Wednesday, July 11, 2012

Inequality update

A few items to get through. First up is this column on corporate corruption in today's New York Times in which author Eduardo Porter manages to work in an income inequality angle:
The inexorable rise of income inequality is also likely to encourage fraud, fostering resentment and undermining trust in capitalism’s institutions and rules. Economic research shows that participants in contests in which the winner takes all are much more likely to cheat. And the United States is becoming a winner-takes-all economy.
Porter takes the results of a winner-take-all experiment, claims that the US is becoming a winner-take-all economy and then further extrapolates this into a warning against the dangers of income inequality. The problem with this claim is that its underlying premise -- that the US is becoming a winner-take-all economy -- is false. In fact, it's difficult to think of a single example within the economy where this is true.

Take Apple for example, which produced a phone so revolutionary that some dubbed it the "Jesus Phone." Is Apple an example of a winner who took all? Far from it. Even with all its hype the phone still has less than half the marketshare of all smartphones. Not only is a wildly successful product such as the iPhone not an example of a winner-take-all, it's not even an example of winner-take-most.

The iPhone isn't alone. Look at other successful companies or individuals and see if any can be described as winner-take-all. Is there a company that receives 100 percent of the profits from an entire industry? A CEO or employee who earns 100 percent of the company money spent on salary (other than, obviously, companies owned by a single employee)?

This is not mere semantics, as the difference between winner-take-all and winner-take-most is vast. In a winner-take-all environment, the incentive to cheat is very high, as even the runner-up will be left with nothing. In contrast, in a winner-take-most environment -- which is the most pessimistic scenario -- even those who finish behind can still profit handsomely. While most people will not become CEO, that doesn't mean they will try to cheat their way to the top. In a situation where the CEO gets everything and everyone else zero, however, the calculus changes dramatically.

In short, this is another example of income inequality doom-mongering premised on faulty claims and logic. Yet again one must wonder why if income inequality is such a pressing and obvious problem, those who claim something must be done struggle so mightily to make their case.

Moving along, the Pew Economic Mobility Project has a new report out which demonstrates yet again that, from an absolute perspective, the welfare of most Americans continues to improve. A couple of charts are particularly noteworthy:

As the charts show, 84 percent of all Americans earn more than their parents and 72 percent of those raised in the bottom quintile have greater wealth than their parents, indicative of a country that very much remains a land of opportunity. Other data highlights:
  • Median income in the bottom income quintile increased by 74 percent between the two generations.
  • Thirty-six percent of those who start in the bottom experience absolute mobility gains but are still stuck in the bottom quintile as adults. 
  • 20 percent of Americans are “falling despite the rising tide”—they make more money than their parents did, but have actually fallen to a lower rung of the income ladder. 
  • Overall, 59 percent of sons earn more than their fathers did at the same age, and only in the top quintile do less than half of sons exceed their fathers’ earnings. Among sons raised in the bottom, 85 percent exceed their fathers’ earnings. 
In other words, most people -- particularly those at the bottom -- are doing better than the generation that came before them. Among those who have failed to move up to a higher quintile or have even fallen, for a good number of them it isn't because they are doing worse from an absolute perspective, but that others have improved at an even faster rate which has increased the distance between the economic rungs. 

Lastly, Matthew Schoenfeld makes some very good points on income inequality in an opinion column in today's Wall Street Journal. Some excerpts:
"From the time of Pericles until the end of the 18th century in London—2,300 years," notes Harvard Prof. Lawrence Summers, "standards of living on Earth increased perhaps 100%." In the U.S. since 1790, by contrast, real per capita gross domestic product has increased nearly 4,000%. Quality of life, in other words, increased 40 times more in 220 years of American history than it had globally over two millennia. In 2012, a typical American in the bottom fifth of the income distribution has a far higher quality of life—and life expectancy—than the average member of the top 1% in 1790. 
Critics today often point to the 1950s as the last years before American society became so divided between haves and have-nots. At the end of that decade, America's "Gini coefficient"—the most common measure of income inequality, running from 0 (least unequal) to 1 (most unequal)—was 0.37. Today it is 0.45. 
But in 1959, more than 20% of families fell below the poverty line. In 2010 that figure was just over 13%. Real per capita GDP today is 270% higher than it was in 1959. A family in the bottom fifth of the income distribution today makes the same amount in real terms as a family earning the median income in 1950. So inequality might have increased, but so too—dramatically—has quality of life. 
Read the whole thing, which goes on to make an interesting sports analogy.
Plainly there is lots of good news on the income inequality front. This good news is obscured, however, by those who would prefer to confuse the issue by focusing on relative measurements of welfare and inequality rather than absolute measures, which paints a much different picture. Why would they do this? 

At least two reasons come to mind. First is that if there is no problem to be solved, then there is no justification for expanded government intervention. Before one can engage in a power grab, a justification for that power must be made. By conjuring up a problem, leftists provide an excuse for long-favored agenda items such as tax hikes that are offered as a cure for this non-existent malady. Second, it's likely part of an effort to discredit capitalism. The more people witness the positive results of capitalism, the more they may begin to question the wisdom of the leftist project to expand government. It's an existential threat to those who advocate a large, activist public sector. 

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