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Posts Tagged ‘Inequality’

A regular theme of these columns is that the economy is not a fixed pie. If Person A becomes rich, that doesn’t mean less income for Persons B and C.

Indeed, the evidence is very strong that successful entrepreneurs only capture a tiny fraction of the wealth they create.

And there’s also lots of data showing how average incomes can rise over time and how all segments of society tend to rise together.

My reason for revisiting this topic is a story in the Economist about the possibility of an “grossly uneven” recovery, as illustrated by this chart.

My knee-jerk reaction to this chart is that nobody should pay attention to economic forecasters for the simple reason that they have a terrible track record.

And IMF economists seems to be among the worst of the worst when they make predictions.

This may be because economists at the IMF have a mistaken Keynesian view of the economy.

Or it may simply reflect the fact that it’s basically impossible to make such predictions (if any economists actually had that ability, they would be billionaires).

But today’s topic isn’t the foibles of the economics profession.

Instead, I want to focus on this issue of whether rich countries should be blamed for being richer than poor countries.

Here’s some of what the Economist wrote.

Over the longer term, the economic recovery is projected to remain grossly uneven. That, the fund argues, reflects…variations in fiscal largesse. In 2020 rich and poor countries alike loosened the purse-strings to protect households and businesses from the impact of lockdowns. This year fiscal support in the rich world is projected to remain broadly as generous as it was last year, allowing time for the private sector to get back on its feet (and, some economists would argue, even leading to some overheating in America). Emerging markets, by contrast, have shrunk their budget deficits (adjusted for the economic cycle, and before interest payments). The result will be a two-speed global economy. Output in the rich world is expected to return to its pre-pandemic trend by next year, and then to rise slightly above it. For the rest of the world, however, gdp is expected to remain well below trend at least until 2025.

As you can see from the excerpt, the IMF is wedded to the Keynesian view that government spending supposedly is good for growth – notwithstanding all the real-world evidence to the contrary.

But I’m more interested in the two points that aren’t mentioned, both of which revolve around the strong link between economic liberty and national prosperity.

  • First, rich countries tend to be rich because they have (or had) good economic policy.
  • Second, poor countries fail to converge because they tend to have bad economic policy.

For what it’s worth, the IMF’s failure to grasp these two points may help to explain why the bureaucracy advises poor countries to make bad choices.

The bottom line is that the global economy is not a fixed pie. If there are “grossly uneven” growth rates in the world, the reason is that some nations don’t follow the prudent recipe for prosperity.

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Our friends on the left believe (or at least claim to believe) that the United States is an unfair nation because the rich get richer and the poor get poorer.

More specifically, they assert that the economy is a fixed pie and that when people like Bill Gates and Jeff Bezos become rich, then there is less prosperity for everyone else.

This is grotesquely inaccurate, as I explained earlier this year.

We have a great opportunity to revisit this issue because the Census Bureau just released its annual report on Income and Poverty in the United States. I went to Table A2 and created this chart to show how inflation-adjusted income has increased over time for the average household.

In other words, families are earning more, no matter how we measure the average (“median” is the household in the middle and “mean” is the average of all households).

By the way, when you break down the data by quintiles, as I did back in 2018, you find that a big overlap in the economic well-being of all income groups.

Simply stated, we rise and fall together based on the health of the overall economy. That’s true for the poor, true for the rich, and true for the middle class.

Which is why growth is so important, especially for the least fortunate.

But it’s not simply about growth. It’s also about people’s decisions.

Mark Perry, an invaluable scholar at the American Enterprise Institute, crunched the data from the Census Bureau’s report and here are some of his key findings.

On average, there are five times more income earners per household in the top income quintile households (2.0) than earners per household in the lowest-income households (0.40). …the average number of earners per household increases for each higher income quintile, demonstrating that one of the main factors in explaining differences in income among US households is the number of earners per household. …More than six out of every ten American households (64.7%) in the bottom fifth of households by income had no earners in 2020. …more evidence of the strong relationship between average household income and income earners per household. …the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g., staying in school and graduating from high school and college, getting and staying married, working full-time, etc.), which means that individuals and households are not destined to remain in a single-member, low-income quintile forever.

The bottom line is that income is correlated with work, which is hardly a surprise.

But it also is correlated with other choices such as marriage and graduation, as the great Walter Williams sagely observed.

Let’s wrap up looking at some additional data from Mark Perry.

Our left-leaning friends routinely assert that the middle class is shrinking.

It turns out that they’re right, but not because people are becoming poor.

Instead, more and more households are earning above $100,000.

The moral of the story is that free enterprise delivers great results, assuming that politicians don’t smother it with excessive taxes, spending, regulation, and intervention.

And if we want faster growth, we need smaller government.

P.S. We can learn a very important lesson about the effect of big government by comparing living standards in the United States and other developed nations.

P.P.S. For those who want to learn more about income mobility, I strongly recommend this video from Russ Roberts.

P.P.P.S. This data on global income also shows that the economy is not a fixed pie.

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There are divisions of the right between small-government conservatives, reform conservatives, common-good capitalists, nationalist conservatives, and compassionate conservatives.

There are also divisions on the left, as illustrated by this flowchart, which shows the Nordic Model (a pro-free market welfare state) on one end, and then different versions of hard-core leftism on the other end.

I’m showing these different strains on the left because it will help decipher the editorial position of the Washington Post.

I cited one of their editorials a couple of weeks ago that had some very sensible criticisms of a wealth tax. But it also embraced other class-warfare taxes (higher capital gains taxes and more onerous death taxes).

In other words, the Washington Post is on the left, but not as crazy as Bernie Sanders or Elizabeth Warren.

Now we have another editorial from the Post that illustrates this distinction.

The bad news is that the editorial (once again) endorses class-warfare tax policy.

…inequality of wealth is a serious problem in the United States. …to an unhealthy degree, wealth in the United States is being gained through unproductive activity — “rent-seeking”… Well-designed government interventions can reduce inequality from the top down, through more aggressive taxation of capital gains and estates… …everyone, poor and rich, has a lot to gain from curbing wealth inequality. The policies that can achieve that goal are neither radical nor complicated.

The good news is that the Post understands that there are serious consequences of going too far.

What remains to be considered are the counterarguments. …could a more aggressive attack on wealth inequality undermine incentives and result in an economic pie that is smaller and, inevitably, more difficult to distribute? If too aggressive, of course, at the bottom of that slippery slope lies Venezuela’s bankrupt socialism.

I suppose I should be happy that the editorial acknowledges the danger of hard-core leftism.

But my concern is that going in the wrong direction at 60 miles per hour still gets a nation to the wrong destination.

Yes, going in the wrong direction at 90 miles per hour gets to Venezuela even sooner, so I’d rather delay a very bad outcome.

That being said, it would be nice if the Washington Post (or any other rational leftists) drew some lines in the sand about limiting the size and scope of government.

Both numbers are far too high, of course, but setting some sort of limit would at least show that there is some long-run difference between the rational left and the AOC crowd.

Let’s conclude with some extracts that show why I’m worried that the Post will always be on the wrong side. After acknowledging that there are risks of going too far to the left, the editorial tell us we shouldn’t worry about going that direction.

In fact, too much inequality can undermine growth, too. …the perpetuation of steep inequalities, over generations, can turn into a drag on output…by wasting the potential of those who might have acquired skills or started businesses if not consigned by poverty to society’s margins. …extreme inequality fosters demands for populist policies, which, in turn, damage growth.

To be fair, the Washington Post is at least semi-good on the issue of school choice, so I take somewhat seriously their concerns about not wasting potential.

And it’s also worth noting that the editorial understands that populist policies (which presumably includes lots of anti-market nonsense such as protectionism) would be misguided. Though I’d feel much better about that part if the editorial recognized the difference between moral and immoral inequality.

P.S. The core problem is that our friends on the left don’t appreciate that low-income people will be better off if the focus is on growth rather than inequality.

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In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

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Weird items sometimes show up in my inbox, and this clip from Nikole Hannah-Jones (creator of the academically shoddy 1619 Project) definitely qualifies.

She actually cites the economic wasteland of Cuba as a role model for equality.

Ms. Hannah-Jones said that Cuba’s results are because of socialism.

On that point, I’ll agree, though I think it shows why that collectivist ideology is so destructive.

Let’s look at some comparisons based on the Maddison data. This first chart shows how Cuba has fallen far behind Panama and the Dominican Republic, two other multi-racial nations in the region.

The key thing to realize is that Cuba was equal to (or richer than) those countries when the communists took power in Cuba.

But socialist policies have caused Cuba’s economy to stagnate and now Panama is almost three times richer and the Dominican Republic is nearly two times richer (and you can click here is you also want to see comparisons with Chile and Costa Rica).

In other words, Cuba is a role model, but not for anything positive.

Let’s drive that point home with another chart comparing three nations – Cuba, Singapore, and Taiwan – that were roughly equal back in 1959.

What makes this comparison especially instructive is that Cuba went for socialism and Singapore and Taiwan became pro-market reformers. So it should be no surprise that the latter two have far surpassed Cuba.

The same thing is true, by the way, if you compare Hong Kong and Cuba.

Let’s conclude by addressing one final point.

Ms. Hannah-Jones asserted that Cuba deserves praise for having equality.

I doubt that’s true since left-wing dictators usually steal lots of money while ordinary people suffer.

But even if she’s right and Cuba genuinely has equality, it’s only because socialism has impoverished everyone, including the ruling class.

Our friends on the left apparently think that’s something to applaud, as Margaret Thatcher observed, but I’d rather be part of a society characterized by an “unequal sharing of the blessings.”

P.S. Ms. Hannah-Jones may be even more wrong about Cuba than Bernie Sanders, Jeffrey Sachs, or Nicholas Kristof.

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When I was first learning about economics in the 1970s and 1980s, Arthur Okun’s equality-efficiency tradeoff was part of just about any discussion of public policy.

Folks on the left acknowledged that their policies would lead to less prosperity, but they argued that result was acceptable because the benefits of a more-equal society would offset the cost of reduced economic output.

Needless to say, there were vigorous debates about how much additional equality could be achieved and how much economic damage might be caused by any particular policy, but few if any economists pretended that more government was actually good for growth.

Unfortunately, that has changed. A growing number of people on the left (especially those with tax-free jobs at international bureaucracies) now claim that bigger government actually is the way to get more growth.

Here’s their theory.

This illogical hypothesis is so absurd and so anti-empirical that I now get excited when I find economists who still use Okun’s framework when analyzing various reforms.

For instance, there is a new study from the European Central Bank that looks at whether a pro-growth policy (free trade) leads to less equality.

The working paper, authored by Roland Beck, Virginia Di Nino, and Livio Stracca, specifically measures the impact of membership in so-called “globalisation clubs.”

The mounting criticisms against globalisation…have sparked a lively debate about whether the narrative of the benefits of free trade and capital flows is still intact. …In this paper, we reconsider the effects of globalisation on income and inequality studying the consequences of quasi-natural experiments like accessions to “Globalisation Clubs”.Our list of Globalisation Clubs includes the World Trade Organisation (WTO), the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), which all require their members to pursue some form of either liberal trade or investment policies or a combination of both. …The main purpose of our study is to shed light on the hypothesis that globalisation leads to an efficiency-equity trade-off which is a fundamental concern in economics dating at least back to Okun (1975). In other words, is the hypothesis that globalisation increases economic efficiency to the detriment of cohesion and equality supported by the data?

Here are the key results.

The analysis leads to three main findings. First, with the exception of financial liberalisation we find that all our “globalisation shocks” lead to a significant increase in trade openness – a prerequisite for considering them globalisation shocks in the first place. Second, the effects on per capita income are mixed; positive for WTO accessions and trade openness shocks, insignificant for OECD accessions and even negative for EU accessions and financial liberalisations. …Finally, we find little evidence that globalisation shocks lead to more inequality. The Gini coefficients (market and net) tend not to change or even to fall, and the labour share of income to be unchanged or even rise, in the wake of a globalisation shock.Taken together, our results point to mostly positive effects for countries following globalisation shocks and challenge the view that globalisation is necessarily an efficiency-equity trade-off.

I’m not surprised by these findings.

There’s no reason to think that OECD membership will lead to better policy and there are good reasons to think EU membership might push policy in the wrong direction.

The WTO, by contrast, has a good track record of trade liberalization. So these results from the study make sense.

The primary takeaway from this research is that free trade is good for prosperity. Not only does it lead to more growth, but low-income people enjoy above-average gains.

Though I would argue that free trade would be just as desirable if rich people were the ones who enjoyed above-average gains. The key point is that all groups benefit when there are reforms to shrink the size and scope of government, and we shouldn’t get worked up if some people benefit more than others.

But there’s a secondary takeaway. This European Central Bank study also is an example of methodologically sound research (i.e., recognizing that more government is not a free lunch).

P.S. While I applaud the honesty of left-leaning economists who use Okun’s framework, that doesn’t stop me from criticizing some of their crazy conclusions.

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While debunking OECD and IMF research on inequality, I explained that it’s important to distinguish between income that is earned honestly and loot that is obtained thanks to government cronyism.

That’s also the message of this video from the Hoover Institution.

In the video, David Henderson contrasts how our lives are improved when an entrepreneur develops a new product.

The entrepreneur almost surely gets richer faster than we get richer, but we all wind up better off. Indeed, there’s a clear relationship between the share of rich people in a society and overall prosperity.

And that’s a good description of what has actually happened in market-oriented nations such as the United States.

Heck, it even happened to some degree in China when there was partial reform.

By contrast, government favoritism is a recipe for inefficiency and stagnation (and since LBJ was an awful president, I like that David used him for the example of corrupt cronyism).

In a column for CapX, Andrew Lilico correctly differentiates between moral inequality and immoral inequality.

The only legitimate questions about the distribution of wealth concern whether it is truly the property of those that possess it, as opposed to having stolen or extorted it. …Wealth is property. If it has been innocently acquired, people should be able to enjoy their property without censure or the (quite incorrect) suggestion that their flourishing causes others harm.

Not only is it incorrect to suggest that one person’s flourishing causes harm to others, it is completely wrong.

As pointed out in the video, Nobel Prize-winning economist William Nordhaus calculated that entrepreneurs only capture a tiny fraction (2.2 percent) of the wealth they create for society. That means 97.8 percent for the rest of us.

And other academic scholars have produced similar results.

The bottom line is that the recipe for growth and prosperity is the same recipe for helping the less fortunate.

P.S. As you can see from his Wikipedia page, Professor Nordhaus is not a libertarian or conservative, so it should be clear he wasn’t trying to come up with a number to justify capitalism.

P.P.S. I also recommend my four-part series (see herehere, here, and here) on why we should care about poverty reduction rather than pushing for coerced equality, as well as my two-part series (here and here) on how statist policies produce the immoral type of inequality.

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Government schools in America are a national disgrace.

Every year, we throw more money into the system and every year we get back mediocre results.

The numbers are especially depressing when you compare how other nations get better outcomes while having significantly lower levels of per-pupil spending.

Given this grim situation, I’m always on the lookout for analysis that can help us figure out how to make things better.

Though some people seemingly want to make things worse.

In an article for the Atlantic, Caitlin Flanagan reveals how elite private schools have become high-pressure pathways for entrance to elite colleges. It’s a fascinating – and even disturbing – look at the life of people (mostly) in the top-1 percent.

But what grabbed my attention was her conclusion. She accurately observes that government schools do a crappy job, but then suggests that high-performing private schools are the problem.

In a just society, there wouldn’t be a need for these expensive schools, or for private wealth to subsidize something as fundamental as an education. We wouldn’t give rich kids and a tiny number of lottery winners an outstanding education while so many poor kids attend failing schools. In a just society, an education wouldn’t be a luxury item. …We’ve allowed the majority of our public schools to founder, while expensive private schools play an outsize role in determining who gets to claim a coveted spot in the winners’ circle. …Public-school education—the specific force that has helped generations of Americans transcend the circumstances of their birth—is profoundly, perhaps irreparably, broken. In my own state of California, only half of public-school students are at grade level in reading, and even fewer are in math. …Shouldn’t the schools that serve poor children be the very best schools we have?

At the risk of understatement, this point of view (the article’s headline in the print edition is “Private Schools Are Indefensible”) is utterly perverse.

If we know that private schools do a better job (and not just the super-elite schools discussed in the article), then the ethical answer should be to get rid of the government school monopoly and adopt a system of school choice so that the children of non-rich families also have an opportunity to get a quality education.

That would be good for kids and it would be good for taxpayers (we’re spending record amounts of money on the failed government school monopoly, so turning that money into vouchers would provide enough funding for families to afford the vast majority of private schools).

But this brings up another issue. What if leftists aren’t just against private education? What if they also object to any sort of system where better students get better outcomes?

Chester Finn of the Hoover Institution wrote a column last November for the Wall Street Journal about the efforts to undermine the tiny handful of high-performing government schools.

Nationwide, selective-admission public schools, also known as “exam schools,” are under attack… Much like elite universities, critics allege, these schools have been admitting far too many whites and Asians and not nearly enough blacks and Latinos. …in New York, …admission…is governed by the eighth-grader’ scores on a specialized admission test. …there’s no denying that they’re full of Asian and white kids, many from low-income and middle-class families. …Mayor Bill de Blasio and his schools chancellor have recently pushed to make the admissions process more “equitable.” They want to…abolish the entry exam…[i]nstead of repairing the elementary and middle schools attended by poor and minority kids… Consider another furor in Virginia, over admission to the esteemed Thomas Jefferson High School for Science and Technology in Fairfax County, regularly ranked the country’s top high school by U.S. News. Thomas Jefferson is in such demand that it can accept fewer than 1 in 6 applicants. …The Fairfax County superintendent and board last month moved to abolish the qualification exam… the remedies being sought in every case are wrongheaded. …School systems…have to face the reality that some kids are smarter and more motivated than others, no matter their color. That’s anathema to “progressive” reformers, who prefer to abolish accelerated classes for high achievers. …The progressive assault on education in the name of equity ends up denying smart kids from every background the kind of education that will assist them to make the most of their abilities.

I’m almost at a loss for words.

For all intents and purposes, our friends on the left would rather have everyone be mediocre than allow some students to succeed.

  • They don’t want some kids to succeed by attending private school.
  • They don’t want some kids to succeed by attending so-called exam schools.
  • They don’t want some kids to succeed by taking accelerated classes.
  • They don’t want some kids to succeed by attending charter schools.
  • They don’t want some kid to succeed by being home-schooled.

This hostility to achievement is reprehensible.

Part of it is probably motivated by a cynical attempt to appease teacher unions.

And part of it is presumably the ideological belief in equality of outcomes rather than equality of opportunity, even if the net result is that all students are worse off (the same perverse instinct that leads them to support economic policies that hurt the poor so long as the rich get hurt more).

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My series on poverty and inequality (see here, here, and here) focuses on why we should try to help the poor rather than hurt the rich.

We’ll continue with that theme in Part IV, which begins with this video by Russ Roberts of Stanford University’s Hoover Institution.

Russ makes some great points throughout the video about the importance of creating the conditions for upward mobility.

Here are some of the main takeaways.

  1. The rich are getting richer and the poor are getting richer as well.
  2. Cronyism is bad, especially when it winds up subsidizing the rich.
  3. We should focus on reducing poverty rather than fixating on inequality.

Regarding that final point, my favorite part is when he said that, “Focusing on inequality as something inherently bad can blind us to the problems of poverty. Inequality and poverty aren’t the same thing.  …I’m much more concerned about those at the bottom who are left behind.”

In effect, he was stating his version of the Eighth Theorem of Government. At least the first half of it (he’s probably too nice to impugn the motives of those who focus on inequality).

I also like the fact that he points out the need to get rid of licensing.

And he repeatedly argues that we need to improve the quality of education, though I wish he had explicitly stated that this means we have to replace the government’s failed education monopoly with a choice-based system.

But no need to nit-pick. The video is great, as are his other videos that I have shared over the years (see here, here, here, and here).

P.S. For those who have trouble believing that the poor, middle class, and rich can all simultaneously enjoy rising incomes, click here, here, and here for evidence.

P.P.S. I also think this data from China is very powerful.

P.P.P.S. The people who fixate on inequality favor policies that would make the United States more like Europe, so it’s worth noting that lower-income people in America are usually better off than middle-class people on the other side of the Atlantic.

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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 have 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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