Economics

The Inequality Illusion?

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Economists Wojciech Kopczuk and Allison Schrager have a Foreign Affairs article with the eye-catching title “The Inequality Illusion.” The two argue that “imposing a tax on wealth is a terrible way to promote equality. It actually benefits the super wealthy the most.” They continue:

What is not widely understood is that the growth in income inequality [in the U.S.] has been driven almost entirely by earned income, that is, what people are paid for their work rather than what they earn on their investments. 

Wealth inequality refers to the stock of people’s assets. It represents the accumulation of saved income and returns on investments over the years. Some wealth inequality is inevitable, even desirable, because wealth represents a lifetime of saving and not just luck or opportunity. Extreme income inequality can beget extreme wealth inequality because people with a lot of income, if they save, can amass large fortunes and pass them on to their children. But over time, such wealth can also dissipate as people leave it to multiple children, get married and divorced, develop expensive lifestyles, contribute to charities, or make poor investment decisions. Whereas income inequality has clearly worsened, the recent evidence about wealth inequality is much less convincing.

After reviewing a number of sources, they declare, “Taken together, then, the economic evidence points to increased earnings inequality but to a much more benign picture of changes in wealth inequality. Increasing inequality has been driven by income earners not necessarily by the entrenched wealth holders.”

Given the recent controversy over errors in Thomas Piketty’s data (errors that may or may not undermine his argument), the above article is quite timely.

Check it out.

Havana: The Last Communist City

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Journalist Michael Totten has a disturbing article in the Spring edition of City Journal on the effects of communism in Cuba’s Havana. Using the recent film Elysium to paint a picture of life in Havana, Totten documents how he lied to get into the country and what he witnesses. “Outside its small tourist sector,” he explains, “the rest of the city looks as though it suffered a catastrophe on the scale of Hurricane Katrina or the Indonesian tsunami.” While the goals of the Marxist leaders “were total equality and the abolition of money; the methods were total surveillance and political prisons. The state slogan, then and now, is “socialism or death.”” Furthermore, “Cuba has a maximum wage—$20 a month for almost every job in the country. (Professionals such as doctors and lawyers can make a whopping $10 extra a month.)” This maximum wage is defended by the government, which argues “that life’s necessities are either free or so deeply subsidized in Cuba that citizens don’t need very much money. (Che Guevara and his sophomoric hangers-on hoped to rid Cuba of money entirely, but couldn’t quite pull it off.) The free and subsidized goods and services, though, are as dismal as everything else on the island.” This includes their supposedly wonderful health care system that Michael Moore was raving about years back. This “free” health care requires patients “to bring their own medicine, their own bedsheets, and even their own iodine to the hospital. Most of these items are available only on the illegal black market, moreover, and must be paid for in hard currency—and sometimes they’re not available at all. Cuba has sent so many doctors abroad—especially to Venezuela, in exchange for oil—that the island is now facing a personnel shortage.”

There’s much more. Check it out.

Mercatus Center and Regulations

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Several new studies out of the Mercatus Center at George Mason University this month cover the impact of regulations on the economy:

Check them out.

 

The Co-Opting of Austrians by Classicals

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Image result for mises
Ludwig von Mises

Economist Noah Smith has an interesting piece in The Week explaining how mainstream macroeconomics (“New Classicals”) “shares just enough similarities with the Austrian school to basically steal all their thunder.” Smith lists a couple similarities and differences:

Similarities

  • Human Action Axiom vs. rational expectations and the Lucas Critique
  • Praxeology vs. “Theory ahead of measurement”
  • Deep suspicion of government intervention

Differences

  • Formal mathematical modeling
  • Causes of the business cycle

As Smith concludes,

So it basically seems to me that the New Classicals captured and improved on the basic ideas of the Austrians in almost all of the ways that matter, while vastly improving on the presentation. New Classical concepts of rationality, distrust of empiricism, and distrust of government intervention are more moderate and nuanced than those of the Austrians, and their mathematical style is simply much more appealing to modern academics than the dense, turgid prose of von Mises or Hayek. Thus, if you were a smart young macroeconomist in 1980 who believed that people were both rational and smart, that government intervention was a bad idea, and that theory was the best way to investigate human behavior, you did not become an Austrian; you became a New Classical.

In other words, the New Classicals drank the Austrians’ milkshake.

LSE Report: “Ending the War on Drugs”

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The failure of the UN to achieve its goal of ‘a drug free world’ and the continuation of enormous collateral damage from excessively militarised and enforcement-led drug policies, has led to growing calls for an end to the ‘war on  drugs’. For decades the UN-centred drug control system has sought to enforce a uniform set of prohibitionist  oriented policies often at the expense of other, arguably more effective policies that incorporate broad  frameworks of public health and illicit market management. Now the consensus that underpinned this  system is breaking apart and there is a new trajectory towards accepting global policy pluralism and that  different policies will work for different countries and regions.

So begins a brand new report from the London School of Economics examining the War on Drugs. Its findings suggest

  • A “drug-free world” is not plausible
  • Prohibition isn’t necessarily the problem, yet isn’t the answer
  • Stop sacrificing human rights
  • End mass imprisonment of drug offenders
  • Learn from mistakes

It should also be pointed out that legalization could run drug cartels out of business. Check it out.

World Bank: World Is More Equal

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The World Bank released a summary of the findings of the 2011 International Comparison Program (ICP), which analyzes PPP and real expenditures worldwide. The report describes

the interaction between the real sizes of GDP for 177 economies with the relative price levels for major aggregates and per capita expenditures based on their population sizes. The results indi­cate that only a small number of economies have the greatest shares of world GDP. However, the shares of large economies such as China and India have more than doubled relative to that of the United States. The spread of per capita actual individual consumption as a percentage of that of the United States has been greatly reduced, suggesting that the world has become more equal (pg. 89; bold mine).

The report explains that this should be “interpreted with caution” due to “changes in the ICP methodology and country coverage…” Nonetheless, this is fantastic news. Pope Francis and the rest of us should be rejoicing.

This is just one more source lending support to what Nathaniel and I argued in SquareTwo: global poverty and inequality are declining largely thanks to globalization.

Rags to Riches to Rags

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Mark Rank, professor of social welfare at Washington University, has an excellent piece in The New York Times on income inequality and mobility that further supports the video above:

But is it the case that the top 1 percent of the income distribution are the same people year in and year out? Or, for that matter, what about the top 5, 10 and 20 percent? To what extent do everyday Americans experience these levels of affluence, at least some of the time? …It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.

This demonstrates that

most American households go through a wide range of economic experiences, both positive and negative…Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income…Rather than talking about the 1 percent and the 99 percent as if they were forever fixed, it would make much more sense to talk about the fact that Americans are likely to be exposed to both prosperity and poverty during their lives, and to shape our policies accordingly. As such, we have much more in common with one another than we dare to realize.

Check it out.

Nobel Laureate’s Graduation Speech

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Nobel economist Thomas Sargent gave a 2007 graduation speech using 12 economic concepts:

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

This explains exactly why I find economics so valuable.

500+ Economists Against Raising Labor Costs

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Over 500 economists (including three Nobel laureates) have signed a letter to “Federal Policy Makers” arguing that hiking the minimum wage would be damaging to job creation and the economy:*

As economists, we understand the fragile nature of this recovery and the dire financial realities of the nearly 50 million Americans living in poverty. To alleviate these burdens for families and improve our local, regional, and national economies, we need a mix of solutions that encourage employment, business creation, and boost earnings rather than across-the-board mandates that raise the cost of labor. One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass the increase to their consumers in order to make ends meet. Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance…For these reasons, we encourage federal policymakers to examine creative, comprehensive policy solutions that truly help address poverty, boost incomes from work, and increase upward mobility by fostering growth in our nation’s economy.

Check it out.

*Pic from Mark Perry

The Great Enrichment

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Economist Deirdre McCloskey presented a paper entitled “The Great Enrichment Came and Comes From Ethics and Rhetoric” at a New Delhi conference for the Centre for Civil Society in January. The following excerpt is, in large part, why I support markets:

Free markets, that is, have not been bad for the poor of the world. The sole reliable good for the poor, on the contrary, has been the liberating and the honoring of market-tested improvement and supply. Private charity and public works, socialism and central planning, by contrast, have often made people worse off. Yet economic growth since 1800 has almost always made them better off, by enormous factors of increase. The enrichment of the poor, that is, has not come from charity or planning or protection or regulation or trade unions, all of which, despite their undoubted first-act popularity among our good friends on the left, merely redistribute a constant or a shrunken pie. The mere arithmetic shows why. If all profits in the American economy were forthwith handed over to the workers, the workers (including some amazingly highly paid “workers,” such as sports and singing stars and big-company CEOs) would be 20 percent or so better off, right now. One time only. The 20 percent is to be compared with a rise in real wages 1800 to the present by a factor of 10 or 30 or (allowing for improved quality of goods) 100, which is to say 900 or 2,900 or 9,900 percent. If we want to make the non-bosses or the poor better off by a significant amount, 9,900 percent beats 20 percent every time. At 5 percent per year market-tested improvement and supply goes beyond the one-time 20 percent in a scant four years, and then cumulates to a quadrupling.

Check it out. The third volume of her trilogy on the Bourgeois Era- (the 2nd of which is pictured above)-The Treasured Bourgeoisie: How Markets and Innovation Became Virtuous, 1600-1848, and Then Suspect–will be out in 2015.