Is Assortative Mating to Blame for Income Inequality?

A brand new job market paper has some interesting data on assortative mating and its impact on income inequality. Drawing on data from the Panel Study of Income Dynamics (PSID), the paper 

investigates the evolution of assortative mating based on permanent wage in the U.S. since the late 1960s; quantifies its impact on rising family-wage inequality; and, finally, tries to understand the factors behind this evolution. It documents a significant increase in assortative mating, as measured by couple’s permanent-wage correlation, between families formed in the late 1960s and in the late 1980s. I then show that changes in the degree of assortative mating accounts for a sizable amount of the increase in family wage inequality across these family cohorts. This finding shows focusing on the time trends in permanent-wage inequality is not enough to understand the mechanics of increasing family wage inequality. Note, this finding does not rule out a feedback mechanism. It might be that increasing family wage inequality incentivized individuals to care more about their spouse’s wages, causing a higher degree of marital sorting along permanent wage, which in turn mechanically increased family wage inequality (pg. 23).

What is “a sizable amount”? The data show that “the trend in assortative mating explains more than one-third of the increase in family wage inequality” (pg. 11; emphasis mine). He explains,

I use the Gini coefficient in the left panel, as the measure of inequality, whereas the variance of logarithm is used in the right panel. Solid lines show the actual evolution of family wage inequality with these measures. In the dashed lines, however, I construct the counterfactual family wage inequality by holding the empirical copula distribution fixed at its initial form while letting the permanent-wage distribution vary. The dashed lines thus show the counterfactual evolution of family wage inequality if no change occurred in assortative mating. The left panel shows the rise in the Gini coefficient would be 40% lower, and the right panel shows that the rise in the variance of (log) family wage would be around 35% lower under the counterfactual scenario. The increase in assortative mating thus accounts for a significant amount of the increase in family wage inequality (pg. 11).

As previous research shows, this shouldn’t come as a shock.

Economic Growth Begins in the Home

Sociologist W. Bradford Wilcox and economist Joseph Price have an important chapter in a recent Cambridge-published book on the link between family structure and economic growth. They write,

A stable marriage matters in part because it allows couples to make decisions over time that maximize the economic prosperity of their family unit. Stably married persons have incentives to invest in their marriage and benefit from specialization and economies of scale; their households also tend to earn and save more than their peers who are unmarried or divorced (Stevenson and Wolfers 2007; Lerman and Wilcox 2014). Marriage also has a transformative effect on individuals, especially men. It seems to increase men’s productivity at and attachment toward work, and reduces men’s willingness to engage in risky behaviors, including criminal activity (Akerlof 1998; Nock 1998; Sampson, Laub, and Wimer 2006). What is more, it looks like married parenthood may be especially influential in encouraging men’s engagement in the labor force (Killewald 2012). In the aggregate, then, higher levels of marriage, and probably two-parent families, should boost men’s labor force participation and reduce criminal violence, both to the benefit of national economies. At the same time, insofar as motherhood tends to reduce women’s participation in the labor force (Budig and England 2001), we also explore the possibility that higher rates of marriage and two-parent families reduce growth. Finally, higher rates of intact marriage foster stable two-parent families, which are more likely than single parents to supply children with the human capital they need to thrive first in school and later in the labor force (Lerman and Wilcox 2014; McLanahan and Sandefur 1994). Accordingly, the more children are born and raised in stable, two-parent families, the more a society should experience economic growth (pg. 179-180).

Wilcox and Price continue to lay out the evidence that married, two-parents households:

  1. Have more income and savings.
  2. Lower crime rates.
  3. Higher educational achievements for children.

They conclude,

[W]e find that a significant association between family structure and
economic growth. Every 13 percentage point increase in the proportion of adults who are married is associated with an 8 percent increase in per capita GDP, net of controls for a range of sociodemographic factors. Likewise, every 13 percentage point increase in the proportion of children living in two-parent families is associated with a 16 percent increase in per capita GDP, controlling for education, urbanization, age, population size, and other factors. There is clearly a link between family structure and economic growth. 

…[W]e also note that the cross-national relationship between family structure, household savings, and crime are generally consistent with
our expectations about how marriage and two-parent families foster a social environment more conducive to economic growth in countries around the world. It is striking that more two-parent families are linked to less crime and more savings. If nothing else, the patterns documented in this paper suggest that stronger families, higher household savings rates, less crime, and higher economic growth may cluster together in mutually reinforcing ways.

...In conclusion, this chapter indicates that strong and stable families are
linked to higher levels of economic growth in nations across the globe, despite the fact that marriage and two-parent families are in decline across much of the globe. Given the potential economic importance of marriage and family stability to a nation’s economic life, policymakers, business leaders, and civic leaders should pursue a range of public and private policies to encourage and strengthen marriage and stable families. That is because what happens in the family may not affect only the welfare of private families but also the wealth of nations (pg. 194-195).

Economic institutions at the macro-level matter. But so do the ones at the micro-level. Probably more so. 

The Latest in Development Economics

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There’s a post over at the World Bank’s blog providing brief summaries of the papers presented at the North East Universities Development Consortium last weekend. If you want to see some of the latest research in development economics, check it out. Here are a few that peaked my interest:

  • How does a massive refugee influx affect the receiving economy’s agricultural productivity? In Tanzania, receiving refugees from Burundi and Rwanda in the 1990s resulted in some pluses, some minuses, but ultimately an insignificant change. (Tsuda)
  • In South Africa, income affects psychological well-being AND psychological well-being affects income. The former effect is particularly strong among the poor. (Alloush)
  • Psychology and economics affect each other! An intervention to increase women’s beliefs in their own ability to attain their goals “produces large and persistent increases in employment” in India. And “women who received a job offer have significantly higher [beliefs in their own ability] several months later.” (McKelway)
  • Ukrainian firms from counties with fewer ethnic Russians experienced a deeper decline in trade with Russia because of increased inter-ethnic tensions and a differential rise in negative attitudes toward Russia. (Makarin and Korovkin)
  • Poorly managed schools have poorer teacher practices and poor student outcomes. (Lemos, Muralidharan, & Scur)
  • School disruptions caused by teacher strikes leads to adverse labor market outcomes in Argentina: unemployment is higher, skill levels of the occupations are lower and earnings drop by 3.2 for men and 1.9 percent for women. “This amounts to an aggregate annual earnings loss of $2.34 billion, equivalent to the cost of raising the employment income of all Argentinian primary school teachers by 62.4 percent”. (Jaume and Willén)
  • Getting married one year later in India results in “a significant decline in physical violence, although it has no impact on sexual or emotional violence.” (Dhamija & Roychowdhury)
  • Cash transfers in Kenya reduced physical violence against wives regardless of whether the husband or wife received them, but they reduced sexual violence against wives only when the wives received them. (Haushofer et al.)
  • A multi-year intervention that “engaged adolescents in classroom discussions about gender equality” improved gender attitudes and reported gender-equitable behavior (e.g., “boys report helping out more with household chores”). (Dhar, Jain, & Jayachandran) #RCT
  • A soda tax in Mexico increased gastrointestinal disease because of low-quality drinking water. (Gutierrez & Rubli)
  • Games in Kenya show that spouses don’t totally trust each other. Letting them communicate increase trust a bit. (Castilla, Masuda, & Zhang) #LabInField
  • Christian missionaries settled in healthier, safer and more developed locations in 43 sub-Saharan African countries (early 20th century) and in Ghana (18th-20th century) – this endogeneity led to an overly optimistic account of the importance of colonial missions for long-term development. (Jedwab, Meier zu Selhausen, and Moradi) #RDD
  • A novel index of ethnic segregation – taking into account both ethnic and spatial distances between individuals and computed for 159 countries – reveals that countries where ethnically diverse individuals lived far apart, have higher-quality government, higher incomes and higher levels of trust. (Hodler, Valsecchi, and Vesperoni)
  • An alcohol ban led to an increase in crime in the Indian State of Bihar. Since state capacity and supply of police is fixed, diverting law enforcement resources towards implementing the alcohol ban effectively reduces capacity to prevent crimes. (Dar and Sahay)
  • Workers will privately accept jobs at a wage below the prevailing norm in India, but not when other workers can observe them making the choice. “Workers give up 38% of average weekly earnings in order to avoid being seen as breaking the social norm.” (Breza, Kaur, & Krishnaswamy)
  • Fear of sexual assault reduces women’s labor market participation in India: a one standard deviation increase in sexual assault reports within one’s own district reduced women’s employment probability by 0.36 percentage points, especially among highly educated married urban women. There is no effect of lagged physical assault reports on employment outside home. (Siddique)
  • Cash transfers in Indonesia decreased suicides by 18%. (Christian, Hensel, & Roth)
  • In Brazil, trade with China reduced unemployment for areas exporting stuff and increased unemployment for areas importing stuff. (Brummond & Connolly)

Violence Is Bad For Business

From my paper in Economic Affairs:

The…act of seeking out mutually beneficial exchanges with others expands what Michael Shermer (2015) calls the ‘moral sphere’. As this sphere diversifies, our attitudes regarding the vulnerable and disenfranchised tend to alter for the better. This moral expansion is likely why economic globalisation has been linked to fewer governmental violations of human rights, namely torture, extrajudicial killings, political imprisonment, and disappearances (De Soysa and Vadlammanati 2011). An analysis of 117 countries between 1981 and 2006 also found ‘positive effects of market-economic policy reforms on government respect for human rights’ (De Soysa and Vadlammanati 2013, p. 180) as defined above. While these studies seem to imply the market’s influence on human rights, there is also evidence that human rights boost market liberalisation. Utilising the CIRI Human Rights Data Project (which reports on extrajudicial killings, disappearances, torture, political imprisonment, freedom of speech and government censorship, freedom of religion, freedom of movement and migration, freedom of assembly and association, free and fair elections, workers’ rights, and women’s rights), a 2010 study finds that human rights abuses ‘actually reduce the pace of economic liberalization’ (Carden and Lawson 2010, p. 12). These studies seem to confirm that morals and markets create a positive feedback loop regarding human rights.

…[T]rade and business openness largely reduces the incentives of war and brutalisation. People become more valuable alive and able as potential partners, lenders, investors, and customers…After analysing data spanning from 1970 to 2005, De Soysa and Fjelde (2010) find that higher economic freedom lowers the risk of civil war, more so even than democracy and good governance. This remains true after variables such as income per capita, growth rates, total population, ethnic fractionalisation, and oil exportation are controlled for. Yet these results likely underestimate the total impact of economic freedom on civil war. ‘In reality’, write De Soysa and Fjelde (2010, p. 293), ‘the effect of economic freedom on peace is likely to be larger if we also take into account the indirect effect of economic freedom through its impact on income growth’. These findings correspond with a later study by De Soysa and Flaten (2012), which controls for the same variables and finds that higher levels of globalisation (particularly economic globalisation) reduce the risk of civil war as well as state violations of human rights. Other research finds that free-market conditions and economic liberalisation are associated with lower levels of various societal insecurities, including open armed conflict, violent crime, murder, societal militarisation and political instability (Stringham and Levendis 2010; De Soysa 2011, 2016; Bjornskov 2015). Various organisations from the World Economic Forum (2016) to the UN Global Compact (2014) are recognising the power commerce has to decrease conflict and establish peace (pg. 426-429).

A brand new study looks at the relationship between violence and business by examining Columbia’s reduction in violence between 1995 and 2010. 

The author explains,

To precisely measure the effects of violent crime on firm behaviour, I use the large reductions in violence caused by increased security expenditures of the Democratic Security programme under Uribe’s administration. According to the Uribe’splan published in 2003, the Democratic Security programme aimed at restoring police presence in all municipalities; dismantling terrorist organisations; reducing kidnappings, extortion, and homicides; preventing forced displacement; and fighting the illegal drug trade (Ministerio de Defensa 2003). Uribe’s government intended to achieve these goals by increasing spending on military infrastructure, personnel, and intelligence. High spending on security led to decreased violence in municipalities that voted for Uribe in the presidential elections of 2002 (when he was elected for the first time) as he was looking for re-election in 2006 (he was re-elected).

…I combine unique plant-level and rich consumer pricing data with homicide rates and electoral results in Colombia. Using these data, I compare the prices and market size of Colombian municipalities that showed higher and lower support for Alvaro Uribe in the presidential election of 2002. These correlations were subsequently reflected in larger or lower changes in homicide rates.

I find large effects due to changes in violent crime: 

– When violence decreases by 1%, firm aggregate production increases by approximately 0.4%. This is partly explained by higher production per firm but also explained by the entrance of new firms into the market.  

– Real income increases in areas with less violence. These changes are explained by higher nominal wages, which are larger in size than the documented increases in the general price levels. 

– Consequently, areas with lower violent crime have higher incomes. This condition may further reduce social unrest and violence.  

In conclusion, a “48% decline in homicide rates between 1995 and 2010 in Colombia increased aggregate production by 19.6%. My estimates, however, are a lower bound of the total social costs of violent crime, as they are do not include the costs of mortality or the long-run impacts of violent crime reductions. The benefits of reducing violence, consequently, are even higher. Investments in security improvements are thus an effective way to boost economic development.”

Violence, it seems, is antithetical to business. As I note in my paper, “findings that ‘merely’ demonstrate positive correlations [between markets and morality] should be interpreted in light of the feedback loops: even if moral behaviours are foundational and give rise to market systems (instead of vice versa), market systems in turn reinforce these virtues by imbuing them with value” (pg. 423).

Keys to Ending Global Poverty: Growth and Migration

Harvard’s Lant Pritchett has an incredible new paper out that looks at the best course for eliminating global poverty:

So think of two ways to help the global poor. One is for rich people (in a global sense) to give a dollar and get roughly a dollar’s worth of benefits for the poor. The other people is for rich people to allow people who would like to work at the prevailing wage of their country to do so and not deploy active coercion to prevent this—which reflects the person’s contribution to product and hence is (or can be made to be) zero net cost to the host country. Of course, a dollar for a poor person could produce vastly more human well-being than had the richer person spent the money as the marginal utility was much, much higher for the poor person, but this redistribution effect is the same for both options. This means, at least in current conditions, the least you can do—just increasing the freedom of people who want to work and people who want those people to work to carry out that mutually beneficially transaction across national borders—is better than the best you can do of trying to directly help people in poverty but without allowing them to move to opportunity (pg. 1-2).

Pritchett looks at the Ultra Poor Graduation program, whose stated claim is “to graduate ultra poor households out of extreme poverty to a more stable state. This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare” (pg. 9). Pritchett finds that this program led to an average income gain of $344 dollars by the third year for targeted households. “The five country average NPV of costs per household of the 24 month program was $4,545” (pg. 9).

While Pritchett recognizes that redistribution can indeed benefit the poor, its impact is quite small. He concludes,

A large part of the explanation of differences in labor productivity across countries is differences in “A”—total factor productivity. Transmitting A from country to country has proven difficult. This implies that labor with the exact same intrinsic productivity will have much higher productivity (and hence justify a higher wage) in a high A than in a low A country. But, by and large, rich countries have passed extraordinarily strict regulations on the movement of unskilled labor. A relaxation of these restrictions could produce the largest single gains in global poverty of any available policy, program or project action. And since these gains to movers are (mostly) due to higher A which (at the margin) is a “public good” (it is non-rival and non-excludable) in the host country these gains are essentially free to the host country (or could be free to the host country under some technical design conditions).

Comparing the annual gains of the Ultra Poor Graduation program ($344 per household for a cost of $4,545) to those of a low-skill worker simply moving to and working in the United States ($17,115), Pritchett finds that the Ultra Poor Graduation program would have to invest $226,000 per person in order to match the gains of migration. Furthermore,

sustained rapid economic growth in developing countries—that is sustained by improvements in A—can also produce cumulatively enormous gains. And avoiding growth collapses/stagnation can prevent enormous losses. So, even though traditional measures of the country to country transfers of resources via “foreign aid” do not, in and of themselves, appear to be responsible for producing most of the observed differences in economic growth, investments that could bring that about more sustained growth (both more sustained accelerations and fewer sharp and extended decelerations) could also have astronomical returns. 

As Bryan Caplan sums it up, “Virtually all poverty reduction comes from economic growth and migration – not redistribution or philanthropy.”

What Does Economic Mobility in the U.S. Actually Look Like?

Economist Russ Roberts gives us some insights:

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 that find a very different picture of the impact of the American economy on the economic well-being of the poor, middle, and the rich.

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. 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. Only 70% of those raised in the top quintile exceeded their parent’s income.

Chetty et al find a similar pattern. In an otherwise gloomy assessment of American progress, they find that 70% of children born in 1980 into the bottom decile exceed their parents’ income in 2014. For those born in the top 10%, only 33% exceed their parents’ income.

The poor may find it easier to do better than their parents. But how much better off do they end up? Julia Isaacs’s study for the Pew Charitable Trusts finds that children raised in the poorest families made the largest gains as adults relative to children born into richer families.

In short, “the children from the poorest families added more to their income than children from the richest families. That reality isn’t consistent with the standard pessimistic story that only the richest Americans have benefited from economic growth over the last 30–40 years.” Another “study looks at people who were 35–40 in 1987 and then looks at how they were doing 20 years later, when they are 55–60. The median income of the people in the top 20% in 1987 ended up 5% lower twenty years later. The people in the middle 20% ended up with median income that was 27% higher. And if you started in the bottom 20%, your income doubled. If you were in the top 1% in 1987, 20 years later, median income was 29% lower.” A recent study found that when you follow quintiles, “[o]nly the people at the top gain much of anything between 1980 and 2014.” However, when you follow people, the same study finds that “the biggest gains go to the poorest people. The richest people in 1980 actually ended up poorer, on average, in 2014. Like the top 20%, the top 1% in 1980 were also poorer on average 34 years later in 2014. The gloomiest picture of the American economy is not accurate. The rich don’t get all the gains. The poor and middle class are not stagnating.”

Roberts concludes,

There’s a lot more to study and understand. But what the studies above show is that the economic growth of the last 30–40 years has been shared much more widely than is generally found in the cross-section studies that compare snapshots at two different times, following quintiles rather than people. No one of these studies is decisive. They each make different assumptions about income…which people to include, how to handle inflation. Together they suggest the glass isn’t as empty as we’ve been led to believe. It’s at least half-full.

Does Gender Equality Enlarge Gender Differences?

Previous research has found that the greater the gender equality, the greater the differences between genders. A brand new article in Science heaps on more evidence. Testing 80,000 individuals in 76 countries on preferences such as risk-taking, patience, altruism, positive and negative reciprocity, and trust, the authors found,

Gender differences were found to be strongly positively associated with economic development as well as gender equality. These relationships held for each preference separately as well as for a summary index of differences in all preferences jointly. Quantitatively, this summary index exhibited correlations of 0.67 (P < 0.0001) with log GDP per capita and 0.56 (P < 0.0001) with a Gender Equality Index (a joint measure of four indices of gender equality), respectively. To isolate the separate impacts of economic development and gender equality, we conducted a conditional analysis, finding a quantitatively large and statistically significant association between gender differences and log GDP per capita conditional on the Gender Equality Index, and vice versa. These findings remained robust in several validation tests, such as accounting for potential culture-specific survey response behavior, aggregation bias, and nonlinear relationships.

How do men and women differ?

On the global level, all six preferences featured significant gender differences (fig. S1): Women tended to be more prosocial and less negatively reciprocal than men, with differences in standard deviations of 0.106 for altruism (P < 0.0001), 0.064 for trust (P < 0.0001), 0.055 for positive reciprocity (P < 0.0001), and 0.129 for negative reciprocity (P < 0.0001). Turning to nonsocial preferences, women were less risk-taking by 0.168 standard deviations (P < 0.0001) and less patient by 0.050 standard deviations (P < 0.0001) (26).

The researchers conclude,

The reported evidence indicates that higher levels of economic development and gender equality are associated with stronger gender differentiation in preferences. These findings may also relate to other personality traits, such as the Big Five (3435) or value priorities (36). Our findings do not rule out an influence of gender-specific roles that drive gender differences in preferences. They also do not preclude a role for biological or evolutionary determinants of gender differences (37). Our results highlight, however, that theories not attributing a significant role to the social environment are incomplete (38).

In this regard, our findings point toward the critical role of availability of and equal access to material and social resources for both women and men in facilitating the independent formation and expression of gender-specific preferences across countries. As suggested by the resource hypothesis, greater availability of material resources removes the human need of subsistence, and hence provides the scope for attending to gender-specific preferences. A more egalitarian distribution of material and social resources enables women and men to independently express gender-specific preferences.

DR Editor in Economic Affairs

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My article “Is Commerce Good for the Soul?: An Empirical Assessment” was published in the latest issue of Economic Affairs. The abstract reads,

Numerous empirical studies suggest that market exchange helps (a) create the conditions for liberal values to flourish, (b) refine our sense of fairness, (c) promote cooperation with those who are different from ourselves, (d) develop networks of mutual trust and trustworthiness, (e) generate tolerance and respect towards others, and (f) undermine hostility and conflict in favour of peace. This article reviews this empirical evidence and argues that markets make us better people, morally speaking.

You can read the full thing here. Check it out.

What Is the Impact of Minimum Wage Hikes on the Least-Skilled?

In case you needed more evidence that minimum wage hikes tend to hurt those with the least skills and education, here are the conclusions from a paper from earlier this year:

This paper uses the ACS to generate early estimates of the employment effects of state minimum wage increases implemented between January 2013 and January 2015. Through 2015, our best estimate is that minimum wage increases exceeding $1 resulted, on average, in an employment decline just over 1 percentage point among teenagers, among individuals ages 16–21, and among individuals ages 16–25 with less than a completed high school education. Smaller minimum wage increases and inflation indexed minimum wage increases had much smaller (and possibly positive) effects on these groups’ employment…Due to the short time horizons we analyze, our estimates provide short-run evidence on the effects of the minimum wage increases enacted after the Great Recession. Data on the longer-run effects of this period’s minimum wage changes will be essential for arriving at strong conclusions regarding their effects (pgs. 720-721).

This should surprise no one. As economist Antony Davies explains, “Historically, as the relative minimum wage has risen, unemployment among college-educated workers has not changed, unemployment among high-school-educated workers has risen slightly, unemployment among workers without high school diplomas has increased moderately, and unemployment among young workers without high school diplomas has increased dramatically.” 

“I Am Not the Problem”: Economic Freedom and Human Flourishing

In this passionate TED talk, entrepreneur Magatte Wade explains why the continent of Africa is so poor: bad laws, high tariffs, and excessive red-tape on businesses. “Why is it,” she asks exasperated, “that when I look at the Doing Business index ranking of the World Bank, that ranks every country in the world in terms of how easy or hard it is to start a company, you tell me why African countries, all 50 of them, are basically at the bottom of that list? That’s why we’re poor. We’re poor because it is literally impossible to do businesses in these countries of ours.” She continues, getting even more worked up:

I have a manufacturing facility in Senegal. Did you know that for all my raw material that I can’t find in the country, I have to pay a 45 percent tariff on everything that comes in? Forty-five percent tariff. Do you know that, even to look for fine cardboard to ship my finished products to the US, I can’t find new, finished cardboard? Impossible. Because the distributors are not going to come here to start their business, because it makes no sense, either. So right now, I have to mobilize 3000 dollars’ worth of cardboard in my warehouse, so that I can have cardboard, and they won’t arrive for another five weeks. The fact that we are stifled with the most nonsensical laws out there. That’s why we can’t run businesses. It’s like swimming through molasses.

But it was this story that broke me: 

I explained the [things above] to my employees in Senegal. And one of them started crying — her name is Yahara. She started crying. I said, “Why are you crying?”She said, “I’m crying because I had come to believe –always seeing us represented as poor people –I had come to believe that maybe, yes, maybe we are inferior. Because, otherwise, how do you explain that we’re always in the begging situation?” That’s what broke my heart. But at the same time that she said that, because of how I explained just what I explained to you, she said, “But now, I know that I am not the problem. It is my environment in which I live, that’s my problem.”I said, “Yes.” And that’s what gave me hope –that once people get it, they now change their outlook on life.

No, you’re not the problem.