arthur M. Okun and Anthony B. Atkinson in the 1970s. Their lessons—on how to elicit people’s views on inequality and how to summarize societal welfare using a monetary indicator encompassing both average incomes and their distribution—remain relevant for fiscal policymakers today. …a satisfactory theory of welfare must recognize that welfare depends on both the size and the distribution of national income. …This primer seeks to encourage more widespread use by policymakers of the tools developed by welfare theory. …the primer provides an in-depth, step-by-step refresher on two specific tools chosen because of their simplicity and intuitive appeal: Okun’s “leaky bucket” and Atkinson’s “equally-distributed-equivalent income.”

Please note that the IMF explicitly is saying that it wants policymakers to change laws based on what’s in the study.

And, as you continue reading, it should become obvious that the bureaucrats are pushing a very radical agenda (not that we should be surprised given the IMF’s track record).

Here’s the bureaucracy’s take on Okun and his pro-redistribution agenda.

Okun (1975) proposed a thought experiment capable of eliciting people’s attitudes toward the trade -off between equality and efficiency: Okun asked the reader to consider five families: a richer one making $45,000 (in 1975) and four poorer ones making $5,000. Would the reader favor a scheme that taxed the rich family $4,000 and transferred the proceeds to the poorer families? In principle, each poorer family would receive $1,000. But what if 10 percent leaked out, with only $900 reaching the recipients? What would the maximum acceptable leak be? The leak represented not only the administrative costs of tax-and-transfer programs (and, one might add, potential losses due to corruption), but also the fact that such programs reduce the economic incentives to work. …Okun reported his own answers to the specific exercise he proposed (his personal preference was for a leakage of no more than 60 percent). ….Okun was willing to accept that a $4,000 tax on the rich household [would] translate, with a 60 percent leakage, into a $400 transfer to each of the four poor households.

The only good part about Okun’s equity-efficiency tradeoff is that he acknowledges that redistribution harms the economy. The disturbing part is that he was willing to accept 60 percent leakage in order to take money from some and give it to others.

It gets worse. When the IMF mixes Okun with Atkinson, that’s when things head in the wrong direction even faster. As I noted last month, Atkinson has a theory designed to justify big declines in national income if what’s left is distributed more equally. I’m not joking.

And that IMF wants to impose this crazy theory on the world.

Atkinson (1970) showed that under the assumptions above and having identified a coefficient of aversion to inequality, it becomes easy to summarize the well-being of all households in an economy with a single, intuitive measure: the equally-distributed-equivalent income (EDEI), i.e., the income that an external observer would consider just as desirable as the existing income distribution. …The percentage loss in mean income—compared with the initial situation—that an observer would find acceptable to have a perfectly equal distribution of incomes was introduced by Atkinson (1970) as a measure of inequality.

The study then purports to measure “aversion to inequality” in order to calculate equally-distributed-equivalent income (EDEI).

The greater the observers’ aversion to inequality, the lower the EDEI. Table (2) reports for a few alternative ε coefficients, for the example above.

Here’s a table from the study, which is based on a theoretical rich person with $45,000 and a theoretical poor person with $5,000 of income. A society that isn’t very worried about inequality (ε = 0.2) is willing to sacrifice about $4,000 on overall income to achieve the desired EDEI. But a nation fixated on equality of outcomes might be willing to sacrifice $32,000 (more than 60 percent of overall income!).

I’ve augmented the table with a few of the aggregate income losses in red.

In other words, nations that have a higher aversion to inequality are the ones that prefer lots of misery and deprivation so long as everyone suffers equally.

Another use of this data is that it allows the IMF to create dodgy data on income (sort of like what the OECD does with poverty numbers).

It appears the bureaucrats want to use EDEI to claim that poorer nations have more income than richer nations.

…the ranking of countries based on the EDEI often differs significantly from that based on mean income alone. For instance, South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania. However, those countries’ lower inequality implies that their EDEI is significantly higher than South Africa’s. …Similarly, the United States’ mean income is considerably above that of the United Kingdom or Sweden. However, for an inequality aversion coefficient of ε=1.5, Sweden’s EDEI is above that of the United States, and for ε=2.0 also the United Kingdom’s EDEI is above that of the United States.

Here’s a table from the study and you can see how the United States becomes a comparatively poor nation (highlighted in red) when there’s an “aversion” to inequality.

In other word, even though the United States has much higher living standards than European nations, the IMF is peddling dodgy numbers implying just the opposite.

But the real tragedy is that low-income people will be much more likely to remain poor with the policies that the IMF advocates.

P.S. Fans of satire may appreciate this “modest proposal” to reduce inequality. I imagine the IMF would approve so long as certain rich people are excluded.

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Let’s consider some good news about America.

Some folks on the left like to claim that the middle class is shrinking and that therefore we need bigger government and more redistribution to protect these Americans from falling into poverty.

Well, the first half of that statement is true. The middle class is becoming smaller. But here’s the good news. As I noted in 2015 when sharing some data from Pew, the middle class is shrinking because more and more households are earning six-figure incomes.

Now we have more confirmation. Courtesy of Mark Perry of the American Enterprise Institute, here’s a nice chart based on data from the Census Bureau’s new report on income and poverty in the United States.

Want to feel even better?

In a column for CNBC, Professor Daniel Smith of Troy University explains that government data understates the improvements in living standards. He points out that total compensation has increased much faster than wages.

Complaints that the rich are getting richer while the majority have hit a brick wall in wage growth have led to calls to impose regulations and taxes aimed at creating a “fair” economy. This mantra, however, is wrought with holes and erroneous interpretation of the data… Over the last few decades, employees have been receiving an increasingly larger portion of their overall compensation in the form of benefits such as health care, paid vacation time, hour flexibility, improved work environments and even daycare. …Total compensation, which adds these benefits to wages and salaries, shows that earnings have actually increased more than 45 percent since 1964.

And he notes that income gains are understated if measured against the PCE index rather than the consumer price index.

Furthermore, “purchasing power,” the amount of stuff people can buy with each dollar, has changed dramatically… CPI is notorious for overstating inflation, and thus understating the growth of real wages received by workers. Adjusting the data with the more appropriate Personal Consumption Expenditure index brings the growth in average hourly wages from 5.58 percent to more than 35 percent and the growth in total compensation of employees from more than 45 percent to more than 87 percent.

The bottom line is we’re able to buy more and better for less work.

But even that index fails to grasp the drastic increase in what workers get for their wages. …100.5 hours of work was required to purchase a washing machine in 1959 compared to just 23.3 hours of work (for the average worker) in 2013. Purchasing a TV demanded an astounding 127.8 hours of work in 1959, whereas a worker in 2013 could purchase one with only 20.7 hours of work. Moreover, the improved quality of these goods over the past few decades is staggering. …Today’s iPhones and other smart-phone models seem like a different species from their predecessors… We’ve seen the same progress in knee-replacement surgeries, computers, the Internet, vacuum cleaners, and other technologies we’ve come to rely on.

Professor Smith wrote this piece back in 2014, but these arguments apply just as well today as they did back then.

Though I don’t want to be a Pollyanna. There are very worrisome trends in our economy, especially increased dependency and reduced labor force participation.

So if you prefer to look at the glass as being half empty, Nicholas Eberstadt of the American University authored an article that is very pessimistic assessment about recent trends.

It turns out that the year 2000 marks a grim historical milestone of sorts for our nation. For whatever reasons, the Great American Escalator, which had lifted successive generations of Americans to ever higher standards of living and levels of social well-being, broke down around then—and broke down very badly. …it should be painfully obvious that the U.S. economy has been in the grip of deep dysfunction since the dawn of the new century. …It took America six and a half years—until mid-2014—to get back to its late 2007 per capita production levels. And in late 2016, per capita output was just 4 percent higher than in late 2007—nine years earlier. By this reckoning, the American economy looks to have suffered something close to a lost decade. …Between 2000 and 2016, per capita growth in America has averaged less than 1 percent a year. To state it plainly: With postwar, pre-21st-century rates for the years 20002016, per capita GDP in America would be more than 20 percent higher than it is today. …If 21st-century America’s GDP trends have been disappointing, labor-force trends have been utterly dismal. Work rates have fallen off a cliff since the year 2000 and are at their lowest levels in decades.

I don’t disagree with any of this. Growth has been weak this century.

Which is hardly a surprise since we’ve seen an erosion of economic liberty (thanks Bush and Obama!).

But I also want to keep things in perspective. Weak growth is better than no growth. Our living standards are increasing, even if they could – and should – be rising at a faster clip.

So let me swing back to the Pollyanna side by sharing a chart which ostensibly is bad news because it shows rising inequality. But I view it as good news because it shows that all of us are at least 40 percent richer – in real terms – than we were back around 1980.

By the way, Thomas Sowell has pointed out that higher-income households tend to do better because they have more people working, while lower-income households feature lots of dependency. Moreover, if Professor Smith and others are right, the increase in living standards is far greater than what this chart shows anyhow. But even if you accept this data at face value, we are all getting richer over time.

Yes, growth rates should be faster and incomes should be climbing more rapidly. Especially at the bottom. Whether you look at global data or country-specific data, that’s an argument for free markets and small government.

As I wrote last year, we don’t need perfect policy to get more prosperity. Just give the private sector some breathing room.

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Every so often, I mock the New York Times for biased or sloppy analysis.

Now there’s a new column by David Leonhardt that cries out for correction.

He’s very upset that upper-income people are enjoying higher incomes over time.

A…team of inequality researchers…has been getting some attention recently for a chart… It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality. …the very affluent, and only the very affluent, have received significant raises in recent decades. This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. …only very affluent families — those in roughly the top 1/40th of the income distribution — have received…large raises. …The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

And here’s the chart that ostensibly shows that the economy is broken.

And what is the solution for this alleged problem? Class-warfare taxation and bigger government, of course.

…there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population. Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

Whenever I see this type of data, I’m automatically suspicious for two reasons.

  1. The people at various income levels in 1980 aren’t the same as the people at those income levels in 2014. In other words, there is considerable income mobility, with some high-income people falling to the middle of the pack, or even below, and some low-income people climbing the middle of the income distribution, or even higher. At the very least, this type of chart exaggerates the degree to which “the rich are getting richer.”
  2. Moreover, rich people getting rich doesn’t imply that poor people are losing income. This chart shows that all income percentiles generally enjoy more income with each passing year, so it isn’t grossly misleading like the charts that incorrectly imply income gains for the rich are at the expense of the poor. Nonetheless, a reader won’t have any way of knowing that more inequality and poverty reduction can go hand in hand.

But I think this chart from the New York Times inadvertently shows something very interesting.

As shown in the excerpt above, Mr. Leonhardt wants us to look at this data and support bigger government and class warfare.

Yet look at the annual data. The chart above has the numbers for 1980 and 2014. To the right, I’ve put together the numbers for 1987, 1996, and 2004.

One obvious conclusion is that prosperity (as shown by rising income levels) was much more broadly and equally shared in the 1980s and 1990s, back when the economy was moving in the direction of free markets and smaller government under both Reagan and Clinton.

But look at what happened last decade, and what’s been happening this decade. Government has been expanding (as measured by falling scores from Economic Freedom of the World).

And that’s the period, thanks to Bush-Obama statism, when lower-income people began to lag and income gains were mostly concentrated at the top of the income redistribution.

As the very least, this certainly suggests that Leonhardt’s policy agenda is misguided. Assuming, of course, the goal is to enable more prosperity for the less fortunate.

I’ll add another point. I suspect that big income gains for the rich in recent years are the result of easy-money policies from the Federal Reserve, which have – at least in part – pushed up the value of financial assets.

The bottom line is that Leonhardt seems motivated by ideology, so he bends the data in hopes of justifying his leftist agenda.

What makes this sad is that the New York Times used to be far more sensible.

Back in 1982, shortly after the Professors Hall and Rabushka unveiled their plan for a flat tax, here’s what the New York Times opined.

Who can defend a tax code so complicated that even the most educated family needs a professional to decide how much it owes? …President Reagan’s tax package will eventually roll back rates to the level of the late 1970’s, but it will not simplify the code or rid it of provisions that penalize hard work and reward unproductive investment. …the income base that is taxed has been so eroded by exceptions and preferences that the rates on what is left to tax must be kept high. Thus, the tax on an extra dollar of income for a typical family earning $20,000 is 28 percent and progressively higher for the more affluent. …The most dramatic fresh start, without changing the total amount collected, would be a flat-rate tax levied on a greatly broadened income base. Senator Helms of North Carolina would rid the law of virtually every tax preference and tax all income at about 12 percent. Representative Panetta of Cali-fornia would retain a few preferences and tax at a flat 19 percent. Either approach would greatly improve the efficiency of the system, simplifying calculations and increasing the incentive to earn.

And here’s what the editors wrote about Governor Jerry Brown’s modified flat tax in 199s. They started by praising the core principles of the flat tax.

Taking Jerry Brown seriously means taking his flat tax proposal seriously. Needlessly, he’s made that hard to do. By being careless, the former California Governor has bent a good idea out of shape. …Mr. Brown’s basic idea — creating a simplified code that encourages saving — is exactly right. …The present tax code is riddled with wasteful contradictions and complexity. For example, profit from corporate investment is taxed twice — when earned by the corporation and again when distributed to shareholders. That powerfully discourages savings and investment — the exact opposite of what the economy needs to grow. The remedy is, in a word, integration, meshing personal and corporate codes so that the brunt of taxes falls on consumption, not saving. …there is a reform that achieves all these objectives. Robert Hall and Alvin Rabushka, economists at the Hoover Institution, have proposed an integrated code that applies a single rate to both personal and corporate income. Their plan wipes away most deductions and exemptions, permitting a low tax rate of 19 percent. …Under the Hall-Rabushka plan, individuals would pay taxes on earnings and corporations would pay tax on interest, dividends and profits. That way, every dollar of income would be taxed once and only once.

And they rightly criticized Governor Brown for violating those principles.

Jerry Brown borrowed some of the elements of Hall-Rabushka. He too would eliminate wasteful exemptions, adopt a single rate and favor saving by exempting corporate investment. But at that point, he turns glib. He would impose on corporations a value-added tax, similar to a national sales tax. That eliminates the elegant symmetry of Hall-Rabushka. Indirectly, Mr. Brown’s variation would tax some income twice — which is why his supposed 13 percent rate would collect revenue equal to about 20 percent of total income.

Wow, this isn’t what I would write, but it’s within shouting distance.

The editors back then understood the importance of low marginal tax rates and they recognized that double taxation is a bad thing.

Now check out what the New York Times believes today about tax reform.

First and foremost, the editors want more money taken from the productive economy to expand the D.C. swamp.

Real reform would honestly confront the fact that in the next decade we will need roughly $4.5 trillion more revenue than currently projected to meet our existing commitment…. Even more would be needed if the government were to make greater investments.

And even though class-warfare taxation is unlikely to generate much revenue, the editors want both higher tax rates and more double taxation.

…it would make sense to increase the top rates on them and eliminate a break on income from investments. …the richest 1 percent pay 33 percent of their total income in taxes; if rates were changed so they paid 40 percent, it would generate $170 billion of revenue in the first year.

The editors want to take one of the most anti-competitive features of the current system and make it even worse.

It would also be a good idea to scale back accelerated depreciation allowances that let businesses write off investments faster than assets actually wear out. Speedy write-offs for luxuries like corporate jets could be eliminated altogether.

They also want to further undermine the ability of U.S. companies to compete on a level playing field in foreign markets.

…they should agree to close…the ability of corporations to defer tax on profits earned abroad.

In a display of knee-jerk statism, the editors also want new tax burdens to finance an ever-larger burden of government. Such as an energy tax.

New forms of taxation are also needed. Even prominent Republicans like James Baker III, George Shultz and Henry Paulson Jr. support a carbon tax imposed on emissions to reduce greenhouse gases. …revenue generated by carbon taxes could be used for other purposes as well, including investments in renewable energy and public transportation.

And a tax on financial transactions.

Revenue can also be raised by imposing a tax on the trading of stocks, bonds and derivatives. …Estimates show that a financial transaction tax of even 0.01 percent per trade ($10 on a $100,000 trade) could raise $185 billion over 10 years, enough to finance prekindergarten for 3- and 4-year olds, with money left over.

But the granddaddy of new taxes would be the value-added tax, a money machine for bigger government.

A value-added tax would be akin to a national sales tax, but harder to evade than traditional sales taxes and thus an efficient revenue raiser.

I’m genuinely curious whether there is any type of tax increase the NYT wouldn’t support.

But that’s not really the point of this column. The real lesson is that it’s sad that the editors have gone from being rationally left to being ideologically left.

P.S. I confess that I especially enjoy when the New York Times inadvertently publishes pieces that show the benefits of free markets and personal liberty.

Which is sort of what happened with Leonhardt’s data, which shows more broadly shared prosperity when economic liberty was increasing.

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In addition to his exemplary work as a Senior Fellow for the Cato Institute, Johan Norberg narrates some great videos for Free to Choose Media. Here are some that caught my eye.

But my favorite video, which I shared back in January, is his concise explanation of why policy makers should focus on fighting poverty rather than reducing inequality.

I’m posting it again to set the stage for a discussion on inequality and fairness.

Now let’s dig into the main topic for today.

A study by three academics from Yale’s Department of Psychology concludes that people want fairness rather than equality.

…there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality.

My former grad school classmate Steve Horwitz wrote about the aforementioned study

…what we really care about is something other than inequality per se. We care about upward mobility, or average income overall, or how well the least well off do. …A recent study in Nature argued, with evidence, that what bothers people more than inequality per se is “unfairness.” People will accept inequality if they feel the process that produced it is fair. …when I give talks about inequality. I point out the number of Apple products visible in the room and ask them if they think the wealth Steve Jobs and other Apple founders accumulated over their lifetimes was objectionable. Is that the kind of inequality they object to? Students are usually hard-pressed to articulate why Jobs’ wealth is wrong… I also remind them that economic studies show that only about 4% of the total benefits of innovation accrue to the innovator. The rest goes to consumers.

Steve cites Nozick and Hayek to bolster his argument before then making the key point that markets produce material abundance based on genuine fairness.

As Robert Nozick argued in Anarchy, State, and Utopia: if each step in the evolution of the market is fair by itself, how can the pattern of income that emerges be unfair? …Hayek…observed in The Constitution of Liberty that if we want equality of outcomes, we will have to treat people unequally. If, however, we treat people equally, we will get unequal outcomes. Hayek’s argument was premised on the fact that human beings are not equal in our native intelligence, strength, skills, and abilities. …If people really care about fairness, then supporters of the market should be insisting on the importance of equality before the law. …Equality of outcomes requires that we treat people differently, and this will likely be perceived as unfair by many. Equality before the law corresponds better with notions of fairness even if the outcomes it produces are unequal. …If what appear to be concerns about inequality are, in fact, concerns about unfairness, we have ways of addressing them that demonstrate the power of exchange and competitive markets. Markets are more fair because they require that governments treat us all equally and that none of us have the ability to use political power to protect ourselves from the competition of the marketplace and the choices of consumers. In addition, market-based societies have been the best cure for poverty humans have ever known.

Writing for CapX, Oliver Wiseman analyzes other scholarly research on equality and fairness.

A 2012 study by behavioural economists Dan Ariely and Mike Norton generated some attention for demonstrating that Americans wanted to live in a more equal country. But more equal is not the same thing as fully equal. …if you let people choose between equal and unequal societies – and then tell them that they themselves will be assigned a level of wealth within it completely at random – most people choose inequality. And that preference is observable across the political spectrum, in different countries and at a range of ages.

But people don’t want undeserved inequality since that is the result of unfair interventions (i.e., cronyism).

This paper’s conclusions help explain much of the outcry over economic inequality in recent years. Occupy Wall Street and the very idea of the “one per cent” emerged just after the financial crisis plunged much of the world into recession, and US and British banks were handed billion-dollar bailouts to steady the ship. The anger didn’t come from the fact that bankers were so well paid. It came from the perception that they’d made that money by piling up risk rather than being particularly clever or hard-working – risk that was now being underwritten by the taxpayer. The wealth wasn’t just distributed unequally, but unfairly. The market mechanisms that most people accepted as the rules of the economic game suddenly seemed rigged. …Voters, in other words, don’t want equality – they want fairness. …As the Soviets found, true economic equality cannot be accommodated within a system that allows people tolerable levels of economic and political freedom. But fairness, by contrast, is something capitalism can – and should – deliver.

Professor Tyler Cowen of George Mason University cites some additional academic research buttressing the conclusion people don’t object to fair types of inequality.

…most Americans don’t mind inequality nearly as much as pundits and academics suggest. A recent research paper, by Graham Wright of Brandeis University, found that polled attitudes about economic inequality don’t correlate very well with the desire for government to address it. There is even partial evidence, once controls are introduced into the statistics, that talk of inequality reduces the support for doing something about it. …It’s not obvious why such counterintuitive results might be the case. One possibility is that…talk about economic inequality increases political polarization, which lowers the chance of effective action. Or that criticizing American society may cause us to feel less virtuous, which in turn may cause us to act with less virtue. …A variety of other research papers have been showing that inequality is not a major concern per se. One recent study by Matthew Weinzierl of Harvard Business School shows that most Americans are quite willing to accept economic inequality that stems from brute luck, and that they are inclined to assume that inequality is justified unless proved otherwise.

Last but not least, Anne Bradley of the Institute for Humane Studies augments this analysis by explaining the difference between ethical market-driven inequality versus unfair cronyist-caused inequality.

The question of whether income inequality is bad hinges on the institutions within that society and whether they support entrepreneurship and creativity or thuggery and exploitation. Income inequality is good when people earn their money by discovering new and better ways of doing things and, through the profit mechanism, are encouraged to bring those discoveries to ordinary people. …Rising incomes across all income groups (even if at different rates) is most often the sign of a vibrant economy where strangers are encouraged to serve each other and solve problems. Stagnant incomes suggest something else: either a rigged economy where only insiders can play, or an economy where the government controls a large portion of social resources, stalling incomes, wealth, and wellbeing.

She includes a very powerful example of why it can be much better to live in a society with high levels of (fair) inequality.

Consider the following thought experiment: knowing nothing other than the Gini index scores, would you rather live in a world with a Gini of .296 (closer to equality) or .537 (farther from equality)? Many people when asked this question choose the world of .296. These are the real Gini scores of Pakistan (.296) and Hong Kong (.537). If given the choice, I would live in Hong Kong without thinking twice. Hong Kong has a thriving economy and high incomes, and it is the world leader in economic freedom. The difference between these two countries could not be more striking. In Pakistan, there might be more income equality, but everyone is poorer. It is difficult to emerge out of poverty in Pakistan. Hong Kong provides a much richer environment where people are encouraged to start businesses, and this is the best hope for rising incomes, or income mobility.

Her example of Hong Kong and Pakistan is probably the most important takeaway from today’s column.

Simply stated, it’s better to be poor in a jurisdiction such as Hong Kong where there is strong growth and high levels of upward mobility. Indeed, I often use a similar example when giving speeches, asking audiences whether poor people are better off in Hong Kong, which has only a tiny welfare state, or better off in nations such as France and Greece, which have bloated welfare states but very little economic dynamism.

The answer is obvious. Or should be obvious, at least to everyone who wants to help the poor more than they want to punish the rich (and there are plenty in the latter camp, as Margaret Thatcher explained).

And I’m now going to add my China example to my speeches since inequality dramatically increased at the same time that there was a stupendous reduction in poverty.

Once again, the moral of the story should be obvious. Focus on growth. Yes, some rich people will get richer, but the really great news is that the poor will get richer as well. And so long as everyone is earning money through voluntary exchange rather than government coercion, that also happens to be how a fair economy operates.

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I periodically share data showing that living standards are higher in the United States than in Europe.

My goal isn’t to be jingoistic. Instead, I’m warning readers that we won’t be as prosperous if we copy out tax-and-spend friends on the other side of the Atlantic (just like I try to draw certain conclusions when showing how many low-tax jurisdictions have higher levels of economic output than the United States).

I’m sometimes asked, though, how America can be doing better than Europe when we have more poverty.

And when I ask them why they thinks that’s the case, they will point to sources such as this study from the German-based Institute of Labor Economics. Here’s some attention-grabbing data from the report.

The United States has the highest poverty rate both overall and among households with an employed person, but it stands farther away from the other countries on its in-work poverty rate than its overall poverty rate. The contrast between the US and three other English-speaking countries — Australia, Ireland, and the United Kingdom — is particularly striking. Compared to those three nations, the United States has an overall poverty rate only a little higher but an in-work poverty rate that is much higher.

And here’s the main chart from the study, with the United States as the bottom. It appears that there twice as much poverty in the USA as there is in a stagnant economy like France.

There even appears to be more poverty in America than there is in Spain and Italy, both of which are so economically shaky that they required bailouts during the recent fiscal/financial crisis.

Sounds horrible, right?

Yes, it does sound really bad. However, it’s total nonsense. Because what you read in the excerpt and see in the graph has nothing to do with poverty.

Instead, it’s a measure of income distribution.

And, if you read carefully, the study actually admits there’s a bait-and-switch.

The…approach to measuring poverty is a “relative” one, with the poverty line set at 60 or 50 percent of the median income.

Think about what this means. A country where everyone is impoverished will have zero or close-to-zero poverty because everyone is at the median income. But as I’ve explained before, a very wealthy society can have lots of “poverty” if some people are a lot richer than others.

And since the United States is much richer than other nations, this means an American household with $35,000 of income can be poor, even though they wouldn’t count as poor if they earned that much elsewhere.

This is like grading on a rigged curve. And if you read the fine print of the IZA study, you’ll see that the “poverty” threshold for a four-person household magically jumps by $16,260.

For a household of four (two adults, two children) the difference between the official US threshold and the 60-percent-of-median threshold amounts to more than $16,000 ($24,000 versus $40,260). This means that the size of the working poor population in America according to the official poverty measure is significantly lower than the size obtained in studies using a relative threshold.

In other words, you can calculate a much higher poverty rate if you include people who aren’t poor.

By the way, since the IZA report acknowledges this bait-and-switch approach, I guess one would have to say that the study technically is honest.

But it’s still misleading because most people aren’t going to read the fine print. Instead, they’ll see the main chart showing higher “poverty” and assume that there is a much higher percentage of actual poor people in the United States.

Moreover, some people may understand that there’s a bait-and-switch and simply want to help fool additional people.

And I’m guessing that this is exactly what the authors and the IZA staff expected and wanted. And if that’s the case, then the study is deliberately misleading, even if not technically dishonest.

I’ll close by stating that I don’t mind if folks on the left want to argue that market-based societies are somehow unfair because some people are richer than others. And it’s also fine for them to argue that we should be willing sacrifice some of our national prosperity to achieve more after-the-fact equality of income.

But I’d like for them to be upfront about their agenda and not hide behind dodgy data manipulation.

P.S.When you do apples-to-apples comparisons of the United States with the best-performing economies of Europe, you find that the poor tend to be at the same level, but every other group is better off in America.

P.P.S. You probably won’t be surprised to learn that both the Obama Administration and the leftists at the OECD prefer the “relative” definition of poverty.

P.P.P.S. The problem with our statist friends, as Margaret Thatcher explained, is that some of them are so upset about inequality that they’re willing to make everyone poorer if that’s what it takes to reduce income differences.

P.P.P.P.S. Indeed, this “Swiftian” column about reducing inequality is satire, but one wonders whether statists would actually accept such an outcome.

P.P.P.P.P.S. Data from China demonstrates why our attention should be on poverty reduction rather than inequality.

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