Sunday, November 30, 2014

Bruenig on Inequality

While Matt Bruening has attracted notice in recent days for his column making the sensational claim, in the context of recent events in Ferguson, that riots are good, it's the bracing honesty in his post earlier this month on inequality that I find more noteworthy. Frankly, a more unadulterated view of the lefty position on inequality will be hard to find. Rather than go through the whole thing, I'd like to just focus on a few key parts. First up:
[The distribution of market income] is not at all what people are worried about in most inequality circles. The concern that income inequality hurts the living standards of the poor and middle class is not implicitly about inequality produced by markets. The concern is that high disposable income inequality (relative to other countries) is strong suggestive evidence that the bottom and middle could be made better off by increasing taxes and transfers. That is to say, where disposable income inequality is high, that suggests there is money out there going to the rich that could be hoovered up and shot out to the non-rich.
It doesn't get much more plain-spoken than this, with an approach that can essentially be boiled down to "these people have a lot of money, these other people don't have that much, so we should take from this group and give to that group." In fact, it's not terribly far removed from certain Marxist dogma.

Notice that completely absent from the argument is any conditional or moral component, with seemingly all non-rich people deserving of money belonging to the rich regardless of individual circumstances. All that is apparently required to justify a wealth transfer is one person having less than another. Thus, someone who has diligently worked to start a successful business that produces useful products or services for the rest of society -- and is well compensated for that effort -- is presumably obligated to transfer some of their earnings to an NBA star who blew through tens of millions of dollars on frivolities and is left with nothing (an admittedly extreme scenario used to illustrate the point). 

There is apparently no place for the role of life choices and decisions in assessing need or the moral claim to someone else's money. That's interesting because later in his piece Bruenig provides this chart:

As can be seen, even in Scandinavia there is a high correlation between single motherhood and pre-transfer poverty rates. Thus, it would seem that if the left and income inequality worriers more generally were truly concerned with reducing both poverty and income inequality that they should be among the fiercest critics of single motherhood. Yet how often does one encounter members of the left inveighing against single motherhood and advocating for being in a stable long-term relationship before having children (indeed, Bruenig's wife recently critiqued Rod Dreher for having the temerity to characterize the decision to have multiple children out of wedlock as foolish)? While many on the left have a great affinity for Scandinavia and its envious social indicators, almost invariably unremarked upon is the role of behavior in such outcomes. As Tino Sanandaji has noted, only about 3% of children in Sweden are born to single mothers.

One could almost be forgiven for thinking the left is only concerned about poverty reduction to the extent it involves an expansion of the state and/or confiscating wealth from the well-off. 

Bruenig, meanwhile, concludes his piece on this note:
The concern about inequality has very little to do with the market distribution itself (the market is, after all, just a creature of policy, a government program like any other). Rather, the concern is that high and rising inequality signals that we are throwing away opportunities to relieve the want and humiliation of the bottom (and to a lesser extent, the middle), and are opting instead to shovel more and more of the national income to the rich for no good reason.
There are some amazing assertions made here:
  • The market is a government program, apparently because it is subject to government policy. By the same logic, since our lives are also subject to government policy then life itself can be considered to be one big government program.
  • It is desirable to relieve the want of the bottom (which for most humans is almost endless). We've seemingly moved beyond needs -- a tacit admission that they have largely been satisfied? 
  • Apparently money is not earned by people nor has much to do with things like effort and individual decision-making, but rather is obtained by luck or the operation of a great cosmic shovel which allocates large amounts of money to some people but not others on a mysterious basis. 
  • There is no good reason for the rich to gain additional money. The fact that they may have that money because of contributions made to society via products, services and/or investments is left unexplored. 
The inequality agenda isn't about the creation of more opportunity. It isn't about ensuring the basic needs of each citizen is met. It's about redistribution for its own sake. If only the rest of the left was as unvarnished in presenting its views as Bruenig...

Tuesday, April 08, 2014

Inequality update

The evidence continues to mount that the ongoing uproar over income inequality is much ado about nothing. Exhibit A is this recent piece from New York Times columnist Eduardo Porter (bolded parts mine):
As the income gap in the United States has exploded over the last three decades, blowing past the previous record set in the Roaring Twenties, scholars in fields from sociology and economics to psychology and epidemiology have tried to answer what turns out to be a difficult question: “So what?” 
“The most common moral arguments for and against inequality rest on claims about its consequences,” Professor Jencks [described earlier in the column by Porter as "a renowned professor of social policy at Harvard"] wrote more than a decade ago. “If these claims cannot be supported with evidence, skeptics will find the moral arguments unconvincing. If the claims about consequences are actually wrong, the moral arguments are also wrong.” 
For all the brain power thrown at the problem since then, however, specific evidence about inequality’s effects has been hard to find.
Porter then notes some of the various arguments that have been mounted by the inequality doom-mongerers, such as The Spirit Level's claim that income inequality leads to higher crime, greater teen pregnancy and even diminished life expectancy:
But does the data really back this up? One problem with these analyses is that they are based on correlations between levels of inequality and variables like life expectancy or the odds of poor children climbing the income ladder. But such correlations can’t prove inequality causes other social ills. They can’t disentangle inequality from the myriad things pushing American society this way and that.
Porter then offers up this:
Lane Kenworthy, a sociologist at the University of Arizona, is all too aware of these limitations. He was to be Mr. Jencks’s co-author on the book about inequality’s consequences. Now he is going it alone, hoping to publish “Should We Worry About Inequality?” next year. 
“People that worry about inequality for normative reasons have been very quick to jump on plausible hypothesis and a little bit of evidence to make sweeping conclusions about its consequences,” Professor Kenworthy told me. 
To avoid misleading correlations and better isolate inequality’s impact, Mr. Kenworthy studied its evolution over time, comparing how changes in income concentration across the world’s industrialized nations related to changes in a whole set of social and economic outcomes, from growth and employment to health and educational attainment. 
He came up mostly empty-handed: “My tests suggest it seems to be a small player in the overall story.” 
Professor Stiglitz notes that the United States grew faster during the decades of low inequality immediately after World War II than it did after inequality started rising in the 1980s. But Mr. Kenworthy finds no meaningful impact of inequality on growth one way or the other. “Income inequality isn’t the only thing that differed between these two periods,” he said. 
Similarly, Mr. Kenworthy found no significant relationship between increasing inequality and life expectancy, infant mortality or college graduation rates, among others. Even when some patterns do mesh — teenage pregnancy rates fell a little more slowly in countries where the share of income going to the top 1 percent grew fastest — the relationship is weak. If you take the United States and Britain off the list, the relationship disappears.
Kenworthy expands his thoughts on income inequality in an interview with Porter posted on the Times' Economix blog:
The evidence supports a number of the most prominent [income inequality] hypotheses only weakly or not at all. As best I can tell from the available data, income inequality hasn’t reduced economic growth. It hasn’t hindered employment. It may or may not have played a role in fostering economic crises, including the Great Recession. It hasn’t reduced income growth for poor households. It may or may not have contributed to the weakening of household balance sheets by encouraging too much borrowing. It may or may not have reduced equality of opportunity.  
It hasn’t slowed the growth of college completion. It either hasn’t reduced the increase in life expectancy or the decrease in infant mortality or, if it has, the impact has been small. It looks unlikely to have contributed to the rise in obesity. It hasn’t slowed the fall in teen births or homicides since the early 1990s. It may or may not have weakened trust. It doesn’t appear to have affected average happiness. In the United States it has had little or no impact on trust in political institutions, on voter turnout, or on party polarization. And while it may have boosted inequality of political influence, we lack solid evidence that it’s done so.
Keep in mind that, like Porter -- who should be classified as at least center-left based on a fair-minded reading of his columns -- Kenworthy is a man firmly rooted in the leftist camp (indeed, he has been praised by Matt Yglesias for his book calling for an expansion of the welfare state) who does not seem predisposed towards dismissing or downplaying possible negative impacts resulting from income inequality. And in fact he argues that income inequality is not cost-free:
On the other hand, income inequality has reduced middle-class household income growth. It very likely has increased disparities in education, health, and happiness in the United States. And it has reduced residential mixing in the U.S.
While Kenworthy presents it as established fact that inequality has reduced the income growth of the middle class, it is actually far from agreed upon. Indeed, in Porter's column he quotes Harvard's Professor Jencks that "'Most economists don’t feel there’s a logical mechanism that really is persuasive' linking the rise of the 1 percent and the stagnation of incomes for the rest." 

As for the "very likely" idea that income inequality corresponds with disparities in education, health and happiness, this is fairly unremarkable. Given that money can purchase higher quality goods, including in education and health, it would be surprising if the two weren't related. But, as with income, the real issue is the absolute conditions of health and education, not their relative states (everyone having equally poor health or being equally ignorant would not be a victory).  With regard to residential mixing, it seems logical that income inequality is in fact only a proximate cause, with the real culprit being found in restrictive zoning laws which depress housing supply and drive up its cost.

Kenworthy and Jencks aren't the only ones questioning the alleged desultory impacts of income inequality. Reviewing Thomas Piketty's new book on the topic, which has created a great deal of excitement among leftist intellectuals (Paul Krugman has called it "the most important economics book of the year — and maybe of the decade"), Ira Stoll highlights Piketty's quote that "inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it." 

Assuming the quote is not taken out of context, Piketty's apparent concession that inequality per se is not a bad thing seems a fairly stunning admission. After all, how often do we see hand-wringing about income inequality attached with any kind of qualifier? Rather it seems the issue is typically presented with very little nuance, leaving people with the impression that income inequality should always be considered a grave problem regardless of the particulars. 

Piketty, of course, is in fact very concerned about income inequality -- that's the entire point of his book. Stoll explains why:
Piketty writes that "confiscatory tax rates on income" were "an impressive U.S. innovation of the interwar years" that deserve to be "reconceived and revived." 
How does Piketty justify, morally, what he concedes to be confiscation? 
To me the weakest part of his argument is his assertion that the money he is proposing to tax, now in private hands, was stolen in the first place. 
He writes, "the courts cannot resolve every case of ill-gotten gains or unjustified wealth. A tax on capital would be a less blunt and more systematic instrument for dealing with the question." After all, he writes, "Broadly speaking, the central fact is that the return on capital often inextricably combines elements of true entrepreneurial labor (an absolutely indispensible [sic] force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft." 
Here Piketty is speaking "broadly" indeed, tarring as "outright" thieves anyone who has managed to amass a million dollars or so worth of assets, and proposing to deal with the problem not by enforcing the criminal laws against theft, but by taxing everyone. He acknowledges his own ignorance here—"To be frank, I know virtually nothing about exactly how Carlos Slim or Bill Gates became rich." Surely the decent thing would have been to have looked into the matter and learned something about it before tarring the two men as thieves and proposing to tax away billions of their fortunes as punishment for their supposed crimes.
Again, assuming Stoll's characterization is accurate, Piketty's problem with inequality isn't due to demonstrable harm, but rather his belief in the unseemliness of it all. If the accumulations of vast sums of money is in large part the result of luck and thievery, the justification for its redistribution becomes much easier than if it is mostly due to personal enterprise and the provision of valuable goods or services. 

I suspect that most of the left's anger over income inequality is similarly reasoned. Fighting income inequality isn't about curing an economic ill so much as correcting a cosmic injustice through the redistribution of ill-gotten gains (recall that suspicion of capitalism is a key part of the leftist creed -- otherwise they wouldn't constantly clamor for more government power to restrain it and taxation to ameliorate its perceived negative effects). Making that argument to the American people, however, does not seem to be a winning one at the current time, hence the continued futile quest for proof of income inequality's negative effects in order to justify their desired interventions. 

Monday, March 10, 2014

Inequality update

First up, a mostly sensible column in last Sunday's New York Times from Harvard economics professor Sendhil Mullainathan: 
I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent. 
Our passion about the widening disparity in wealth and income is easy to understand. After all, studies often find that unequal incomes reduce happiness. Of course they do: Jealousy and envy are strong emotions. They are also very basic ones that develop as early as 4 months of age. There is even evidence that great apes are averse to inequality. And though there is debate about that point, at least it produces enjoyable videos. Our outrage at inequality is primal. 
But primal emotions are not always noble ones. Of course, when I see a colleague receive some award, I covet it. But this is not me at my best, and these are not the feelings we would instill and promote in our children. So why would we want public policy to cater to such feelings?
While Mullainathan's message that anger at the 1% is a distraction from finding ways of helping those at the bottom is absolutely correct, there are a couple of points worth quibbling with here. When Mullainathan references "our outrage" at the top 1% he seems to take it as a given that anger at the rich is widespread, but it's unclear how true this is. How much outrage against the 1% really exists outside of academia, Occupy Wall Street veterans and other assorted leftist ideologues? While it isn't hard to imagine that considerable ire exists among many Americans towards the financial sector and those who made their riches there given the huge public bailouts it has received over the years, it isn't obvious there is blanket outrage towards the 1% per se. 

This ties into another point: it's instructive that when Mullainathan references his own personal envy and jealousy, it isn't in the context of the 1% but rather his colleagues -- people more like himself. Intuitively, this seems likely to be the case for most people. After all, who really measures their welfare against the 1% or uses people like Warren Buffet, Bill Gates or Hollywood celebrities as a personal measuring stick? Conversely, who gets any real satisfaction from outperforming (however one measures such things) those from a much lower socioeconomic demographic? 

Rather, it seems much more plausible that people measure themselves against other people from a similar background -- friends, neighbors, family, colleagues, acquaintances from high school and college, etc. I would submit that much more jealousy is generated when someone's close acquaintance gets a new car, house or takes a fabulous international trip than when that same person discovers that some famous person just bought a 5th home. 

These are, however, minor issues in what is overall a solid column which helps move the inequality conversation in the right direction (I would also disagree, however, with his argument that higher tax revenue is needed to promote greater opportunity). 

Now let's move on to the bad, in the form of another New York Times column written by an academic economist, this time from -- surprise, surprise -- Paul Krugman:
[I]f generous aid to the poor perpetuates poverty, the United States — which treats its poor far more harshly than other rich countries, and induces them to work much longer hours — should lead the West in social mobility, in the fraction of those born poor who work their way up the scale. In fact, it’s just the opposite: America has less social mobility than most other advanced countries.
Actually, contra Krugman, there is no reason to think why the US approach to dealing with its poor would produce greater social mobility than countries with more elaborate social welfare schemes. The reason for this is very simple: social mobility -- a measurement Krugman also relies upon in a recent blog post -- is a terribly flawed measure of progress, as this example nicely illustrates:
Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.
In other words, one method of boosting social mobility would be to simply reduce the earnings of the rich, thus compressing income percentiles and making it easier to skip from a lower percentile to a much higher one. Why that would be desirable, however, is unclear. If presented, for example, with the choice between getting a raise of $20,000 and jumping from the 10th percentile to the 90th in Country X, or getting an extra $80,000 and only jumping from the 10th percentile to the 20th in Country Y, how many people would choose the former?

To make this even simpler, just consider the fact that in a country where each person doubled their income year after year that social mobility would be zero, as everyone would remain in the exact same income percentile. For those obsessed with social mobility such a country would be a pariah, even though it would represent an amazing growth in living standards for its citizens. 

The real intellectual bankruptcy of the income inequality issue, however, is to be found in a recent Twitter exchange I had with Sean McElwee. McElwee, who has extensively written about income inequality for such publications as Salon, The New Republic and The Huffington Post, caught my eye with this claim in a recent HuffPo piece:
The actual data show that higher government expenditures increase upward mobility. That's why countries like Denmark have much higher levels of mobility. We find the same correlation at the local level within the U.S.: Higher government spending leads to more mobility.
When I pointed out the meaninglessness of Danish mobility statistics to McElwee he simply responded that he would "rather live in a more equal society." Doubting whether he actually meant this or fully appreciated his statement's ramifications, I then asked if he would prefer to live in a society where everyone made $15,000 per year (perfectly equal) or a range of $10,0000-20,000 per year (somewhat equal) over the status quo found in the US. Unsurprisingly he declined to answer, instead calling such scenarios "absurd situations."

After some more back and forth in which I argued that absolute welfare trumps relative welfare measurements (such as social mobility), McElwee stated that "I think relative welfare is intimately tied to absolute welfare." This is where the conversation took a very interesting turn. Wondering how McElwee's claim could be true, I then asked how my welfare would be harmed, for example, if Bill Gates were to accrue another billion dollars (in fact, Bill Gates gained another $4 billion in the last six months alone). McElwee's response? With his extra money Bill Gates could get more health care, which harms the rest of us because such purchases would come at the expense of others who require health care.

Think about this for a second. McElwee has spilled a lot of proverbial ink over the income inequality issue and has presumably given it considerable thought. When pressed for an example of how inequality can hurt others he, presumably reaching for his strongest argument (after all, he's had plenty of time to think the issue over), argues that inequality can deprive others of health care. Let's unpack just some of the ways in which this claim is absurd:
  • Bill Gates is worth $76 billion. Presumably that should be sufficient to cover every conceivable health care expense he may incur. Can anyone conceive of even an outlandish scenario in which Bill Gates receives an extra billion dollars and then proceeds to purchase additional health care with it because the $76 billion he already had was apparently insufficient to meet his needs? Does that even begin to make sense? 
  • Conversely, if giving Bill Gates an extra billion dollars would result in someone being deprived of health care, then doesn't it also logically stand that taking a billion dollars away from Gates and dumping it into the ocean -- thus reducing inequality -- would then pave the way for someone previously denied health care to obtain it? Is that at all plausible?
  • Even if Gates did want to spend his extra money on health care, does anyone really think that the US is currently at its health care production possibilities frontier and that it would be impossible to create additional health care resources to meet additional health care demand from other people? That any additional demand from Gates would come at the expense of others? When pressed on this, McElwee just notes that there are limited resources and that scarcity is the central tenet of economics. True enough, and maybe someone would have to give something else up to obtain additional health care (for example, spending on a vacation or a new television), but the idea that we have already created all of the health care resources we possibly can is nonsense.
  • Let's also note that if we are currently at our health care production maximum that Obamacare is essentially an exercise in futility, as it is totally pointless to extend health insurance to more people if there is no more health care to be obtained. 
  • Lastly, if billionaires buying up all the available health care, and thus denying it to others, one would think this issue would have been raised by the left during the great health care debate which proceeded the passage of Obamacare. It was not, presumably because it is not true and anyone who seriously made such a claim would have been laughed out of the room.
Lastly, I'll note that McElwee has deployed The Spirit Level in support for his inequality arguments, including a January Huffington Post column as well as a Rolling Stone piece published just the other day. When I pointed out that the book was both eviscerated by Tino Sanandaji (among others) years ago as well as labeled as "largely debunked" by The Economist (in October 2012), McElwee's response was to simply note that some people still believe the book's arguments to hold some validity and to label The Economist as "libertarian"and presumably thus hostile to The Spirit Level's arguments. 

That The Economist is libertarian will no doubt come as a surprise to those active in libertarian circles. Let's note, for example, that the publication has endorsed Democrats in the last three US presidential elections and, in a 2012 economic "report card", gave President Obama an A- for his bailout of GM and Chrysler and a B+ for the 2009 stimulus package. Say what you will about either policy, they can't be accurately described as libertarian. 

Given the frequently absurd arguments trotted out by the left on the topic of income inequality, it begs the question of why the issue animates them so deeply. Why do they continue to bang the inequality drums when the weaknesses in their arguments are so glaring? While it is impossible to know for sure, this recent statement from a leading member of the California state Democratic Party likely provides us with some real insight:
"I'm going to say something, and it's probably going to get me in trouble, but there are some people who are just too rich," said party secretary Daraka Larimore Hall in a last effort to rally the rank and file before delegates dispersed. "If we don't solve the problem of income inequality we will lose our souls and we will lose our republic."
This is the game right here. Ranting about income inequality isn't about raising up the fortunes of the poor, leveling the playing field or having a discussion about how best to increase the opportunities available to the less fortunate, but rather tearing down the rich (who frequently amass their fortunes in the marketplace, which leftists are distrustful of -- hence their constant calls for additional regulations to be placed upon it). As an added bonus, taking the rich down a peg via higher taxation helps provide more revenue for government do-gooding. Apply this template for understanding the inequality debate and everything begins to make sense.

Wednesday, February 19, 2014

PBS funding

Michael Hiltzik writing in Monday's Los Angeles Times:
[A] PBS unit that funded independent documentaries canceled a film about the Koch Brothers last year, fearing the reaction of one of its major donors, David Koch. 

That underscores the cynicism of the steady withdrawal of public funding from PBS since the Reagan administration. It's another example of the old story of big government getting off the horse, so big business and the wealthy can saddle up [the column begins by noting PBS's decision to return a $3.5 million donation from a billionaire to help fund documentaries about the state of pensions for state and local government employees]. As David Sirota, the author of the PandoDaily expose, wrote in its aftermath, PBS doesn't stand for "Public Broadcasting Service" anymore. As it becomes more addicted to big-bucks donors, it risks becoming the Plutocrat Broadcasting Service.
Hiltzik, it seems, would have no problem if our tax dollars, via PBS, were used to support the anti-Koch Brothers documentary he references. From a moral and philosophical perspective, forcing other people to provide money to subsidize your preferred political views is reprehensible. 

More practically, Hiltzik's example nicely illustrates the pointlessness of taxpayer funding for PBS. The canceled anti-Koch documentary, Citizen Koch, ended up receiving more money from donations than what PBS had originally promised its producers ($170,000 in a Kickstarter campaign vs. $150,000 from PBS). So everyone was left better off; the taxpayers didn't have to fund something they might disagree with and the producers ended up with more money. This is cause for outrage?

Furthermore, even if the fundraising campaign had failed, the idea that anti-Koch crusaders need PBS to reach a wide audience is ludicrous (and if one acknowledge's that PBS' role isn't vital to spreading that message, then why do we care if they support the documentary or not?). If there is one thing the media does not lack for, it is information about the alleged nefariousness of the brothers Koch. 

Anyone with an internet connection -- which is to say, the vast majority of Americans -- can read the 2010 The New Yorker article which arguably kicked off the anti-Koch frenzy. has four pages devoted to Koch-related articles (sample headline: "Koch-backed Conservatives Go Pro-Cervical Cancer"), while The Huffington Post, Mother Jones (sample: "How the Koch Brothers Backed Public-School Segregation"), The Nation, Washington Monthly, Talking Points Memo, Daily Kos, etc. offer hundreds if not thousands more. The hour-long documentary Koch Brothers Exposed can be viewed in its entirety on YouTube along with plenty of other anti-Koch pieces.

Taxpayer funding of PBS is both morally problematic and practically unnecessary. Hiltzik's hand-wringing over reduced funding suggests he either desires others to pay for the spread of his political message or is simply against any cuts to government on principle, regardless of the practicalities. Possibly both. It's not a message worth taking seriously. 

Monday, February 17, 2014

Krugman vs. Mankiw

Paul Krugman, last spotted around these parts refuting his own arguments on income inequality, is upset with Harvard economics professor Greg Mankiw for penning a defense of the top 1 percent income earners in Sunday's New York Times (Krugman's own turf -- one could be forgiven for suspecting that a partial motivation for Mankiw's authoring of the piece was the joy of trolling Krugman). In his column Mankiw notes the huge sums earned by movie stars, top athletes, best-selling authors and the like, and speculates that the lack of public ire over such incomes is due to a sense by most people that the money was deserved as their talents are readily observable and obvious (e.g. Robert Downey Jr. was paid $50 million for Iron Man 3, but his acting ability also helped produce well over $1 billion in revenue for the movie). In sharp contrast, Mankiw speculates that anger over the compensation of CEOs and those who work on Wall Street may stem from their talents and the benefits they generate being much less apparent. 

In a Sunday morning blog post Krugman responded by managing to totally miss Mankiw's point:
Greg Mankiw has written another defense of the 0.1 percent — and this one is kind of amazing. 
Before I get to the amazing part, however, can I say enough with the movie stars. Yes, a handful of media stars make a lot of money. But they are a trivial part of the story (pdf): 
The upper tiers of the income distribution are overwhelmingly occupied by executives of one kind or another — corporate, finance, real estate, and lawyers who are surely more corporate than Perry Mason. And even the biggest names in media aren’t real players. Remember, the 40 top-paid hedge fund managers and traders made an average of more than $400 million each in 2012.
That's great, but Mankiw explicitly acknowledged in his column that entertainers and media types comprise a minority of top earners:
[A]ctors, authors, and athletes do not make up the entire ranks of the rich. Most top earners make their fortunes in ways that are less transparent to the public.
After raising a point irrelevant to Mankiw's column (whose argument depends not at all with how many people in the media, arts or sports are earning big bucks), Krugman then blasts the Harvard professor for advancing the idea that, given the important role of Wall Street in allocating the country's capital, "It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task." 
Has Greg been living in a cave since 2006? We’re now in the seventh year of a slump brought on by Wall Street excess; the wizardly job of “allocating the economy’s investment resouces [sic -- Krugman was evidently in such a rage and so eager to get the piece published that he didn't even run a spell check]” consisted, we now know, largely of funneling money into a real estate bubble, using fancy financial engineering to create the illusion of sound, safe investment. We also know that there is a real question whether hedge funds, in particular, actually destroy value for their investors.
Whatever one thinks of Krugman's ranting, a sophisticated argument (excess!) against the value of Wall Street it is not. Indeed, it is not at all apparent what exactly Krugman is getting at here. So, because of the financial crisis, then Mankiw is wrong that capital allocation is an important task which attracts very talented and richly compensated people? Also unaddressed by Krugman is Mankiw's point that "recent research establishes that those working in finance face particularly risky incomes. Greater risk requires greater reward."

In any case, if Krugman wanted to make a more sensible case against Mankiw he should have taken issue with his blanket description of Wall Street as "decentralized and competitive." As but one example, the credit ratings agencies which were at the heart of the real estate bubble and its aftermath are a regulated oligopoly, facing less competition that it would under a free market. But for Krugman to make this line of attack would have required being on the side of smaller government, and so his avoidance of it is unsurprising.

Mankiw, meanwhile, responded to Krugman's post on his own blog, via a link to his economics textbook, that a variety of players -- including government regulators -- were responsible for the crisis.

Lastly, Krugman concludes his blog post by discussing tax fairness:
One more thing: Mankiw argues that our tax system is fair because the top 0.1 percent pays a higher share of income in federal taxes than the middle class. This neglects the partial offset of this progressivity by regressive state and local taxes. But surely the main point is that to the extent that taxes on the 0.1 percent are high (they aren’t really, in historical context) that’s largely because Mitt Romney lost the 2012 election, so that Obama’s partial rollback of the Bush tax cuts and the high-income surcharges that partially finance health reform remained in place and the Ryan budget didn’t happen. It’s kind of funny to claim that our system is fair thanks to policies that you and your friends tried desperately to kill.
A few points:
  • Krugman is apparently unaware that even if Mitt Romney would have won in 2012 that Democrats still would have controlled the Senate, thus almost assuredly blocking the path for any tax reduction on top income brackets. 
  • Even if the Ryan budget -- or any other conceivable GOP budget plan -- had passed, the rich still would have paid much more in federal tax as a percentage of their income than the middle class. As Mankiw points out in his column (but Krugman declines to note), the top one-tenth of 1 percent of the income distribution paid 33.8% of their income in federal taxes while the middle class, defined as the middle fifth of the income distribution, paid 12.4% -- a 21.4 percentage point gap. Slash this by 10 percentage points (an extreme scenario) and the rich are still paying a good bit more than the middle class (also recall there is no tax cut plan in existence which only cuts taxes for the rich but not the middle class as well, further complicating the math). 
  • One can play these counterfactuals all day. It's not hard to imagine that had Al Gore prevailed in the 2000 election that the Clinton-era top tax rate of 39.6% would have been maintained for all of last decade -- but so what? If ifs and buts were candy and nuts...
Little wonder that Scott Winship labeled Krugman's blog post "one of the most disingenuous things I’ve read of his in awhile."

Tuesday, January 28, 2014

Krugman self-refutes

Paul Krugman in yesterday's column:
Extreme inequality, it turns out, creates a class of people who are alarmingly detached from reality — and simultaneously gives these people great power.
While Krugman uses this language as a lead-in to some criticism of people who have compared President Obama to Nazi Germany, he could have been describing himself. In the column's opening paragraph he says the following:
[Rising inequality] also has big social and human costs. There is, for example, strong evidence that high inequality leads to worse health and higher mortality.
Now, anyone who has not drunk deeply from the inequality kool-aid would probably cast a skeptical eye towards such an assertion. Does it even make the slightest bit of sense that, for example, Bill Gates sees his wealth double -- thus increasing inequality -- and suddenly someone else's health worsens and they head to an earlier grave? Is that at all plausible? How does that work exactly?

Those who have been keeping a close eye on the inequality debate might also be mindful that perhaps the leading proponent of the argument that inequality imperils health, the Richard Wilkinson and Kate Pickett-authored The Spirit Level, has been thoroughly discredited, with The Economist noting that the book's conclusions have "been largely debunked."

Beyond his failure to apply common sense or keep up with the state of the inequality debate, more damning is that Krugman obviously failed to either read or comprehend the very piece he links to as evidence for his claim. Here is an excerpt from the Angus Deaton-authored article (who recently spoke at the Cato Institute on inequality), in which I have bolded some of the most relevant parts:
Inequality, Race, and Health 
Why might income inequality be a health hazard, and what accounts for the fact that people die earlier in American states and cities where income inequality is higher? If income is protective of health, and the relationship is concave, then redistribution from rich to poor will improve aggregate health, although this effect appears to be too small to explain the geographical patterns in the United States. If health depends on others' incomes, for example if health is linked to relative deprivation, then income will be protective of health for individuals, and income inequality will be hazardous to health in the aggregate. But if the [National Longitudinal Mortality Study] is used to look at the probability of death as a function of income for white males and females on a state by state basis, there is no evidence of any link between the estimated coefficients and state-level measures of income inequality. 
Darren Lubotsky and I have investigated the relationship between income inequality, race, and mortality at both the state and metropolitan statistical area level. In both the state and the city data, mortality is positively and significantly correlated with almost any measure of income inequality. Because whites have higher incomes and lower mortality rates than blacks, places where the population has a large fraction of blacks are also places where both mortality and income inequality are relatively high. However, the relationship is robust to controlling for average income (or poverty rates) and also holds, albeit less strongly, for black and white mortality separately. Nevertheless, it turns out that race is indeed the crucial omitted variable. In states, cities, and counties with a higher fraction of African-Americans, white incomes are higher and black incomes are lower, so that income inequality (through its interracial component) is higher in places with a high fraction black. It is also true that both white and black mortality rates are higher in places with a higher fraction black and that, once we control for the fraction black, income inequality has no effect on mortality rates, a result that has been replicated by Victor Fuchs, Mark McClellan, and Jonathan Skinner using the Medicare records data. This result is consistent with the lack of any relationship between income inequality and mortality across Canadian or Australian provinces, where race does not have the same salience. Our finding is robust; it holds for a wide range of inequality measures; it holds for men and women separately; it holds when we control for average education; and it holds once we abandon age-adjusted mortality and look at mortality at specific ages. None of this tells us why the correlation exists, and what it is about cities with substantial black populations that causes both whites and blacks to die sooner. 
In a review of the literature on inequality and health, I note that Wilkinson's original evidence, which was (and in many quarters is still) widely accepted showed a negative cross-country relationship between life expectancy and income inequality, not only in levels but also, and more impressively, in changes. But subsequent work has shown that these findings were the result of the use of unreliable and outdated information on income inequality, and that they do not appear if recent, high quality data are used. There are now also a large number of individual level studies exploring the health consequences of ambient income inequality and none of these provide any convincing evidence that inequality is a health hazard. Indeed, the only robust correlations appear to be those among U.S. cities and states (discussed above) which, as we have seen, vanish once we control for racial composition. I suggest that inequality may indeed be important for health, but that income inequality is less important than other dimensions, such as political or gender inequality. 
Social versus Medical Determinants of Health 
Most of the work on inequality, income, and health looks at cross-sectional or geographic data, with the time-series relatively unexplored. Paxson and I look at income, income inequality, and mortality over time in the United States and the United Kingdom. The postwar period usefully can be broken in two. In the quarter century up to the early 1970s, there was steady productivity growth, with mean and median income growing in parallel, and very little change in income inequality. After 1970, in the United States, productivity growth was much slower; although there was a good deal of income growth at the top of the income distribution, real median family income stagnated or fell. Slow income growth was accompanied by rapid growth in income inequality. The United Kingdom shared the rise in income inequality, which was even more marked than in the United States, but did not experience the same slowdown in the growth of real incomes. If income and income inequality are important determinants of mortality decline, and even allowing for some background trend decline in mortality, then the United States and the United Kingdom should have similar patterns of mortality decline up to the early 1970s, followed by slower decline after 1970, particularly in the United States which had an unfavorable trend in both growth and inequality. But the data show precisely the reverse. Mortality decline accelerated in both countries after 1970, and there is no obvious difference in the patterns in the two countries. Indeed, the most obvious distinction between Britain and the United States is that changes in trends start a few years earlier in the United States. These findings suggest that, as argued by Cutler and Meara, changes in mortality over the last half century in the two countries have been driven, not by changes in income and income inequality, but by changes in risk factors or in medical technology, with the changes being adopted more rapidly in the United States.
In other words, while Krugman claims there is "strong evidence that high inequality leads to worse health and higher mortality," the very piece he links to shows precisely the opposite. Once race is controlled for, income inequality has zero impact on mortality in the US and  -- even worse for Krugman -- growing income inequality in the UK and US after 1970 actually corresponds with accelerating mortality decline.

We can rest assured that if Krugman had more solid evidence of a negative relationship between income inequality and health inequality that he would have cited it. That he mustered supporting evidence which contradicted his assertion suggests incredible sloppiness and/or straw-grasping. The prophets of income inequality doom are growing increasingly desperate.

Saturday, January 04, 2014

Middle class progress since 1987

Writing his final column for the Wall Street Journal before decamping for the Brookings Institution to direct its Hutchins Center on Fiscal and Monetary Policy, David Wessel uses the piece to bemoan the lack of middle class progress over the last quarter-century:
In a 1998 book, my colleague Bob Davis and I argued the U.S. was on the cusp of an era of broadly shared prosperity that would boost the middle class. We were wrong. We correctly saw the potential of information technology, but we expected the gap between winners and losers to narrow. It didn't. 
Output of goods and services per person has grown by about 45% since 1987. That's substantial, but the percentage increase is only half the 90% increase of the preceding 26 years (1961-1987). 
For folks in the middle, the past quarter century doesn't look so good. The cash income of the median family, the one at the statistical middle, barely kept up with inflation. Add in health insurance and other noncash benefits, and it has risen significantly more. But here's an arresting fact: Adjusted for inflation, the typical man who worked full-time made less in 2012 ($49,398) than his analog did in 1987 ($50,166). Because more women were educated and landed better-paying jobs, they did better: Median earnings rose 16%. 
Where did the money go? Disproportionately to the best off, the best educated, the two-professional couples, the winners on Wall Street and in Silicon Valley. Technology and globalization favored the best-educated. The rise of finance paid some handsomely. Earnings of those at the top of almost every field rose faster than at the middle. 
Different measures show differences in degree, but the trend is clear: The latest Census data show the share of pretax income going to the top 5% of families rose from 15.7% in 1962 to 17.2% in 1987 to 21.3% in 2012. Higher tax rates on the well-off and benefits aimed at the bottom damp the trend, but that wealth redistribution hasn't offset inequality-widening market forces.
While perhaps not exactly grim, the picture painted by Wessel of middle class fortunes certainly suggests little worth celebrating. But how well do these monetary figures reflect the state of the middle class now versus 25 years ago? Wessel throws out income stats as a proxy for well-being, but isn't one's standard of living the real measure? Income, after all, is simply means to an end, which for most people is used to better one's living conditions.

Using this measure, is there any reason to think that standard of living for the middle class has essentially stagnated since 1987? Would anything other than a small minority, when offered a $50,000 inflation-adjusted annual income in either 1987 or 2012 either choose the former or be indifferent to the outcome? Think about just some of the things someone opting for a 1987 life over 2012 would have to deal with:
  • Letters instead of email
  • Calling someone and hoping they were home; no text messages 
  • No free long-distance and Skype/Facetime
  • No Google maps, and certainly no maps/GPS on your phone or car
  • Travel plans a much bigger hassle (no Kayak price alerts, Priceline or Tripadvisor)
  • Meeting with friends a much bigger hassle (forget sending a group text message to see what's up or calling someone to let them know you are running late)
  • No online shopping (closest analog is catalogs, where, among other hassles, price comparison is much more difficult)
  • No Tivo/DVR, or Netflix streaming. Want to watch something? Better be home when it airs and plan your bathroom breaks carefully.
  • Basically, far less efficient use of time (the list of IT/telecom related advancements are too long to list), with more of our day spent doing things we enjoy
  • Thin, cheap, widescreen HDTVs (no small thing when the average American watches 34 hours of television per week)
  • Very unlikely to own a cell phone, and certainly none that fits easily in your pocket
  • VHS/cassette tapes instead of DVD/Bluray and CD/mp3, with the attendant winding of tape to find the right song or scene. Plus, music is now downloadable and no more trips to the video store.
  • More expensive flights with far fewer entertainment options (no DirecTV, personal video entertainment, inflight wifi, Kindle, Angry Birds, iPad or iPod -- last four also applies to road trips)
  • Film instead of ubiquitous digital cameras. Capturing memories on video requires bulky and expensive camcorders.
  • Must forgo all medical advances since 1987
  • No access to all art created since 1987 (e.g. music, movies and television)
  • Less safe, efficient and dependable automobiles
  • Indeed, qualitative improvements all over the place. How many products were superior in 1987 to their 2012 versions?
  • Likely no access to Whole Foods (only had 3-4 stores at the time) and generally less exciting and nutritious food options, including restaurants, than were commonly found 25 years ago (how common, for example, was Thai food in the late 80s vs today?).
How does this not qualify as broadly-shared prosperity? How many items on this by-no-means-comprehensive list are accessible only by the rich or a select few? Let us further remember that much of the inequality Wessel decries and the gains experienced by the top few percent are due to many of the products and services listed.

Take Apple for example, which revolutionized the smartphone, introduced the tablet computer and makes one of the most popular laptop computers. Without Apple consumers would either not have acess to such products or would be using inferior versions of them. On the other hand, Apple has also resulted in the creation of hundreds of millionaires and at least one billionaire, thus contributing to a slight rise in inequality. How many people would like to forgo the products developed by Apple in exchange for a tiny dent in income inequality? Likely almost no one save for a relative handful of far left ideologues.

The same no doubt holds for other products as well. The co-founder of Whole Foods, John Mackey, is worth somewhere in the neighborhood of $100 million, the godfather of online shopping, Jeff Bezos, is a multi-billionaire and Netflix founder Reed Hastings is worth over $250 million. Redistribution of their combined wealth -- about $29.5 billion -- would amount to just under $94 per American. Again, how many people would be willing to trade away access to the products and services they have helped create in exchange for a small slice of their fortune? How many people doubt their existence is anything other than a huge net win for most Americans (and citizens in other countries where their products and services are offered)?

Now, admittedly, there are a few financial downsides to life in 2012 vs. 1987. These include:
  • More expensive health care (although most people are insulated from this via insurance, and have only felt the impact through a greater share of their compensation going to employer-provided insurance than wages. Furthermore, again, the state of medicine in 2012 is superior to that of 1987)
  • Higher college tuition
  • Higher housing costs in many cities and coastal areas (due in large part to government zoning/building restrictions)
On net, however, how much does the picture really change? While it is no doubt true that the middle class could have performed even better over the last 25+ years than it actually did, what actually transpired hardly counts as a sob story, and one can only speculate what further leaps in human progress await over the next quarter century. Perhaps the constant improvements in our standard of living are now regarded as so commonplace and unexceptional that Wessel and others have forgotten how remarkable they truly are.