By Simon Grey, on January 6th, 2012
What about the “losers”? Bite your tongue. When you call lower-income people “losers,” you’re falsely assuming that we’re all racing for the same finish line: material success. But to a large extent, lower-income people are just racing for other finish lines. Leftist outrage over income inequality is therefore deeply misguided. To a large extent, incomes differ because priorities differ. And if the poor don’t consider their lack of riches a big deal, why should anyone else?
As I wrote before, most poor people are where they are because of the choices they’ve made in their life. In fact, it is fair to say that, all things being equal, they don’t want to be rich. They would rather have whatever they have instead of wealth.
Note that this isn’t some deep psychological analysis, but rather a tautology: by their fruits ye shall know them. You can tell that most poor people want to be poor (or, more accurately, have what they have instead of wealth) by the mere virtue of the fact that they are poor. At this point in time, the markers of poverty are fairly well-known, and so only the astonishingly ignorant do not know what is needed to avoid poverty.
Thus, most poor people know that their past actions would likely lead to poverty, yet they made them anyway. Since they knowingly made those decisions, they are no more deserving of anyone’s pity than child who sticks his finger on a hot stove after being told not to do so.
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By Simon Grey, on December 27th, 2011
During the legislative debate before enactment of the 16th Amendment, Republican President William Taft and congressional supporters argued that only the rich would ever pay federal income taxes. In fact, in 1913, only one-half of 1 percent of income earners were affected. Those earning $250,000 a year in today’s dollars paid 1 percent, and those earning $6 million in today’s dollars paid 7 percent. The 16th Amendment never would have been enacted had Americans not been duped into believing that only the rich would pay income taxes. It was simply a lie to exploit American gullibility and envy.
I believe it was either last year, or possibly in the spring of this year, when conservatives got their panties in know over how 49% of all taxpayers paid no income taxes (though, funnily enough, all taxpayers still paid their FICA and other payroll taxes). The theory was that there would arise a class of professional voters, who would simply elect officials to pay take money from the rich and give it to the more-deserving poor, of which said professional voters just so happened to be a part.
The reality appears to be a bit different, at least historically speaking. When the income tax was first enacted, it only applied to the rich, who comprised 0.5% of the population. Thus, the percentage of the population paying the income tax increased 100-fold over 98 years to 51%. If the theory of professional voters were true, the percentage of taxpayers should have at least remained stable (or even decreased) while the tax rates should have remained stable or increased. Reality, as it were, is markedly different.
In spite of all the attempts at class warfare in the last one hundred or so years, the poor still get screwed over by the rich. This is probably because there is a strong correlation between a general form of stupidity and poverty,* as well as a strong correlation between wealth and general intelligence. In essence, the wealthy are generally intelligent enough to figure out how to make things work to their advantage (hence their wealth). If one is cunning enough to convince people to buy something they don’t need, it seems plausible that one could also sell someone a political policy that works to their disadvantage.
The historical norm has been that poor people pay quite a bit in taxes, and the wealthy are often the beneficiaries of those taxes (think of the feudal system as a general model of this). The idea that those who are intelligent enough to become quite wealthy won’t also be intelligent enough to protect their wealth is, quite frankly, absurd, and the idea that somehow the poor will manage to “reappropriate” wealth from the rich is even more absurd.
* Two quick notes: a lack of education generally correlates to stupidity, which in turn correlates to lower income (as evidence by the myriad statistics showing that high school dropouts earn less than those with a high school diploma, bachelor’s degree, etc.) Also, shorter time horizons also correlate to stupidity as well.
By Christopher Briem, on November 4th, 2011
More back to the future in a way. Income, poverty and general distribution issues used to be bigger topics in both academic research as well as the media and public discourse. I once had a whole class just in how to measure poverty. Seems to be a resurgence in the whole topic.
American Community Survey income distribution for households in the Pittsburgh MSA looks like this:
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| HOUSEHOLD INCOME IN THE PAST 12 MONTHS (IN 2010 INFLATION-ADJUSTED DOLLARS)
Universe: Households |
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| 2010 American Community Survey 1-Year Estimates |
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Pittsburgh, PA Metro Area |
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| Estimate |
Margin of Error |
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| Total: |
978,959 |
+/-8,063 |
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| Less than $10,000 |
75,445 |
+/-4,207 |
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| $10,000 to $14,999 |
60,079 |
+/-3,254 |
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| $15,000 to $19,999 |
62,736 |
+/-3,285 |
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| $20,000 to $24,999 |
65,678 |
+/-3,660 |
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| $25,000 to $29,999 |
55,960 |
+/-3,892 |
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| $30,000 to $34,999 |
58,099 |
+/-3,570 |
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| $35,000 to $39,999 |
47,868 |
+/-2,885 |
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| $40,000 to $44,999 |
48,436 |
+/-2,846 |
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| $45,000 to $49,999 |
41,672 |
+/-3,031 |
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| $50,000 to $59,999 |
83,244 |
+/-4,605 |
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| $60,000 to $74,999 |
100,043 |
+/-4,547 |
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| $75,000 to $99,999 |
115,755 |
+/-5,690 |
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| $100,000 to $124,999 |
67,399 |
+/-3,740 |
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| $125,000 to $149,999 |
33,898 |
+/-2,113 |
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| $150,000 to $199,999 |
32,787 |
+/-2,388 |
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| $200,000 or more |
29,860 |
+/-2,590 |
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By Simon Grey, on November 2nd, 2011
As can be seen above, having a college degree is becoming worth less. And the cost continues to increase. Worst of all, one cannot default on student loans, so those who take on massive loans to fund their education will find that they are essentially slaves to the banks for life if they cannot find a decent-paying job.
I hope we can finally stop with the utterly worthless advice to go to college and pursue a career. The former is becomingly increasingly less correlated with the latter, and we are only doing a disservice to young people if we say otherwise.
Also, my experience has taught me that most of what passes for higher education is nothing more than drivel. Most of what is taught is obvious, wrong, or pointless. If you want to be smarter, go to the library and find good books to read. If you need help getting started, use a search engine to find classics of the western canon. Then imbibe deeply.
In the meantime, forget college.
By Simon Grey, on September 26th, 2011
Freakonomics asked if forgiving student loans en masse was a good idea. Here was their conclusion: 1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts.
I guess it would help to define “high income.” Everything I’ve seen suggests that college grads generally start with relatively income when joining the workforce and that it eventually increases over time. And, once you adjust for inflation, grads today are earning less than grads of, say, thirty years ago, on the average. The only way the above claim is true is if one compares the college grads to those with less education. Also note that income growth, though a trend, is not promised to continue indefinitely. Also note that going to college is the recommended course of action, while dropping out of high school is not. In essence, those who have played by the rules, so to speak, are in a tough bind because they have played by the rules. It is cruel to argue that they don’t deserve consideration because they are still better off than those who didn’t follow the rules.
2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.
Can we get rid of this whole nonsensical stimulus thinking? All money circulates. Ceteris parabis, the money will be spent at some point. The only concern is over timing, not necessarily net effect. And there is no objective reason to prefer immediate results to delayed results. This point, though technically true, is irrelevant.
3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?
This is simply asinine. No one thinks that forgiving loans makes education more desirable. People think that the student loan system is fraudulent (i.e. people were talked into loans under false pretenses). The reason most people support loan forgiveness is because they see it as a reasonable redress to the outrages of the system. Also, note that the current system does a remarkable job of subsidizing marginal students, which is the problem in the first place.
4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.
Don’t or can’t? How many grads have to take on subpar jobs because they can’t afford to wait for better jobs or undertake risky ventures? These kids have been sold a lie, and many they have no recourse (and I mean this literally as they can’t even default out of their loans). The government guaranteed repayment of student loans, and, in order to prevent getting hit in the shorts, has made it impossible to discharge this debt through bankruptcy. As such, banks have little incentive to ensure the loan’s recipient’s ability to repay. In short, the government has created the mess, under the guise of helping the underprivileged. They have turned the underprivileged into slaves. Shouldn’t the slaves be able to lobby their master? Or is that too much to ask?
5. Politics: Notice the political rhetoric? Give free money to us, rather than “corporations, millionaires and billionaires.” Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative. Instead, they’re comparing it with the worst alternative. So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?
This is simply stupid. The 15% of the population in poverty already receives money. To the tune of billions of dollars per year. How much more do they need? You’d think hundreds of billions of dollars would be enough to cure poverty, but apparently the federal government sucks worse at charity than it does at disaster relief in a chocolate city after a hurricane.
This is nothing more than a grossly ignorant appeal to emotion. The poor already get money from the federal government. And why are corporations more deserving of billions of dollars? The government has already lined the pockets of their Wall Street cronies through student loans. Shouldn’t this be redressed?
Conclusion: Worst. Idea. Ever.
More like: Worst. Rebuttal. Ever.
However, I don’t find the idea of student loan forgiveness all that appealing, in part because students still deserve to face the consequences of their (admittedly stupid) decision to go to college instead of getting a real job. In order for a lie to work, one party must tell it and another party must believe it. If you believe a lie, you need to live with the consequences. But if you take advantage of those who have believed a lie, then you deserve the consequences thereof as well.
My proposal, then, is very simple: allow grads to default on their student loans. Grads’ credit scores will take a hit, which is a reasonable consequence t their decision to essentially waste four years of their life. And banks would be forced to write a bunch of bad loans, killing their profits, which is a reasonable consequence to their decision to loan money to people that didn’t deserve it.
The current system is broken and remarkably unfair to those it purports to help. Correcting this problem doesn’t require forgiving all students of their loans. Allowing grads who find that a college degree is worthless to default on their loans should be sufficient to clear the market.
By Winton Bates, on June 1st, 2011
I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.
The criteria used in the index are: housing, income, jobs, community (individuals’ perceptions of the quality of their support networks), education, environment (air pollution by tiny particulate matter), governance (voting and transparency), health, life satisfaction, safety (assaults and homicide) and work-life balance (working mothers, total hours worked and leisure).
Under the default setting, with all criteria being given equal weight, the countries that come out on top are Australia, New Zealand, Canada and Sweden. If you suppress all criteria other than income, Luxembourg is a long way ahead of the field, followed by the United States and Switzerland. The income measure used in the study (reflecting household financial income and wealth) has Australia in 14th place and New Zealand in 25th place.
The substantial difference between the outcomes of these weighting systems is interesting. In a previous post I observed that all well-being indicators tend to tell similar stories about well-being levels in different countries. The two observations are actually consistent. My research covered a larger number of countries, including many poor countries as well as the wealthy democracies of the OECD. Well-being indicators tend to tell a similar story when wealthy countries are compared with poor countries, but can tell different stories when wealthy countries are compared to each other.
Equal weighting of a range of indicators and a focus on income alone seems to me to be equally arbitrary approaches to well-being comparisons. Well-being is obviously affected by factors other than income, but it would be difficult to argue that all relevant factors are equally important. Value judgments have to be made to determine appropriate weights. An appropriate weighting system might be derived by conducting surveys to obtain weights reflecting the values of people in different countries. Alternatively, surveys could be used to obtain weights reflecting the values of people with different political views in particular countries, or across the whole of the OECD.
In the absence of such survey evidence, I have looked at the rankings for three somewhat extreme political groups drawn from my own imagination: Scrooges, Socioholics and Warm Fuzzies. As I imagine them, all three groups perceive governance and safety as being important to well-being. The Scrooges add income as the only additional factor. The Socioholics add housing, jobs, education and health in addition to income. The Warm Fuzzies exclude income and all the additional factors added by the Socioholics, but replace those factors with community, environment, life satisfaction and work-life balance.
So, which countries come out on top of the welfare rankings according to the values of these three political groups?
Scrooges: The countries that come out on top are Australia, Luxembourg and the United States. New Zealand is placed about 8th, behind Sweden, Austria, Canada and UK.
Socioholics: Australia and Canada come out on top, followed by New Zealand and the United States.
Warm Fuzzies: Australia, Denmark and Sweden are on top, followed by New Zealand, Canada and Norway.
What do I get out of this? My main observation is that Australia seems to come out fairly well, whatever coloured political lenses you use. The well-being of New Zealanders also looks fairly good, particularly if you adopt either a Socioholic or Warm Fuzzy perspective.
Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.
By Winton Bates, on December 17th, 2010
 I found this to be the most interesting question explored in ‘Government Size and Implications for Economic Growth’, by Andreas Bergh and Magnus Henrekson. Before I explain, however, I want to provide some comments on the author’s conclusions about the effects of size of government on economic growth.
Bergh and Henrekson base their conclusions about the effects of size of government on economic growth on a review the recent econometric literature using panel data for high-income countries. They conclude: ‘In rich countries there is, indeed, a robust negative correlation between total government size and growth’ (p.30). They qualify this conclusion by noting that, as with many other econometric studies, the issue of causation has not been completely settled (p.33). They explain the ability of the Scandinavian welfare states to maintain modest economic growth despite big governments in terms of relatively strong performance of those countries with respect to other aspects of economic freedom. These conclusions are consistent with my own review of the relevant literature ( background paper for the NZ 2025 Taskforce) and modest econometric efforts. The reservation I have about the review of the literature by Bergh and Henrekson is somewhat technical – so some readers may prefer to skip this paragraph. My reservation concerns the authors’ enthusiasm for Bayesian Averaging of Classical Estimates (BACE), a technique used to deal with possible sensitivity of parameter estimates to the inclusion of different control variables in regression models. A recent paper by Antonio Ciccone and Marek Jarocinski suggests that margins of error in international income estimates are too large for such agnostic growth empirics to be reliable. In any case, in my view the economic reasoning that tells us that the economic costs of taxation rise approximately in proportion to the square of the tax rate provides a more powerful case against big government than the results of cross-country econometric studies. (The authors appear to attribute this insight to the Swedish economist, Jonas Agell (p.17), although it should more appropriately be attributed to much earlier work by Arnold Harberger, or possibly even to Alfred Marshall.)
It is well known that the economic cost of high tax rates arises in part from the substitution of leisure for income. Some would argue that this is beneficial because many people obtain more happiness from spending time with family and friends than from working. One reason why the argument is spurious is because it may be rational for individuals to sacrifice some current happiness to provide their children with a better education, fund early retirement or pursue any number of other objectives that are important to them.
Another reason why the argument is spurious is that what economists talk about as a choice between income and leisure is often actually a choice between time spent on paid work and time spent on unpaid household chores. It is doubtful whether people obtain much more pleasure from housework, weeding the garden and childcare than from working for pay. Bergh and Henrekson make the good point that high rates of labour taxation provide an incentive for consumers to produce such services themselves in the home rather than to work longer hours in order to purchase them in the market place. The authors suggest that this explains why hours of unpaid work are substantially greater in Sweden than in the US and hours of paid work are correspondingly lower in Sweden than the US.
The authors also provide a graph comparing average hours worked per person in Sweden and the US over the period 1956 to 2003. It shows that average hours worked in Sweden were substantially lower than in the US during the 1950s, when Sweden’s tax rates were much lower, the situation has been reversed in recent decades.
Over the last couple of centuries the ancestors of the vast majority of people in high-income countries have managed to obtain the benefits of participation in a market economy – the benefits of exchange and specialization on the basis of comparative advantage, resulting in much higher living standards and providing greater opportunities for skill development and incentives for further innovation. High taxes associated with big government provide the opposite incentives – encouraging people to shun the market and to produce services for themselves. Self-sufficiency is not without its attractions, but I doubt whether many people would freely choose the poverty experienced by their ancestors, even if that was the only way they could ensure a supply of fresh, organically-grown vegetables.
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By Winton Bates, on June 23rd, 2009
“What are the applied implications of our findings? In the work area we suggest that a balance between hours of work, social time and leisure will produce the highest well-being, whereas even work that is enjoyable will produce less well-being if carried out for too many hours. Conversely, it would be an error to assume that people would be happiest if all their time were spent in pleasurable leisure activities. … At the policy level an implication is that too many work hours, without sufficient free time or vacation, will prove less rewarding for most people” (Diener, Weiting Ng and Will Tov, 2008, ‘Balance in life and declining marginal utility of diverse resources’, Applied Research Quality Life).
This quote is from the conclusions of an article which assesses how average happiness levels differ with differing amounts of time spent in various ways (free time, with family and friends, and commuting) as well as with income levels. The findings seem to confirm the predictions of standard economic thinking in this area i.e. as our consumption of any good (including non-market goods such as leisure) rises the marginal utility of adding an additional unit of the good tends to decline.
What does the article tell us about marginal utility? The part of the study that seems most informative uses data from the Gallup World Poll, a representative sample of people almost covering about 95 percent of the world. As its main measure of happiness the study uses affect balance, which measures relative experience of positive feelings (enjoyment, and smiling and laughing) and negative feelings (depression, anger, sadness and worry) for the previous day.
The results suggest that the marginal utility of “free time” and “time with family and friends” is quite high for the first few hours of each activity (in the time category zero to four hours) and then declines to around zero. The marginal utility of additional income rises steeply for incomes up to around $US 40, 000 and then increases moderately, if at all. (The ladder of life indicator shows a similar pattern, but with the marginal utility of income remaining positive at high income levels).
How much additional income would a person need to earn to compensate for the loss of utility associated with the sacrifice of an hour of free time or an hour with family or friends. My rough calculation suggests that the hourly rate of pay required would be around $28 for a person with an income of around $20, 000 per year. (The loss in utility for sacrifice of an hour of leisure equals 0.075. Income on the preceding day would have needed to rise by $28 in order to raise utility by 0.075.)
For people with higher incomes, the hourly wage rate needed to compensate for the loss of an hour of leisure time would be very much higher. At first sight it might appear that with incomes in excess of around $60,000 the hourly rate of pay required to compensate for sacrifice of an hour of leisure would be huge. We need to remember, however, that some of the people earning this additional income might be saving it to spend at times of their lives when their earning capacity is diminished and the marginal utility of additional income is much higher. There are also some people who enjoy their work so much that they would not require any compensation for sacrificing an hour of free time. More research is required before we will have a good understanding of why people make the choices they make between income and leisure.
The quote at the beginning of this article suggests that the choice that individuals make between income and leisure is a government policy issue. Why should it be? The weight of evidence suggests that when governments attempt to regulate how people live their lives they tend to make people more miserable rather than happier. As I see it, the main benefit of research of this kind is that the findings may help individuals to improve their own well-being and that of their families by enabling them to make better choices.
By Winton Bates, on May 29th, 2009
Some New Zealanders might say that this is a question that only an Australian could ask, but it seems to me to be a good way to raise the issue that I want to discuss. (I hope that when I look back on this in a few days time it will still seem like a good idea!)
The ratings that I am writing about are the ladder of life ratings from the Gallup World Poll – the top step of the ladder represents the best possible life and the bottom step represents the worst possible life. But I could be referring to any of a range of surveys that ask people to place a numerical rating on how happy they are or on how satisfied they are with their lives.
I do not intend to argue that New Zealanders have a peculiar propensity to over-rate their satisfaction with their lives. The issue I want to discuss is what it means when surveys show that New Zealanders are just as satisfied with their lives as people in the U.S. even though average incomes in NZ are only about two-thirds of the U.S. level. I propose to compare the impact of income differences and other factors on the survey measures of subjective well-being in order to enable readers to consider whether the impacts attributable to income differences provide an accurate measure of its impact on the quality of lives.
It is now possible to make fairly accurate comparisons of the impact of income and other factors on average ratings of subjective well-being at a national level. Recent research by John Helliwell, Christopher Barrington-Leigh, Anthony Harris and Haifang Huang has shown that a high proportion of differences in average life evaluations between countries can be explained statistically by differences in a relatively small number of variables reflecting social, institutional and economic circumstances of life (See Table 3, ‘International Evidence on the Social Context of Well-being’, Working paper 14720, NBER, 2009). The most important variables are income (log of per capita GDP), friends (the proportion of survey participants who have relatives or friends they can count on for help when they are in trouble), freedom (the proportion who satisfied with their freedom to choose what they do with their lives) and corruption ( responses to questions relating to whether corruption is widespread throughout government and business).
In the Figure below I have used these research results to show reasons why average survey measures of subjective well-being in several countries differ from the U.S. ratings.
The net differences from U.S. ratings are shown next to the label for each country. If you focus on New Zealand you can see that the perception of NZers that their country is relatively free of corruption outweighs the negative impact on survey responses of the fact that average incomes in NZ are substantially lower than the U.S. average.
If you consider that corruption is as big a problem in the U.S as, for example, in Greece, you might think that this provides an accurate depiction of the relative impacts of income differences and corruption on the quality of life in New Zealand and the U.S. However, when I look at the expert ratings of corruption levels in Transparency International’s corruption index, the U.S. doesn’t look too bad. The rating of the U.S. in this index (7.3) is lower than Denmark and NZ (both on 9.3) and Australia (8.7) but well above Italy (4.8) and Greece (4.7). (It is also interesting that Greeks do not perceive that their corruption problem to be any worse than that in he U.S. and that NZers do not perceive themselves to be as free of corruption as the Danes).
The point is that the influence of various factors on the survey ratings of quality of life depends on the way they are perceived. Americans are sensitive to corruption in their society and they don’t like it. The ratings are more like emotional responses than dispassionate evaluations. It seems to me that self-reports of how people feel about their lives tell us about their emotional state, which is an important influence on well-being but is not identical to it.
One way to test survey ratings is to ask ourselves to what extent we would be prepared to rely on them in making decisions affecting our own well-being. It seems to me that income may be more important to people when they make decisions affecting their our well-being than when they answer questionnaires about the quality of their lives. If you were in Europe contemplating a choice between moving your family to either the U.S. or NZ, would you consider the importance of differences in average income levels to be adequately reflected in survey ratings of the quality of life?
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