Economics

Not that kind of rivalry, but the kind spoken of in economics. GMU economist Bryan Caplan has a fascinating blog post in which he examines how rivalrous a married couple’s consumption bundle typically is with some aid from equivalence scales. Caplan takes an imaginary couple with the high earner making $60,000 and the low earner making $40,000 annually. Using four distinct empirical strategies, he finds that “the low-earning spouse makes out like a bandit.  The surprise: The high-earning spouse gains as well – for all four ways to estimate real-world rivalry…[I]f one partner outearns the other by 50%, share-and-share-alike marriage raises the high-earner’s effective consumption by about 30%, and the low-earner’s effective consumption by about 100%.  To quote Keanu, “Woh.””

He concludes,

These calculations deliberately ignore all the evidence that marriage makes family income go up via the large male marriage premium minus the small female marriage penalty.  So the true effect of marriage on economic well-being is probably even more massive than mere arithmetic suggests.  Why then are economists – not to mention poverty activists – so apathetic?

See the full post for the calculations.

Drawing on data from the Congressional Budget Office, economist Mark Perry provides the following two charts:

“As the data show in the top chart,” writes Perry,

the shares of pre-tax income for the four lower income groups was greater than their shares of federal taxes paid in 2010. In contrast, the highest quintile earned about half (51.9%) of all income in 2010 but paid more than two-third (68.8%) of all federal taxes collected. The top 1% earned 14.9% of pre-tax income in 2010 but paid 24.2% of all federal taxes collected…The federal tax system is highly progressive (higher income households shoulder an increasingly greater tax burden), especially for federal income taxes, as the bottom chart shows. The top income quintile paid almost all federal income taxes in 2010 (94.1%), and the top 1% paid almost 39% of all income taxes. In contrast, the bottom two income quintiles actually had negative shares of income taxes in 2010 and were in fact “net tax receivers” because their refundable tax credits exceeded the income tax otherwise owed.

Not only do the top earners pay the highest amount of taxes, but it tends to be their innovations that benefit society as a whole. Yale economist William Nordhaus’ 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement” found that innovators only capture 2.2% of the total present value of social returns. As GMU economist Don Boudreaux pointed out, “The smallness of this figure is astounding. If it is anywhere close to being an accurate estimate, the implication is that “society” pays a paltry $2.20 for every $100 worth of welfare it enjoys from innovating activities.”

The rich may be evil and all that, but they sure do pay for it.

Yesterday, I posted “War on Poverty: The Results” with a rather depressing graph from economist Lawrence McQuillan. However, the post may have struck readers as odd, given that I tend to actually be optimistic about the rise of living standards all over the world (including the U.S.). I’ve also mentioned before that there is a difference between statistical categories and flesh-and-blood people (i.e. “the poor” in 1970 are likely not “the poor” of 2014). But frankly, the U.S. Census data (which McQuillan’s graph was based on) is, as Washington Post columnist Robert Samuelson writes, “a lousy indicator of people’s material well-being. It misses all that the poor get — their total consumption. It counts cash transfers from government but not non-cash transfers (food stamps, school lunches) and tax refunds under the EITC. Some income is underreported; also, the official poverty line overstates price increases and, therefore, understates purchasing power.” In fact, one could argue that “the poor will always be with you” if we take the U.S. Census Bureau’s approach to measuring poverty:

The current poverty thresholds do not adjust for rising levels and standards of living that have occurred since 1965. The official thresholds were approximately equal to half of median income in 1963-64. By 1992, one half median income had increased to more than 120 percent of the official threshold (pg. 1).

Due to rising standards of living, poverty must become relative to the surrounding standards:

Adjustments to thresholds should be made over time to reflect real change in expenditures on this basic bundle of goods at the 33rd percentile of the expenditure distribution (pg. 2).

While the U.S. Census data can be useful (hence my original post), it is woefully inadequate. As a mentioned above, a major thing it misses is the material well-being of the poor. As science writer Matt Ridley explains,

Yet looking back now, another fifty years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be describe as ‘below the poverty line’…Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did. Even in urban China 90 per cent of people now have electric light, refrigerators and running water. Many of them also have mobile phones, inter net access and satellite television, not to mention all sorts of improved and cheaper versions of everything from cars and toys to vaccines and restaurants.

(From the Heritage Foundation)

While poverty by certain standards may not have budged, the literal material well-being of the underprivileged in America has increased dramatically. The safety net has played (and should arguably continue playing) a role in protecting the poor from some of the most brutal blows poverty has to offer. But when you consider the many life-easing materials mentioned above, I think you’ll find that LBJ had little to do with the market forces that brought them about.

In a brief blog post, economist Lawrence McQuillan comments on the chart above:

The poverty rate in the United States fell by half from 1950 to the start of the “War on Poverty.” And it was on track to continue falling. But after the “War on Poverty” programs kicked in, the poverty rate has been stuck in a narrow corridor.

The lesson: Despite good intentions, statist redistribution programs to “help the poor” lead to multigenerational dependency and shrinking opportunities and incentives for low-skill individuals to enter the workforce, increase their skills, and move up the income ladder.

In the comments, McQuillan says, “Note in the chart above that the poverty rate fell dramatically after the Clinton overhaul [in 1996].” This drop in poverty was also corroborated in a 2000 study referenced by McQuillan.

But does this faithfully capture the condition of the poor in the U.S.? I’ll explore this in Part 2.