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Posts Tagged ‘Inequality’

In an ad during last year’s campaign, Kamala Harris asserted that “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested redistribution.

Here’s an oft-used meme illustrating this argument that fairness is only possible with “equality of outcomes.”

I admit this is a clever image, but only in theory.

If you look at the societies that actually have followed Marx’s dictum of “From each according to his ability, to each according to his needs,” you find misery and destitution (nations such as Cuba, North Korea, and Venezuela today, and countries such as Maoist China and the Soviet Union in the past).

Sort of like this modified meme.

But the above meme only tells part of the story.

Because here’s a look at what capitalism actually delivers.

In other words, there may be inequality in capitalism, but only in the sense that some people get richer faster than other people get richer.

If we mixed the final two memes, we would get something akin to the right side of this image, which shows equal misery under socialism and unequal prosperity under capitalism (hat tip to Winston Churchill).

The bottom line is that if we care about the well being of the less fortunate, the policy goal should be free markets and limited government.

Which was the entire point of my three-part series (here, here, and here) on poverty and inequality.

P.S. Here’s a story from Sweden about what happens when the ideology of equality produces bizarre choices.

 

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Back on December 28, I shared four charts for the explicit reason that I wanted everyone to understand that average living standards in the western world have skyrocketed over the past few centuries.

I could have used that data to clear up myths about “robber barons” or “sweatshops,” but I had a more modest goal. I simply wanted to show that it’s possible for all of us to become much richer if we give the economy enough breathing room.

And that means policy makers should focus on growth rather than inequality (especially since the policies to reduce inequality generally lead to less prosperity).

Some pundits don’t grasp that essential point. Christopher Ingraham of the Washington Post groused in a recent column that Jeff Bezos and Elon Musk became much wealthier in 2020.

Billionaires as a class have added about $1 trillion to their total net worth since the pandemic began. And roughly one-fifth of that haul flowed into the pockets of just two men: Jeff Bezos, chief executive of Amazon (and owner of The Washington Post), and Elon Musk of Tesla and SpaceX fame. …the two men increased their net worth by a staggering $200 billion last year, a sum greater than the gross domestic products of 139 countries. …two men amassed enough wealth this year to end all hunger in America (with a price tag of $25 billion, according to one estimate) eight times over… The evident difficulty of getting billionaire wealth to trickle down to everyone else is a challenge for policymakers in our new gilded era.

Notice, specifically, that Mr. Ingraham ponders the “difficulty of getting billionaire wealth to trickle down to everyone else.”

What he apparently does not understand is that the rest of us don’t lose money when people like Bezos and Musk become richer.

Indeed, it’s far more accurate to say that they actually created wealth for the rest of us.

If you don’t believe me, perhaps you’ll be convinced by Professor William Nordhaus of Yale, who authored a seminal study back in 2004 that estimated producers only capture a tiny slice of the wealth they create for society.

The present study examines the importance of Schumpeterian profits in the United States economy. …We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. …Using data from the U.S. nonfarm business section, I estimate that innovators are able to capture about 2.2 percent of the total social surplus from innovation. This number results from a low rate of initial appropriability (estimated to be around 7 percent) along with a high rate of depreciation of Schumpeterian profits (judged to be around 20 percent per year).

By the way, Professor Nordhaus won the Nobel Prize for his work on climate change, is affiliated with the Brookings Institution, and he supports a carbon tax. So he’s not some fire-breathing libertarian with a mission of defending capitalism.

He simply crunched the data and found innovators produce far more wealth for society than they do for themselves.

In a 2018 article for the American Institute for Economic Research, Professor Don Boudreaux of George Mason University elaborated on the implications of the Nordhaus research.

…each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality. …That’s quite a bargain for humanity! …Bezos alone is responsible for making his fellow human beings nearly $6.5 trillion dollars better off as a group. …Similar calculations can in principle be made for every entrepreneur who has ever succeeded in the modern market economy, from legendary titans such as Bezos and the late Steve Jobs to the far more numerous yet unknown – but as a group no less important – entrepreneurs who innovate in much smaller ways. …It’s as if strangers routinely approach us and, asking nothing in return, hand to each of us a stash of cash. …capitalism works magnificently.

Amen to the final three words.

Back in 2014, I explained that we should be thankful for rich entrepreneurs.

They made the rest of us richer as they became rich themselves. That’s a win-win situation.

I’ll close by citing the words of Joseph Schumpeter. He’s not nearly as famous as other economists such as Milton Friedman or Adam Smith, but I don’t know anybody who was more succinct and more accurate in describing the real-world benefit of capitalism.

P.S. Needless to say, the above analysis gets much weaker if companies such as Tesla and Amazon are benefiting from government cronyism.

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Ethical people, regardless of ideology, should be motivated by an empathetic desire to help the poor rather than a spiteful thirst to punish the rich.

That was the message in Part I and Part II of this series. That’s also today’s message, and we’ll start with this video.

There’s a lot of information in this video, broken down into five thematic points.

  1. Profit (earned through voluntary exchange) is good, while plunder (obtained through government coercion) is bad.
  2. Because people are different, it is important to distinguish between equality of opportunity and equality of outcomes.
  3. People don’t understand inequality, and that leads many of them to overlook the important problem of poverty.
  4. We are getting richer over time, meaning that the middle class is only disappearing because some are becoming rich.
  5. Thanks to the spread of pro-market policies, the entire world is becoming more prosperous with better life outcomes.

For today’s column, let’s focus on item #3 and I want to specifically take this opportunity to explain why we should be aware of how a type of data known as the “Gini coefficient” is used (and sometimes misused).

By way of background, the Gini coefficient measures the distribution of income in a society. As seen in this illustration from Wikipedia, a high coefficient means some people have a lot more income than others and a low coefficient means most people have similar levels of income.

I’ve never been a big fan of the Gini coefficient for three reasons.

First, it’s often used by folks on the left who want higher taxes and more redistribution. Though that’s actually an indictment of how the coefficient is misused.

Second, it doesn’t tell us whether inequality is the result of something good (some people getting rich by providing especially valuable goods and services) or the result of something bad (some people grabbing undeserved loot thanks because of bailouts, subsidies, protectionism, industrial policy, and cronyism).

Third, it does not tell us whether a society is poor or prosperous.

Regarding that final point, Professor Davies pointed out in the video that the most equal nations in the world are Sweden and Afghanistan.

But having similar Gini coefficients is utterly meaningless because it turns out that the similar scores are for radically different reasons – i.e., people in Afghanistan are equally impoverished and people in Sweden are equally prosperous.

And I can’t resist pointing out that Sweden’s superior results are surely correlated with the fact that Swedes enjoy far higher levels of economic liberty (Sweden is #22 and Afghanistan is #136 according to the Heritage Foundation’s Index of Economic Freedom).

You could also do a comparison between nations with very different Gini coefficients.

The United States, for instance, is much more “unequal” than Afghanistan. But I can’t imagine anyone in America wanting to trade places. After all, almost everyone in the U.S. is far richer than almost everyone in Afghanistan.

Or, if you prefer comparing developed nations, I’ve previously noted that poor people in the United States have the same amount of income as middle-class people in nations with lower levels of inequality.

I’ll close with one final bit of data that shows why Gini coefficients should be viewed with caution. Here’s another visual from the Wikipedia page, this one showing how world inequality increased substantially between 1820 and 2002.

Was that increase in inequality a bad outcome?

Of course not. It was simply a result of the Western world becoming rich because of limited government and the rule of law.

And now that developing nations are finally shifting to market-oriented policies, their incomes also are increasing (which, as a side effect, means global inequality is decreasing).

In other words, we should pay attention to the recipe for growth and prosperity, not the Gini coefficient.

P.S. While I’m not a fan of the Gini coefficient, the so-called trade deficit will always be my least favorite statistic.

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I began yesterday’s column with a short clip of me explaining why we should focus on reducing poverty, not reducing inequality.

Here’s a more thorough discussion of the same topic.

The video makes three central points, all of which are very sound.

  1. The economy is not a fixed pie, the rest of us don’t become poor when someone else becomes rich.
  2. In a free society, there will be unequal outcomes because we have all make different choices in life.
  3. Fixating on the irrelevant issue of inequality distracts from addressing the real problem of poverty.

I want to focus on #3 because it’s very distressing that some folks on the left are more interested in hurting the rich rather than helping the poor.

Indeed, some of them are so motivated by spite that they even advocate for policies that will hurt poor people so long as rich people are hurt even more.

I normally try to avoid sounding judgemental, but that’s morally reprehensible.

The decent thing to do is figure out the policies that will help people climb the economic ladder.

With that in mind, here are some highlights from a recent FEE column by Gonzalo Schwarz. He begins with the common-sense observation that it’s best to focus on upward mobility.

…economic mobility, poverty, and income inequality…are not the same, and the policy responses to address them vary. …the income inequality narrative has come to dominate our current public policy discourse, especially in the United States. …The rich are getting richer, but the poor are getting richer too… Policies that aim to remove the barriers faced by people looking to climb the income ladder should be rigorously discussed and pursued.

He then points out that policies to reduce inequality often backfire.

Schwarz cites the minimum wage as an obvious example since it is a recipe for joblessness when politicians mandate pay levels that exceed the value of many low-skill workers.

But my interest in public finance leads me to share this excerpt.

Policy solutions aimed at reducing income inequality will not necessarily positively impact those looking to escape poverty… Quite often, these goals can come into conflict. …A…popular public policy “solution” to address income inequality is to raise the corporate income tax (CIT) and use the proceeds to fund government programs… A recent Harvard Business School working paper…find that a reduction in state corporate income taxes increases real investment, a key driver of economic growth. This is consistent with data from the Organisation for Economic Cooperation and Development (OECD), which published a wide-ranging 2008 paper that found that taxes on income tend to hamper economic growth significantly more than other tax instruments.

Schwarz’s conclusion is spot on.

Pursuing an agenda focused on boosting upward social mobility is more conducive to the discovery of the barriers in the way of human flourishing and wealth creation. Breaking down these barriers, both artificial and natural, is the best way to ensure that each and every person has the opportunity to achieve their American Dream. Certainly, we don’t need more income inequality to achieve broader prosperity but chasing the inequality red herring puts that goal at risk.

I’ll add my two cents to this discussion by noting that President John F. Kennedy was right to observe that a rising tide lifts all boats.

Data from the Census Bureau shows that all income groups tend to rise and fall together.

In other words, if you’re hurting the rich, you’re probably hurting the poor as well. And vice-versa.

And if you’re enacting policies that help the rich, then incomes for everyone else are probably rising as well.

P.S. Regular readers already know this, but I’ll make the should-be obvious point for any new readers that there are some types of government policy (bailouts, subsidies, protectionism, industrial policy, cronyism, etc) that produce unjust forms of inequality.

In other words, it’s good when people become rich by providing the rest of us with goods and services we value, but it’s not good for them to get rich by climbing into bed with politicians.

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I have a couple of cameos in a new left-leaning documentary film, Race to the Bottom. I shared a clip two day ago with my views on corporate tax and the Laffer Curve.

Today, here’s what I said about the left’s mistaken views on inequality.

The fundamental problem is that I think some of our friends on the left are primarily motivated by disdain for the rich.

Indeed, their envy and resentment is so strong that they’re happy to support policies that hurt the poor, so long as the rich suffer a disproportionate amount of harm.

Consider this sarcastic visual.

I hope this visual greatly exaggerates the problem, but I’ve previously shared substantive research suggesting that the folks on the left are fixated on punishing success.

That agenda does not produce good results.

In a thorough article for Reason, David Henderson of the Hoover Institution explores the issues of poverty and inequality.

Most of what is framed as a problem of inequality is better conceived as either a problem of poverty or a problem of unjustly acquired wealth. …It’s important to distinguish the concepts of inequality and poverty. …Many people who worry about income inequality want to tax higher-income people more. Given what economists know about the harmful effects from raising already high marginal tax rates even higher, tax increases could certainly reduce measured inequality—because they would cause higher-income people to reduce their taxable income by working less, by taking more pay in the form of untaxed fringe benefits, or by investing more in municipal bonds, whose interest is not taxable by the feds. Of course, none of this would make lower-income people better off. Indeed, to the extent that higher taxes discourage capital accumulation, they slow the growth of worker productivity. One of the main ways to increase worker productivity is to increase the amount of capital per worker. With a slower growth rate of capital, worker productivity will grow more slowly—and so will real wages. This makes lower-income people worse off than they would have been.

Henderson uses Lydon Johnson as an example of how some people use government favoritism to line their pockets.

But he wisely notes that any inequality that arises from “unjustly acquired wealth” is a symptom of the real problem of cronyism.

Great wealth, meanwhile, is a problem only to the extent that it is unjustly extracted. Government favoritism to politically powerful people may increase income and wealth inequality, as it did in the case of Lyndon Johnson and his wife. But it is the government favoritism, not inequality per se, that is the true problem.

As a quick aside, Lyndon Johnson almost certainly ranks as one of America’s worst presidents (along with failures such as Hoover, Roosevelt, Nixon, and Wilson).

And, having read Henderson’s article, I now have an additional reason to despise LBJ.

I’ll close by recycling my Eighth Theorem of Government, which is simply another way of expressing my oft-made point that we should try to improve life for the poor rather than worsen life for the rich.

Indeed, I sometimes think this theorem is a good way of discerning who is a good person and who is a bad person.

Regarding the latter, we should recognize that some people are simply misguided. These are the folks who actually think that there’s a fixed amount of income and wealth, so they mistakenly believe that if someone like Bill Gates gets rich, the rest of us somehow lose.

Smart folks on the left know that’s not true, so I give them credit for that, but I also think they are reprehensible for being motivated by a desire to hurt the rich, even when that means the rest of us suffer as well.

The bottom line is that market-driven growth is good for everyone, especially the poor.

P.S. The most accurate political analysis of inequality came from Margaret Thatcher.

P.P.S. Here’s the world’s best-ever tweet about inequality.

P.P.P.S. For more wonky readers, I suggest this data and this data about China and this data about the world.

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In 2018, I shared a video from Professor Russ Roberts (a.k.a., @econtalker) on the economic status of the middle class, followed by a video last year on whether the rich are the only ones earning more income.

Today, we’ll look at his video on household income and mobility.

All of his videos are models of clarity, but nonetheless they require close attention because they are filled with so much useful information.

You’ll learn that some people manipulate numbers to paint a grim picture about economic mobility in America. But when you do honest apples-to-apples comparisons, you’ll see that capitalism is capable of delivering big benefits to ordinary people so long as it has enough breathing room to function.

In other words, we’re getting richer – as I wrote last year.

And, as I pointed out in an interview on CNBC, we should care about growth and opportunity instead of fretting whether some people get richer faster than other people get richer.

I’m writing on this topic today because there’s a new report from the Brookings Institution, authored by Stephen Rose, that looks at income trends. And it’s methodologically sound because it follows the same people over time, thus allowing the all-important apples-to-apples comparisons.

…the PSID panel data follow the experiences of the same respondents year after year. Even from one year to the next, many individuals’ incomes change significantly. This is particularly true at the tails of the distribution: nearly one-third of individuals in the bottom and top income quintiles are there temporarily because of an unexpected positive or negative event (Rose 1994). Multiyear incomes are therefore more equal than single-year incomes. …Piketty and Saez…argue that middle-class incomes have been stagnating. But their cross-sectional approach does not reflect individual experiences because they are comparing “similarly-situated people” and not looking at the experiences of the same individuals over time.

And what does Professor Rose find?

He points out that there are now a lot more “upper middle class” people in America (his data are adjusted for inflation, which is another way of ensuring apples-to-apples comparisons).

…the higher income classes expanded significantly during the first period. Between 1967 and 1981, the upper middle class tripled in size (from 6% to 18%) and the MMC grew by 3 percentage points (from 47% to 50%). Offsetting these gains were a corresponding shrinkage of the lower middle class (LMC) from 31% to 20% and the poor/near-poor (PNP) from 16% to 11%. In the later period (2002 to 2016), the changes were in the same direction, but more modest. The upper middle class (UMC) grew by 4 percentage points, the size of the MMC declined by 3 points, while the shares of the LMC and PNP were largely unchanged. In previous work, I argued that the differences between the UMC and those with lower incomes were the key driver of rising inequality.

Since Brookings is a left-of-center think tank, it’s not a surprise that Rose has a somewhat negative interpretation (“rising inequality”) of this data.

But he’s actually giving us good news.

Robert Samuelson, in his column for the Washington Post, wrote about Professor Rose’s new study and put together a table based on his data.

And I’ve augmented the table with some arrows to call attention to what’s happened in the 50 years between 1967 and 2016. The bottom line that America now has fewer lower-income and middle-income people and a lot more upper-income people.

Perhaps it is true that we have more inequality today than we did in 1967, but only very twisted people (such as those who work for the IMF) would want to erase all the gains we’ve enjoyed since that time.

To be sure, all income groups could do even better with pro-growth policies such as tax reform and spending restraint. And we also could adopt policies that are especially beneficial for the less fortunate, such as school choice and licensing reform.

Sadly, the politicians who rant and rave about inequality are more interested in punishing the rich rather than helping the poor.

P.S. Margaret Thatcher debunked the left’s view of inequality in her farewell remarks to Parliament.

P.P.S. With apologies to Jonathan Swift, here’s David Azerrad’s “modest proposal” to end inequality.

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Earlier this month, Neil Ferguson was awarded membership in the Bureaucrat Hall of Fame after he and his mistress were caught violating lockdown rules that Ferguson – in his role as a supposed public health expert – demanded for the entire United Kingdom.

This was a stunning display of hypocrisy, perhaps even to the extent that Joe Biden or Elizabeth Warren might be shocked.

But I want to focus on a different point, which is the degree to which the coronavirus has exposed the fault line between those who are subsidized by government and those who pay for government.

In her Wall Street Journal column, Peggy Noonan opines about how the “protected” don’t have to worry about the consequences of economic shutdowns.

There is a class divide between those who are hard-line on lockdowns and those who are pushing back. We see the professionals on one side—those James Burnham called the managerial elite, and Michael Lind, in “The New Class War,” calls “the overclass”—and regular people on the other. The overclass are highly educated and exert outsize influence as managers and leaders of important institutions—hospitals, companies, statehouses. …Since the pandemic began, the overclass has been in charge—scientists, doctors, political figures, consultants—calling the shots for the average people. But personally they have less skin in the game. The National Institutes of Health scientist won’t lose his livelihood over what’s happened. Neither will the midday anchor. I’ve called this divide the protected versus the unprotected. …Here’s a generalization based on a lifetime of experience and observation. The working-class people who are pushing back have had harder lives than those now determining their fate. They haven’t had familial or economic ease. No one sent them to Yale. …they look at these scientists and reporters making their warnings about how tough it’s going to be if we lift shutdowns and they don’t think, “Oh what informed, caring observers.” They think, “You have no idea what tough is. You don’t know what painful is.”

Fareed Zakaria’s column for the Washington Post acknowledges that it is a problem when a bunch of cossetted elites make policy for everyone else.

…there is a broader distrust that we need to understand. …Social power exists in three realms — government, the economy, and the culture. …In all three, leaders tend to be urban, college-educated professionals, often with a postgraduate degree. That makes them quite distinct from much of the rest of the country. …And yet, the top echelons everywhere are filled with this “credentialed overclass.” …many non-college-educated people…see the overclass as enacting policies that are presented as good for the whole country but really mostly benefit people from the ruling class… Let’s look at the covid-19 crisis through this prism. Imagine you are an American who works with his hands — a truck driver, a construction worker, an oil rig mechanic — and you have just lost your job… You turn on the television and hear medical experts, academics, technocrats and journalists explain that we must keep the economy closed — in other words, keep you unemployed — because public health is important. All these people making the case have jobs, have maintained their standards of living… The covid-19 divide is a class divide.

Writing for USA Today, Professor Glenn Reynolds observes that the self-anointed experts are not the ones paying the price for coronavirus policies.

…it’s hard not to notice a class divide here. As with so many of America’s conflicts, the divide is between the people in the political/managerial class on the one hand and the people in the working class on the other. And as usual, the smugness and authoritarianism are pretty much all on one side. …in Los Angeles — where less than half the county is working now — radio journalist Steve Gregory asked the L.A. County Board of Supervisors whether any of them were willing to take voluntary pay cuts during this crisis. He was told by the chair that his question was “irresponsible,” which is to say embarrassing and inconvenient. (By contrast, New Zealand’s senior officials, including the prime minister, are taking a 20% pay cut.) …There really are two Americas here: Those still getting a paycheck from government, corporations or universities, and those who are unemployed, or seeing their small businesses suffer due to shutdowns. …Then there are the hypocritical gestures, like Chicago Mayor Lori Lightfoot’s illicit haircut… People don’t appreciate being lectured and condescended to and bossed around. They especially don’t appreciate being urged to sacrifice by people who make no sacrifices themselves.

I’m tempted to focus on Glenn’s point about how American politicians should follow the lead of New Zealand lawmakers and accept a pay cut as a gesture of solidarity.

Heck, all levels of bureaucracy should take a haircut. Bureaucrats already have a significant advantage in compensation compared to the private sector, and that gap surely will grow now that so many businesses have been shuttered and so many workers have been forced into unemployment.

But I want to focus on a different point, which is the inherent unfairness of the elite having consequence-free power and authority over ordinary people.

In part, it’s the point that Thomas Sowell makes in the accompanying quote.

But it goes beyond that. The problem with the “overclass” or “protected class” is that they also don’t pay any price when they’re totally right, somewhat right, or only partly right.

In other words, the people who live off the government, either directly or indirectly, have relatively comfortable lives – all financed by the people who deal with much greater levels of hardship and uncertainty.

At the risk of understatement, that’s not right.

P.S. This gap is exacerbated when government officials display thuggery rather than empathy.

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At the risk of understatement, I’m not a fan of the International Monetary Fund (IMF).

The international bureaucracy is the “Johnny Appleseed” of moral hazard, using bailouts to reward profligate governments and imprudent lenders.

The IMF also is infamous for encouraging higher tax burdens, which is especially outrageous since its cossetted employees are exempt from paying tax on their lavish salaries.

In recent years, the IMF has been using inequality as a justification for statist policies. Most recently, the lead bureaucrat at the IMF, Kristalina Georgieva, cited that issue as a reason for governments to impose higher taxes to fund bigger welfare states.

…inequality has become one of the most complex and vexing challenges in the global economy. Inequality of opportunity. Inequality across generations. Inequality between women and men. And, of course, inequality of income and wealth. …The good news is we have tools to address these issues… Progressive taxation is a key component of effective fiscal policy. At the top of the income distribution, our research shows that marginal tax rates can be raised without sacrificing economic growth. …Gender budgeting is another valuable fiscal tool in the fight to reduce inequality…. The ability to scale up social spending is also essential… A cornerstone of our approach to issues of economic inclusion is our social spending strategy.

What’s especially remarkable is that the IMF has claimed that the punitive policies actually will lead to more growth, in stark contrast to honest people on the left who have always acknowledged the equity-efficiency tradeoff.

The economics editor at the left-leaning Guardian, Larry Elliott, is predictably delighted with the IMF’s embrace of Greek-style fiscal policy.

Raising income tax on the wealthy will help close the growing gap between rich and poor and can be done without harming growth, the head of the International Monetary Fund has said. Kristalina Georgieva, the IMF’s managing director, said higher marginal tax rates for the better off were needed as part of a policy rethink to tackle inequality. …The IMF managing director, who succeeded Christine Lagarde last year, said higher taxes on the better off…would help fund government spending to expand opportunities for those “communities and individuals that have been falling behind.” …Georgieva said the IMF recognised that social spending policies are increasingly relevant in tackling inequality. …She added that many less well-off countries needed to scale up social spending.

Ironically, the IMF actually has admitted that this approach is bad for prosperity.

It has produced research on something called “equally distributed equivalent income” to justify lower levels of income so long as economic misery is broadly shared.

I’m not joking. You can click here to see another example of the IMF embracing poverty if it means the rich disproportionately suffer.

In other words, negative-sum economics. Though Margaret Thatcher was more eloquent in her description of this awful ideology.

At first, this column was going to be a run-of-the-mill anti-IMF diatribe.

But as I contemplated how the people fixated on inequality are willing to treat the poor like sacrificial lambs, it occurred to me that this is a perfect opportunity to unveil my Eighth Theorem of Government.

P.S. Here are my other theorems of government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.

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I periodically see tweets that deserve attention because they reveal something very important, usually in a clever and succinct fashion.

Today, let’s add to this collection.

I’ve argued, over and over again, that the best way to help the poor is to focus on policies designed to boost growth rather than policies designed to reduce inequality.

Simply stated, the former approach is a recipe for making everyone more prosperous, while the latter approach means everyone fights for bigger slices of a shrinking pie.

When making this argument, I sometimes ask people whether they would rather be a poor person in Hong Kong or France? There’s no welfare state in the former, but lots of opportunity, whereas France has plenty of handouts but not much hope for upward mobility.

But no matter how often I’ve tried to analyze and explain why we shouldn’t fixate on inequality, I’ve never come close to cramming this much insight into such a concise observation.

Kudos to @Jon_StewartMill. In just ten words, he captures the key insight that I’ve tried to get across in several dozen columns.

I’ll close with some speculation about why some people fixate on inequality. What makes them focus on trying to drag down the rich instead of finding ways to build up the poor?

I’m not sure, though there is polling data to suggest that some people really are motivated by envy and resentment of success.

But I suspect that politicians who play the class-warfare card simply think it’s a way of maximizing votes.

Even worse than the politicians are the “poverty hucksters” who deliberately lie about poverty in hopes of advancing a redistributionist agenda.

P.S. The most powerful numbers on why growth matters more than inequality come from China.

P.P.S. The most reprehensible effort to reduce inequality (by making everyone poorer) came from the IMF.

P.P.P.S. The most accurate political analysis of inequality came from Margaret Thatcher.

P.P.P.P.S. The best satire on the issue of inequality can be found in this “modest proposal.”

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Last year, I wrote a column that investigated why the left is fixated on the unequal distribution of income and wealth, yet doesn’t seem to care at all about unequal distribution of attractiveness.

The question becomes even more intriguing when you consider that attractiveness is oftentimes nothing more than luck, simply a matter of winning the genetic lottery.

People with lots of income and wealth, by contrast, generally work very hard to offer goods and services of value to society, so they actually earn their riches.

Let’s review some additional evidence about good luck for people with good looks.

The Economist shares data from a new book about the advantages enjoyed by attractive people.

Just why are pedestrians likelier (three times as likely, according to one study) to defy traffic laws to follow a man across the road when he is wearing a suit than the same man dressed in denim? Similarly motorists stuck at a traffic light are slower to honk their horn if the car in front has a prestige brand. …A further piece of research cited by the authors involved undergraduates who were shown photos of 50 chief executives from the Fortune 1000 list of big firms. Half of these bosses were from the most profitable groups and half from the least profitable. The undergraduates were asked to judge, on looks alone, which executives had qualities such as competence and dominance. Remarkably, the students tended to pick out those executives who led the most successful companies. …it seems more probable that people with a certain type of appearance are likely to get promoted than it is to believe they are innately more competent than everyone else. …When participants in a study were shown pictures of male employees of a business consultancy, with similar clothes and masked faces, they perceived the taller men more positively in terms of team leadership skills. Indeed, research has shown that taller and more attractive men earn more than their shorter and plainer colleagues. …Physical characteristics also affect recruitment at lower levels. A group of Italian researchers sent CVs to a range of employers, some with photos and some without. Applicants deemed attractive by independent scorers were 20% more likely to get an interview than the same application without a photo.

Being attractive doesn’t just help people get better jobs and earn more income.

Here’s some data that may be even more important to a lot of people.

This study was conducted to quantify the Tinder socio-economic prospects for males based on the percentage of females that will “like” them. Female Tinder usage data was collected and statistically analyzed to determine the inequality in the Tinder economy. It was determined that the bottom 80% of men (in terms of attractiveness) are competing for the bottom 22% of women and the top 78% of women are competing for the top 20% of men. The Gini coefficient for the Tinder economy based on “like” percentages was calculated to be 0.58. This means that the Tinder economy has more inequality than 95.1% of all the world’s national economies. In addition, it was determined that a man of average attractiveness would be “liked” by approximately 0.87% (1 in 115) of women on Tinder.

Here’s a chart showing that only the most attractive men have an advantage on the hook-up site.

Here’s an explanation of the chart, as well as some discussion of how the system is wildly unequal.

The area in blue represents the situations where women are more likely to “like” the men. The area in pink represents the situations where men are more likely to “like” women. The curve doesn’t go down linearly, but instead drops quickly after the top 20% of men. Comparing the blue area and the pink area we can see that for a random female/male Tinder interaction the male is likely to “like” the female 6.2 times more often than the female “likes” the male. …the wealth distribution for males in the Tinder economy is quite large. Most females only “like” the most attractive guys. …Figure 3 compares the income Gini coefficient distribution for 162 nations and adds the Tinder economy to the list. …The Tinder economy has a higher Gini coefficient than 95.1% of the countries in the world.

And here’s the chart from the article showing how Tinder inequality compares to economic inequality among nations.

Regular guys don’t do very well and unattractive guys get the short end of the stick.

…the most attractive men will be liked by only approximately 20% of all the females on Tinder. …Unfortunately, this percentage decreases rapidly as you go down the attractiveness scale. According to this analysis a man of average attractiveness can only expect to be liked by slightly less than 1% of females (0.87%). This equates to 1 “like” for every 115 females. …The bad news is that if you aren’t in the very upper echelons of Tinder wealth (i.e. attractiveness) you aren’t likely to have much success.

Whether your goal is income/wealth or sex/relationships, the bottom line is that it helps to be attractive.

And being attractive is largely the result of luck. Which brings us back to the issue of why leftists don’t try to address this very meaningful form of inequality. Where are their plans to prevent discrimination against those of us who didn’t win the looks lottery? And to imposes taxes on those who wound up with favorable genes?

P.S. Libertarians are sometimes accused of being autistic dorks, and you don’t find many females at libertarian events, all of which presumably means male libertarians might benefit from government redistribution of dating partners. But we are moral and don’t favor government coercion and intervention, even when we might gain an advantage.

P.P.S. Here’s what would happen if Elizabeth Warren applied her class-warfare approach to dating.

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I’ve created a new page to showcase various “Poverty Hucksters.”

These are people and institutions that use data about income distribution to mislead and lie about the prevalence of poverty in the United States.

This rogue’s gallery includes:

What is their dodgy tactic? Here’s how I described the methodology in 2018.

…the bureaucrats…have put together a measure of income distribution and decided that “relative poverty” exists for anyone who has less than 50 percent of the median level of disposable income.

More recently, I explained why this approach is senseless, at least if one wants to measure actual poverty

…an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline.

Now we have a new member of this ill-begotten group of hucksters.

Here’s an excerpt from an article in the latest issue of the Economist.

…international comparisons…make…America a true outlier. When assessed on poverty relative to other countries (the share of families making less than 50% of the national median income after taxes and transfers), America is among the worst-performing in the OECD club of mostly rich countries (see chart). Despite its higher level of income, that is not because it starts with a very large share of poor people before supports kick in—it is just that the safety net does not do as much work as elsewhere. On this relative-poverty scale, more than a fifth of American children remain poor after government benefits, compared with 3.6% of Finnish children.

And here’s the accompanying chart.

Needless to say, any chart that purports to show less poverty in Mexico than the United States is laughably inaccurate.

But that’s the kind of perverse outcome that is generated when using a ridiculously dishonest approach.

I suppose the Economist deserves a bit of credit. In both the article and in the chart, they acknowledge (at least for careful readers) that they’re measuring the share of the population with less than 50 percent of a society’s median income, not the share of people living in poverty.

So why, then, do they refer to the “poverty rate”?

I have no idea if the reporter is dishonest or incompetent, but I can say with certainty that the Economist has done a disservice to readers.

P.S. The Economist relied on dodgy data from the Organization for Economic Cooperation and Development. And if you read the columns about the other Poverty Hucksters, you’ll find that most of them also relied on numbers from that left-leaning, Paris-based bureaucracy. Yet another example of why the OECD is the worst international bureaucracy, at least on a per-dollar-spent basis.

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Here’s a simple quiz to determine whether you should support a candidate like Bernie Sanders or Elizabeth Warren: Would you embrace a policy that increased income for poor Americans by 10 percent if it also happened to increase income for rich Americans by 15 percent?

Normal people automatically say yes. After all, they don’t resent rich people and they want lower-income people to enjoy better living standards.

Some of our left-leaning friends (including at the IMF!), however, are so fixated on inequality that they are willing to deprive the poor so long as higher-income people have even larger losses (Margaret Thatcher nailed them on this issue).

Let’s look at some analysis of this issue.

The Wall Street Journal has an editorial that starts by highlighting some good economic news.

…low- and middle-income folks are reaping more economic benefits than during the Obama years. …Worker earnings increased by 3.4% while the poverty rate declined 0.5 percentage points to 11.8%, the lowest level since 2001. Benefit rolls are shrinking as low-income workers earn more. …the number of full-time, year-round workers increased by 2.3 million in 2018, and employment gains were biggest among minority female-led households. The share of workers in female-led households who worked full-time year-round increased by 4.2 percentage points among blacks and 3.6 percentage points among Hispanics. …The jobless rate for black women last month fell to a historic low of 4.4% and neared a nadir for Hispanic women at 4.2%. …The share of households making less than $35,000 in inflation-adjusted dollars has fallen 1.2 percentage points since 2016 while those earning between $50,000 and $150,000 and more than $200,000 have both increased by 0.8 percentage points.

It then makes to all-important point that policy makers should fixate on growth rather than inequality if the goal is to help he less fortunate.

Democrats focus on income inequality… What really matters for a healthy democratic society, however, are economic opportunity and income mobility. …The Obama policy mix, which Democrats want to return to only more so, put a priority on reducing inequality rather than increasing economic growth. But higher taxes, hyper-regulation and income redistribution resulted in slower growth and more inequality during the Obama Presidency. …This is a lesson for the left and those on the big-government right who want to use tax policy and subsidies to redistribute income to reduce inequality. Policies that hurt growth hurt lower-income workers the most.

José Ponce, in a column for FEE, sagely observes that “Gini” numbers can be very misleading because they tell us nothing about a society’s overall prosperity.

…inequality on its own is insufficient for any means of understanding. By definition, it measures the level of income or wealth that a group of people receive or own relative to another group of people within a society. The key word here is relative. That means it provides no information in regards to whether the bottom quintile has a low or high level of income or about the quality of life… For instance, Cuba, with a Gini index of 0.38 and Liberia with 0.32 have much less inequality than the highly-developed Singapore and Hong Kong, with Gini coefficients of 0.45 and 0.53, respectively. Citizens in a poor country with low inequality are equitably poor. …Elaborating on this point, rising inequality may not necessarily be a negative outcome just as declining inequality may not necessarily be positive. A developing society where both the rich and the poor have growing incomes, but the rich are rising faster than the poor, will experience a surge in inequality. However, since both the rich and the poor have increased incomes, everyone is better off than before.

Let’s close with a chart from Mark Perry showing that ever-greater numbers of Americans are climbing the income ladder.

P.S. This data from China is the most powerful and persuasive that I’ve seen on why growth matters far more than inequality.

P.P.S. This bit of satire also illustrates why inequality numbers are grossly misleading.

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I religiously read just about everything from Thomas Sowell, John Stossel, Walter Williams, Tim Carney, and other libertarian-minded experts

But I also make a point to regularly read non-libertarians such as Desmond Lachman, Will Wilkinson, Dalibor Rohac, and Noah Smith even though I sometimes – or even often – disagree with their policy prescriptions.

What matters is that they generally have intelligent and thoughtful observations on issues that I care about.

But they’re not necessarily accurate. For instance, Noah Smith recently wrote an interesting column for Bloomberg about whether people are poor because of their own behavior or because of external factors.

Here are the passages that caught my attention.

…there is at least one rich country where people…work hard, avoid risky, self-destructive behavior and make wise life choices. That country is Japan. And it still has plenty of poverty. …Given all of this good behavior, conservatives might expect that Japan’s poverty rate would be very low. But the opposite is true; Japan has a relatively high number of poor people for an advanced country. Defined by the percentage of the population earning less than half of the median national income, Japan’s poverty rate is more than 15% — a little lower than the U.S., but considerably higher than countries such as Germany, Canada or Australia… This suggests that there is something very wrong with the conservative theory of poverty.

Fortunately, I don’t need to explain what’s wrong with Smith’s analysis.

Writing for National Review, Kevin Williamson has already pointed out his errors.

Smith here relies on a useless measure of “relative” poverty, the share of the population earning less than half of the median income. You can see the limitations of that approach: A uniformly poor society in which 99 percent of the people live on 50 cents a day and 1 percent live on 49 cents a day would have a poverty rate of 0.00; a rich society with incomes that are rising across-the-board but are rising much more quickly for the top two-thirds would have a rising poverty rate… It would be far better to consider poverty in absolute terms, but our progressive friends are strangely resistant to that.

It is indeed strange that so many folks on the left have decided to use an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty.

Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same.

Or a country could execute all the rich people and the alleged rate of poverty would decline.

No wonder the practitioners of this approach often produce absurd data, such as the OECD’s assertion that there’s more poverty in the United States than in basket case economies such as Greece and Italy.

Shame on Noah Smith. He should know better.

I’ll continue to read his work, so he’s not being kicked out of my club of non-libertarian writers.

But I will add him to list of people and groups who are guilty of peddling fake poverty data. These “poverty hucksters” include the OECD, of course, and also the United Nations, the New York Times, the Equal Welfare Association, Germany’s Institute of Labor Economics, the Obama Administration, and the European Commission.

P.S. A “poverty pimp,” by contrast, is someone who personally profits from administering the welfare state.

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Looking at issues such as mobility, fairness, and inequality, I’ve recently shared excellent videos from Russ Roberts and John Stossel.

I also had an opportunity to discuss these issues yesterday on CNBC.

As you can see, I started with a political observation about the American people being naturally inclined to support growth and upward mobility, which suggests limited appeal for the spiteful agenda of Bernie Sanders, AOC, and the rest of the class-warfare crowd.

I hope I’m right about that, and a quick online search found this bit of somewhat-encouraging polling data from 2014.

Since I’m a bit of a bleeding-heart libertarian, I then took the opportunity to condemn various forms of cronyism (such as the corrupt TARP bailout) that transfer unearned money into the pockets of undeserving rich people.

I suggested that honest people from across the ideological spectrum could – and should – come together to curtail such nauseating policies. That’s the kind of fairness government should promote.

Though I’ll confess I’m not very hopeful. I concluded the discussion by observing that Senator Sanders recently chose to sacrifice the interests of poor children in order to curry favor with the union bosses at the National Education Association.

P.S. As indicated by his question about the desirability of millionaires, the host (Robert Frank) seemed sympathetic to good policy. He also was sufficiently well informed to know about how China’s partial liberalization has lifted hundreds of millions of people out of abject poverty.

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In the debate over “fairness,” my statist friends mistakenly see the economy as a fixed pie. This leads them to claim that rich people are rich because poor people are poor.

But there’s no data to support this position (other than in kleptocracies such as Venezuela where a ruling socialist elite steals wealth).

So some folks on the left will back down from that extreme claim and instead assert that the rich are the only ones enjoying more prosperity as time goes by.

For evidence, they cite data showing that incomes have been mostly flat over the past 30-40 years for poor people and middle-class people, particularly when compared to the rich.

But there’s a big problem with their data. They look at income levels in some past year and then they compare that data with income levels in a recent year.

But, as I wrote back in 2015, this means they are comparing apples and oranges.

There is considerable income mobility in the United States, which means today’s rich and today’s poor won’t necessarily be tomorrow’s rich and tomorrow’s poor.

I don’t necessarily expect people to automatically believe me. So if you’re one of the skeptics, watch this video from Russ Roberts. It is almost eight minutes and it is filled with rigor and data, but it’s worth watching since it masterfully demonstrates that lower-income and middle-class households actually enjoy larger gains than rich households.

As Russ says, you have to follow the same people over time if you want legitimate analysis.

And he shares lots of data showing that the rich actually have smaller-than-average gains in income over time.

It’s also worthwhile to investigate what happens with families over time. What we find is that children from poor households are more likely to exceed their parents’ income than children from rich households.

In other words, Russ’ conclusion was right. The American dream still exists. And if we can convince politicians to focus on growth, we can achieve better outcomes for people of all income levels.

P.S. The above video is a great addition to John Stossel’s recent video.

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Because they wrongly assume the economy is a fixed pie, some of my friends on the left think it’s bad for there to be rich people. They actually think that must mean the rest of us have less income.

But that’s not true. At least it’s not accurate if we start with the assumption that wealth is earned honestly and not accumulated thanks to subsidies, bailouts, protectionism, and other forms of cronyism.

So if it’s good to have more honest rich people, what’s the recipe to make that happen?

Frans Rautenbach, author of South Africa Can Work, recently crunched numbers and wrote about economic policy and the prevalence of billionaires.

Here is some of Frans’ accompanying analysis.

I calculated the relative number of billionaires by dividing the population of a country by the number of billionaires, to calculate the number of people per billionaire. So, the lower the number the greater the percentage of billionaires. …What is immediately clear, is that the three top performers in the table are Hong Kong, Switzerland and Singapore, all countries with exceptionally free markets and very low tax burdens. What that makes clear is, if a country is really serious about nurturing billionaires, free markets and low taxes are the way to go.

By the way, Frans focused on major countries.

If he included every jurisdiction, I very much suspect Monaco would be at the top of the list.

Followed by some of my other favorite places, such as Bermuda, Liechtenstein, and the Cayman Islands.

But it’s true that the numbers for those small place would distort the rankings, so it makes sense to remove them.

In his analysis, Frans also addresses the fact that Nordic nations do reasonably well and correctly attributes their success to the fact that they are very laissez-faire in areas other than fiscal policy.

What we also see, is that not all the Nordic countries are world-beaters in the billionaire stakes. The social democracy system (high taxes and spending on welfare benefits) has not worked to make Finland and Denmark top performers. …a fair question: Why do Sweden and Norway beat the US in the super-rich game? We now know that the high-equality welfare state of social democracy is not the reason. If that were so, it would have been fair to expect Finland and Denmark to beat the US too. And we would have expected all four these countries to have dynamic, high-growth economies – which they don’t. Having said that, it remains true that both Sweden and Norway are free markets in their own right. …The only criterion that identifies them as statist is size of government (tax, government spending, and so on). According to the other four criteria (trade policy, monetary policy, regulatory policy, and property rights and rule of law), these countries are very free. …What is more, until about 1950, Sweden and Norway had smaller governments than the UK, the US, Japan, Germany and France.

Now that we’ve looked at the policies associated with having more rich people, let’s look at the policies that are needed to retain them.

Bloomberg has a very interesting story on the migration of millionaires around the world.

The world’s wealthy are increasingly on the move. About 108,000 millionaires migrated across borders last year, a 14 percent increase from the prior year, and more than double the level in 2013, according to Johannesburg-based New World Wealth. Australia, U.S. and Canada are the top destinations, according to the research firm, while China and Russia are the biggest losers. …Wealth migration figures…can also be a key future indicator, said Andrew Amoils, head of research at New World Wealth. “It can be a sign of bad things to come as high-net-worth individuals are often the first people to leave — they have the means to leave unlike middle-class citizens,” he said. …Australia tops most “wish lists” for immigrants because of its perceived safety, no inheritance tax and strong business ties to China, Japan and South Korea.

Here’s an accompanying chart.

I’ll simply note that if the numbers were adjusted for population, the United States would not rank nearly so high (I’m guessing America’s unfair death tax is a major reason why some rich people choose other countries).

What can we say about the nations losing rich people?

If you peruse the data from Economic Freedom of the World, you’ll notice that they don’t rank very high.

China’s tightening grip on capital outflows in recent years has placed many of the country’s wealthier citizens in the crosshairs of the taxman, leading to a shift of assets and people. …Turkey losing 4,000 millionaires last year, the third straight year that many have left. About 7,000 millionaires left Russia last year.

My two cents is that rich people aren’t fully confident about stability in come countries (think Russia) and they’re quite worried about government greed in other nations (think France).

Another issue is that successful entrepreneurs and investors don’t feel comfortable having their private financial data being promiscuously shared, and one way to minimize government snooping is to move to move.

The desire for privacy is also prompting rich individuals to reconsider their place of residence. Under the Common Reporting Standard, launched by the Organisation for Economic Co-operation & Development in 2017, banks and other financial institutions are disclosing data on foreign account holders to their local tax authority. …”Many wealthy people are looking for opportunities to reduce risks associated with spreading information about their accounts,” said Polina Kuleshova of Henley & Partners. …Citizenship and residency by investment programs are big business: currently, the industry is worth an estimated $2 billion annually… The Organisation for Economic Co-operation & Development is scrutinizing…these schemes. In October 2018, it released a blacklist of 21 jurisdictions, including Malta and Cyprus, that it believes are undermining international efforts to combat tax evasion.

Since I’m a critic of the OECD’s efforts to create a global tax cartel, I’m glad people still have some options to protect themselves. Including the CBI programs.

P.S. This analysis of cross-border migration between nations also applies to cross-border migration between states. Unsurprisingly, successful people move from high-tax hellholes (places such as New Jersey, Illinois, and California) to zero-income-tax jurisdictions (places such as Texas, Florida, and Tennessee).

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I wish my leftist friends understood the Laffer Curve. I also wish they understood the downsides of artificially low interest rates. And the Rahn Curve. And comparative advantage.

But perhaps more than anything else, I wish they understood that poor people aren’t poor simply because rich people are rich.

John Stossel has a new video from Reason about the issue.

Spot on.

John is right about income growth. That’s why I think it’s so important to have policies that enable more growth. When the economy does well, that’s good for the poor, good for the rich, and good for the rest of us as well.

And this position is certainly supported by the historical data. We are much richer than 50 years ago and 100 years ago.

Heck, poor Americans are rich compared to people in many developing nations.

I also like what John said about income mobility. People can rise out of poverty. And they can fall out of prosperity.

By the way, I wish the discussion about unfairness also mentioned height and looks. There’s fairly solid academic evidence that taller people and better-looking people earn more money and have better lives.

That’s genuine unfairness, just like having better parents is a source of genuine unfairness.

Yet not even Bernie Sanders or AOC has proposed taxes to equalize those sources of real unfairness (since I don’t want to give them any ideas, hopefully they don’t read my columns).

P.S. I started today’s column by giving examples of things I wish leftists understood. Well, there are also issues where I wish my friends on the right had more insight. For instance, I would like them to understand that tax cuts very rarely pay for themselves. I wish they realized that spending caps are far preferable to balanced budget rules. And I wish they understood that disapproval of things such as drug use, gambling, and prostitution doesn’t mean those activities should be illegal.

P.P.S. I also mentioned at the start of the column that higher incomes for some people doesn’t imply lower incomes for other people. I should have included the caveat that this isn’t true if government is tilting the playing field. Bailouts, protectionism, subsidies, and other forms of cronyism enable the politically well connected to prosper at the expense of everyone else.

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Today is my last day in Chile, so today’s column will build upon what I wrote last week.

I have three charts that illustrate how Chile’s pro-market reforms have been great news – especially for poor people (or, to be more accurate, for Chileans who used to be poor).

We’ll start with this chart from the most recent issue of Economía y Sociedad, which shows that there’s more mobility in Chile than any other OECD nation.

Honest folks on the left should view this as unambiguously positive.

Similarly, this Gini data (measuring the degree of inequality) should be slam-dunk evidence of progress for all left-of-center people.

For what it’s worth, I don’t care about the Gini coefficient. What matters to me is economic growth so that everyone can get richer.

If rich people happen to get richer faster than poor people (like in China), that’s fine.

And if poor people happen to get richer faster than rich people (like in Chile), that’s fine as well.

What irks me is that folks who fixate on inequality often support policies that retard growth. In other words, they’re so worried about rich people getting richer that they advocate for bigger government, which makes it harder for poor people to become richer.

Economic growth, by contrast, truly is the rising tide that lifts all boats.

Which is why this final chart (based on the Maddison database) is so powerful. It shows 1975-2016 income trends for Chile (red) and other major Latin American economies. As you can see, Chile started near the bottom and is now the region’s richest nation.

Wow, Chile didn’t just converge. It surpassed.

It’s also worth noting how nations such as Argentina, Venezuela, and Cuba have enjoyed very little income growth over the past 40 years.

The bottom line is that those nations are evidence of the costly impact of statism, while Chile is an amazing example of how capitalism generates widely shared prosperity.

P.S. I’m not claiming Chile is a perfect role model. It is #15 in Economic Freedom of the World, so there is considerable room for improvement. But I am arguing it is a successful example of how better policy is great news for all segments of society.

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I generally don’t write much about the distribution of income (most-recent example from 2017), largely because that feeds into the false notion that the economy is a fixed pie and that politicians should have the power to re-slice if they think incomes aren’t sufficiently equal.

I think growth is far more important, especially for poor people, which is what I said (using the amazing data from China) in a recent debate at Pomona College in California.

But some people don’t accept the growth argument.

Or, to be more exact, they may acknowledge that there is growth but they think the rich wind up with all the gains when the economy prospers.

So let’s review some of the evidence. We’ll start with Robert Samuelson of the Washington Post, who points out that living standards have jumped for people at all levels of income in America.

…the rich are getting richer. The rest of us — say politicians, pundits and scholars — are stagnating. The top 1 percent have grabbed most income gains, while average Americans are stuck in the mud. Well, it’s not so. …the Congressional Budget Office…recently found that most Americans had experienced clear-cut income gains since the early 1980s. This conclusion is exceptionally important, because the CBO study is arguably the most comprehensive tabulation of Americans’ incomes. Most studies of incomes have glaring omissions. …The CBO study covers all…areas. …If the bottom 99 percent experienced stagnation, their 2015 incomes would be close to those of 1979, the study’s first year. This is what most people apparently believe. The study found otherwise. The poorest fifth of Americans (a fifth is known as a “quintile”) enjoyed a roughly 80 percent post-tax income increase since 1979. The richest quintile — those just below the top 1 percent — had a similar gain of nearly 80 percent. The middle three quintiles achieved less, about a 50 percent rise in post-tax incomes.

And here’s the data from Samuelson’s column showing what’s happened in the 21st Century.

Incidentally, economists from the Federal Reserve Bank of San Francisco explain that weaknesses in data mean that upward mobility in America is not being properly measured.

…one needs to keep in mind that measured productivity growth is designed to capture growth in market activities. Thus, it may not fully capture the growth in people’s economic welfare… Measuring real growth properly is useful for addressing a host of questions. For example, existing studies use measured inflation to calculate the real income of children relative to their parents. Chetty et al. (2017) find that 50% of children born in 1984 achieved higher incomes than their parents at age 30. Adjusting for missing growth would raise the real income of children about 17% relative to their parents, increasing the fraction of those who do better than their parents by a meaningful amount.

Moreover, Professor Russ Roberts points out that many analysts rely on snapshots at two periods of time when estimating changes in prosperity.

Adjusted for inflation, the US economy has more than doubled in real terms since 1975. How much of that growth has gone to the average person? …Most people believe that the middle class and the poor are stagnating, treading water, while the rich get all the goodies. …these depressing conclusions rely on studies and data that are incomplete or flawed. …the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. …But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress.

When you follow the same people over time, however, you get a much more optimistic assessment.

When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich. Studies that use panel data — data that is generated from following the same people over time — consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns. Here are some of the studies… This first study, from the Pew Charitable Trusts, conducted by Leonard Lopoo and Thomas DeLeire uses the Panel Study of Income Dynamics (PSID) and compares the family incomes of children to the income of their parents.⁴ Parents income is taken from a series of years in the 1960s. Children’s income is taken from a series of years in the early 2000s. As shown in Figure 1, 84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20% surpassed their parents. …Gerald Auten, Geoffrey Gee, and Nicholas Turner of the Office of Tax Analysis in the Treasury Department used tax returns to see how rich and poor did between 1987 and 2007. They find the same encouraging pattern: poorer people had the largest percentage gains in income over time.

For more information, here’s some data from the Pew study.

Let’s also look at a column by Professor Mark Rank in the New York Times. It was written back in 2014, but his observations about people rising and falling show that there is considerable mobility in the United States.

To what extent do everyday Americans experience these levels of affluence, at least some of the time? In order to answer such questions, Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60… The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …the image of a static 1 and 99 percent is largely incorrect. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60… Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. It suggests that the United States is indeed a land of opportunity, that the American dream is still possible

Amen.

Last but not least, for those of you who really like digging into data, here’s a video from Russ Roberts about the different ways of measuring middle-class incomes.

I cited some Pew data above, so I’ll close by calling your attention to the video of Pew data in this 2015 column. The bottom line is that middle-class Americans are enjoying more prosperity over time.

But it’s also true that different government policies could lead to higher or lower levels of income.

Which is why I’m perplexed that my left-wing friends want policies that would make the United States more like Europe.

Unsurprisingly, I think we should focus instead on pro-market changes that will increase America’s advantage over Europe.

P.S. The healthcare exclusion has a negative impact on take-home pay for ordinary Americans.

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Imagine being a poor person and getting to choose your country. Which one would you select?

The answer probably depends on your goals in life. If you want to emulate “Lazy Robert” and be a moocher, you could pick Denmark. You’ll surely get more than enough money to survive.

Denmark’s also not a bad choice if you have a bit of ambition. It ranks #16 in the latest edition of Economic Freedom of the World, largely because it has a very laissez-faire approach on trade, regulation, and other non-fiscal policies. So there’s a decent chance you could climb the economic ladder.

But if you have lots of ambition and definitely want a better life for your children and grandchildren, you’d presumably pick a nation such as Singapore, which routinely gets very high grades from Economic Freedom of the World.

There’s a lot of economic liberty, which has resulted in huge improvements in living standards. Indeed, people in Singapore are now much richer than Americans.

The last thing you would do, however, is pick a stagnant country such as Greece. Or a miserably impoverished nation such as Zimbabwe.

Unless you’re one of the buffoons at Oxfam. That “charity” just produced an inequality study that says Singapore is one of the world’s worst nations, ranking far below places where people are very poor with very bleak lives.

Here’s how Oxfam describes its report.

In 2015, the leaders of 193 governments promised to reduce inequality under Goal 10 of the Sustainable Development Goals (SDGs). Without reducing inequality, meeting SDG 1 to eliminate poverty will be impossible. In 2017, …Oxfam produced the first index to measure the commitment of governments to reduce the gap between the rich and the poor. The index is based on a new database of indicators, now covering 157 countries, which measures government action… The report recommends that all countries should develop national inequality action plans to achieve SDG 10 on reducing inequality. These plans should include delivery of universal, public and free health and education and universal social protection floors. They should be funded by increasing progressive taxation and clamping down on exemptions and tax dodging.

In other words, the study is a measure of whether nations have punitive welfare states, not whether poor people have better lives.

The assertion in the second sentence that poverty can’t be reduced without reducing inequality is especially absurd. Unless, of course, you choose a dishonest definition of poverty (which is what we get from leftist groups like the UN and OECD, not to mention the Equal Welfare Association, Germany’s Institute of Labor Economics, and the Obama Administration).

But let’s focus on Singapore. Here are some excerpts from a Reuters story on the controversy over that nation’s poor score.

Oxfam on Wednesday rejected Singapore’s defense of its low taxes after the NGO ranked the wealthy city state among the 10 worst-offending countries in fuelling inequality with its low-tax regime. Oxfam’s Commitment to Reducing Inequality (CRI) index ranked Singapore 149th of 157, below Afghanistan, Algeria, and Cambodia, and marginally higher than Haiti, Nigeria and Sierra Leone. …Oxfam’s head of inequality policy, Max Lawson, said the impact of Singapore’s tax policy went beyond its borders, serving as a tax haven for the rich and big corporations. …Singapore Social and Family Development Minister Desmond Lee said on Tuesday…“Yes, the income tax burden on Singaporeans is low. And almost half the population do not pay any income tax,”…“Yet, they benefit more than proportionately from the high quality of infrastructure and social support that the state provides,” he said. “In Oxfam’s view, Singapore’s biggest failing is our tax rates, which are not punitive enough.” Lee also said 90 percent of Singaporeans owned their homes and home ownership was 84 percent even among the poorest 10 percent of households. “No other country comes close,” he said.

Minister Lee is correct, of course.

Singapore is a great place to be poor, in part because the bottom 10 percent in Singapore would be middle class or above in many of the nation’s that get better scores from Oxfam’s ideologues. But mostly because it’s a place where it’s possible to become rich rather than remain poor.

There are some other aspects of the Oxfam study that merit attention, including the curious omission of some of the world’s most left-wing nations, such as Venezuela, Cuba, and North Korea.

In the case of North Korea, I’m willing to believe that there simply wasn’t enough reliable data. But why aren’t there scores for Cuba and Venezuela? I strongly suspect that authors deliberately omitted those two hellholes because they didn’t want to deal with the embarrassment of incredibly poor nations getting very high scores (which is what made Jeffrey Sachs’ SDG Index an easy target for mockery)

Also, I’d be curious to learn why Hong Kong isn’t ranked? Taxes are even lower and there’s even less redistribution in Hong Kong, so maybe it would have been last rather than merely in the bottom 10.

Was Oxfam worried about looking foolish, so they left prosperous Hong Kong out of the study?

That’s my guess. The last thing the left wants is for people to understand that poor nations only become rich nations with free markets and small government.

The bottom line is that Oxfam is an organization that has been hijacked by hard-left activists. Given it’s track record of shoddy reports, it’s now a joke rather than a charity.

P.S. The OECD also produced a shoddy study that grossly mischaracterized Singapore and totally ignored Hong Kong.

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I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challenge, which simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

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A few years ago, I shared an image that neatly summarized why the left’s fixation on income inequality is misguided.

Now I have something even better.

I don’t know who “JIMBOB” is, but this cartoon he created is a masterpiece. The car analogy is perfect.

I’ll have to recycle this cartoon every time I write on the issue (along with substantive analysis, including Max Roser’s numbers and the powerful Chinese data).

That being said, I’m going to suggest one possible revision to JIMBOB. I think it would be a slight improvement if both captions started with “some.”

For what it’s worth, I think that phrasing would better reflect how the left thinks.

Or, to be fair, it shows how some on the left think.

I’ve never forgotten a conversation I had with a friend from the other side of the spectrum. His support for class-warfare policies is based on the fact that some (many?) rich people got their wealth via government.

And those people obviously don’t deserve their loot.

The difference between me and my friend is that I’d rather keep tax rates low and get rid of the programs that provide unjust riches. In other words, we should be guided by this very powerful image.

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I’ve repeatedly argued that faster growth is the only effective way of helping the less fortunate.

Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the poor.

Today, let’s look at some numbers that prove that a fixation on inequality is misguided. The Census Bureau this week released its annual report on Income and Poverty in the United States. That publication includes data (Table A-2) showing annual inflation-adjusted earnings by income quintile between 1967-2017.

To see if my left-leaning friends are right about the rich getting richer at the expense of the poor, I calculated the annual percent change for each quintile. Lo and behold, the data actually show that there’s a very clear pattern showing how all income quintiles tend to rise and fall together.

The lesson from this data is clear. If you want policies that help the poor, those also will be policies that help the middle class and rich.

And if you hate the rich, you need to realize that policies hurting them will almost certainly hurt the less fortunate as well.

One other lesson is that all income quintiles did particularly well during the 1980s and 1990s when free-market policies prevailed.

P.S. Many people (including on the left) have pointed out that the Census Bureau’s numbers under-count compensation because fringe benefits such as healthcare are excluded. This is a very legitimate complaint, but it doesn’t change the fact that all income quintiles tend to rise and fall together. For what it’s worth, adding other forms of compensation would boost lower quintiles compared to higher quintiles.

P.P.S. Here’s an interesting video from Pew Research showing how the middle class has become more prosperous over the past few decades.

P.P.P.S. The Census Bureau’s report also has the latest data on poverty. The good news is that the poverty rate fell. The bad news is that long-run progress ground to a halt once the federal government launched the ill-fated War on Poverty.

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The good news about China is that economic liberalization has produced impressive growth in recent decades, which has helped bring hundreds of millions of people out of poverty.

The bad news is that China started from such a low position that per-capita income is still quite low compared to rich nations.

So what does the economic future hold? Will China continue its upward trajectory?

That’s certainly possible, but it depends on the Chinese government. Will there be additional liberalization, giving the economy more “breathing room” to grow?

Not if the government listens to the bureaucrats at the International Monetary Fund. I wrote three years ago about an IMF study that recommended huge tax increases in China.

And now there’s another IMF report pushing for big tax hikes. Only instead of arguing that higher taxes somehow will produce more growth by financing a bigger burden of government (which – no joke – was the core argument in the 2105 study), this new report claims higher taxes will produce more growth by reducing inequality.

Here’s the basic premise of the paper.

…economic growth has not benefited all segments of the population equally or at the same pace, causing income disparities to grow, resulting in a large increase in income inequality… This is especially of concern as the recent literature has found that elevated levels of inequality are harmful for the pace and sustainability of growth… The paper discusses what additional policies can be deployed to improve equity in opportunities and outcomes, with particular focus on the role for fiscal policy.

But a key part of the premise – the blanket assertion that inequality undermines growth – is junk.

As I noted in 2015 when debunking a different IMF study, “..they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.”

Let’s dig into the details of this new IMF study.

Here’s the problem, at least according to the bureaucrats.

Income inequality in China today, as measured by the Gini coefficient, is among the highest in the world. …Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990.

And here’s the chart that supposedly should cause angst. It shows that inequality began to rise as China shifted toward capitalism.

But why is this inequality a bad thing, assuming rich people earned their money honestly?

When markets are allowed to function, people become rich by providing value to the rest of us. In other words, it’s not a zero-sum game.

Ironically, the IMF study actually makes my point.

…much of China’s population has experienced rising real incomes. …even for the bottom 10 percent incomes rose by as much as 63 percent between 1980 and 2015… This has implied that China reduced the share of people living in poverty immensely. Measured by the headcount ratio, the population in poverty decreased by 86 percentage points from 1980 to 2013 (see figure 6), the most rapid reduction in history.

And here’s the aforementioned Figure 6, which is the data worth celebrating.

Any normal person will look at this chart and conclude that China should do more liberalization.

But not the bureaucrats at the IMF. With their zero-sum mentality, they fixate on the inequality chart.

Which leads them to make horrifyingly bad recommendations.

…several reforms could be envisaged to make fiscal policy more inclusive, both on the tax and expenditure side. …revenues from PIT contribute only around 5 percent of total revenues, a much lower share than the OECD average of 25 percent. Increasing the reliance on PIT, which more easily accommodates a progressive structure, could allow China to improve redistribution through the tax system. …While the PIT in China already embeds a progressive schedule with marginal rates increasing with income from 3 to 45 percent, …redesigning the tax brackets would ensure that middle and high income households with higher ability to pay contribute more to financing the national budget… Property and wealth taxes remain limited in China. Such taxes are broadly viewed as progressive, because high-income households usually tend also to have more property and wealth. …Consideration should therefore be given to adopt a recurrent market-value based property tax.

And why do IMF bureaucrats want all these additional growth-stifling taxes?

To finance a larger burden of government spending.

China still lags other emerging economies and OECD countries in public spending on education, health and social assistance. …social expenditure will need to be boosted.

In other words, the IMF is suggesting that China should copy welfare states such as Italy and France.

Except those nations at least enjoyed a lengthy period before World War II when government was very small. That’s when they became relatively rich.

The IMF wants China to adopt big government today, which is a recipe to short-circuit prosperity.

P.S. I don’t think the IMF is motivated by animus towards China. The bureaucrats are equal-opportunity dispensers of bad advice.

P.P.S. The OECD also is trying to undermine growth in China.

P.P.P.S. There are some senior-level Chinese officials who understand the downsides of a welfare state.

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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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