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Tony Quain
Tony Quain is a commentator on free-market economic theory and policy. He has a Ph.D. in economics from George Mason Univ. More >>
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Inequality today
Redistribution today
Taxes today

Link: http://equitablegrowth.org/news/new-useful-measure-inequality/

The linked article by Nick Bunker argues that we should take the Palma Index (which measures inequality as a ratio of the percent of income received by the top decile (10%) over the percent of income received by the two bottom quintiles (40%)) more seriously, and if not replace the Gini with it, make it an equal partner in explaining unequal outcomes. His reasoning:

But in some cases it can show increases in inequality that the Gini misses. Case in point: the Palma for post-tax income in the United States for 2010 was 1.98, a 43 percent increase since 1979. The larger increase compared to the Gini (21 percent) shows how much of the rising inequality was due to changes at the tails.

You can see its appeal to the left. For those who bemoan the earnings of the "1%", chasing tails has been an obsession. But the Palma exposes their base motivation: they are only obsessed with one tail (the "rich"), not two, and are thus more occupied with envy than with sympathy for the poor. Why is it not 10%/10%? Or 40%/10%?

Another reason they like it is because total inequality, as the author admits, is just not that stunning. Tail inequality has more statistical backing for being an urgent concern, which means that middle inequality has actually improved.

The Palma Index gives four times as much weight to the top 10% as it gives to the bottom 40% and gives no weight at all to the middle five deciles. For a measure of inequality, propounded by supposed defenders of equality, it is a truly discriminate and unequal statistic.

Link: http://www.pieria.co.uk/articles/on_inequality_-_with_any_search_for_answers_it_helps_if_people_can_first_agree_on_the_question

An excellent article.

Murphy identifies three definitional frames that discussions of income inequality must come to terms with before they start talking statistics:

1) Are we looking at inequality of households or individuals?
2) Are we considering annual income (dispensing with age) or lifetime income (adjusting for age, dynamics)?
3) Are we looking at market (pre-government) income or disposable (post-government) income?

I won't go into the reasoning behind each one of these, but Murphy would appear to agree with me that household inequality is a bogus measure: unfairness if it happens is due to individuals' income, not their choice of who they live with. He would also agree that upon reflection, most people wouldn't care if there is vast inequality due exclusively to age: everybody will get his share if that is the case. The first two items are pretty close to being open-shut cases where the only two reasons for not looking at the right data is the absence of such data (which is certainly a concern, especially for getting lifetime income statistics) or the nefarious intentions of the researcher (which is a larger concern).

On the third item, it is more about what the purpose of the research is. If you are trying to assess how economic inequality really is, as exhibited by people's conspicuous consumption, then you should use post-government data. That would be the case 90% of the time. But if you are trying to assess how economic inequality would be, without some or all of the government interferences, you may need to use pre-government data, possibly in conjunction with post-government data. With that caveat out of the way, I agree with Murphy that in general researchers make the mistake/offense of using pre-tax, pre-benefit data all too often.

Then there is this big revelation:

Once we make all these important distinctions and definitional changes – that is, we adjust for age and consider post-tax and post-distribution income at the individual rather than household level – we reach an interesting conclusion. Between 1987 – before which time the US data is less reliable – and now, real spending per person by income quintile shows income inequality has not changed at all. That of course says nothing about whether it is too high or low – merely that it has not deteriorated the way that is frequently argued.

Looking at the correct statistics, the supposed "rise in income inequality in recent years" is a sham. There is no rise in income inequality.

Some further questions for Murphy (and others) to consider, beyond the three he identifies:

1) Are we looking at inequality of (implicit) wages or of income regardless of work effort? Do people really feel it is unfair for someone working twice as many hours to get twice as much pay? Or is it just unfair if they are getting twice the (explicit or implicit) wage? Income inequality statistics almost never adjust for work effort. And if they did, would they include previous work effort to acquire skills and education?
2) Are we looking at income inequality as a proxy for consumption inequality? Would income inequality irk people if everyone consumed the same amount, but those with higher incomes saved the rest (or gave it away)? Or does it all come down to conspicuous consumption?
3) Are we looking at income (or consumption) inequality as a proxy for utility inequality? Discussions of inequality are often peppered with language such as "well off" or "better off", which are terms only appropriate for utility comparisons (and then maybe not interpersonal comparisons). But maybe the question of being better off is the one people are after, no?

Murphy finishes his article saying that the only real solution is equality of opportunity through better or more even-handed education. That may be where a middle-road political solution develops (though whether that means more or less state intervention is not pre-determined), but the improvement of education is an on-going battle anyways. With respect to economic inequality, the best policy is simply to ignore it.

Link: http://online.wsj.com/articles/casey-b-mulligan-the-myth-of-obamacares-affordability-1410218437

Excellent article in today's WSJ.

As with so many left-wing projects, the title (in this case, Affordable Care Act) is unintentionally Orwellian.

Some of the nice points:

Although the ACA helps specific populations by giving them a bigger slice of the economic pie, the law diminishes the pie itself. It reduces the amount that Americans work, and it makes their work less productive. This slows growth in both personal income and gross domestic product. ... By the end of this decade, nearly 20 million additional Americans will have health insurance as a consequence of the law. But the ultimate economywide cost of their enrollments will be at least double what it would have been if these people had enrolled without government carrots and sticks; that is, if they had decided it was worth spending their own money on health insurance. In effect, people who aren't receiving assistance through the ACA are paying twice for the law: once as the total economic pie gets smaller and again as they receive a smaller piece.

Link: http://econlog.econlib.org/archives/2014/08/government_work_1.html

Prof. Caplan seems in a charitable mood ...

Before you get your eyes checked, or think Caplan has gone lefty on us, read the crux of his argument:

[Government enterprises'] performance is almost always disappointing. But contrary to Rothbard's story, their performance is rarely disastrous. ... Am I damning with faint praise? Sure. Even the best government enterprises are slow to cut costs. They're bad at innovation. And they're almost uniformly terrible at putting aside Social Desirability Bias to answer every enterprise's most fundamental question: Is this worth doing at all? Yet the anomaly remains: Simple economics implies that government enterprises should be far worse than they really are.

Link: http://economics.mit.edu/files/9834

Sorry I forgot to post this earlier in the week (this article came out last week and was published on RealClearPolicy on Monday).
Two Harvard/MIT economists take apart Piketty's "laws of capitalism".

Thomas Piketty’s recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating “general laws”to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty’s book, such as the gap between the interest rate and the growth rate.

And the conclusion:

Piketty’s ambitious work, fashioning itself after Marx’s Capital, has focused a great deal of new attention on inequality. Piketty pro¤ers a bold, sweeping theory of inequality applicable to all capitalist economies. Though we believe that the focus on inequality and the ensuing debates are very healthy and constructive, we have argued that Piketty goes wrong for exactly the same reasons that Marx, and before him Malthus and Ricardo, went astray: his approach and general laws ignore both institutions and the ‡exible and multifaceted nature of technology shaped by institutions. We have further suggested that the history of inequality over 20th century in economies such as South Africa and Sweden shows why the focus on top 1% inequality is unsatisfactory and why any plausible theory of inequality has to include political and economic institutions at the center stage. We have also provided a brief outline of a framework that squarely puts the spotlight on institutions, their nature and evolution in the study of inequality.

Link: http://www.nationalreview.com/article/386516/taxes-look-canada-amity-shlaes

Amity Shlaes on the increasingly competitive tax system in Canada, compared to the U.S.'s increasingly un-competitive one:

Canada has emerged competitive: A 2014 KPMG study of tax costs for business ranked Canada first among ten major countries, its costs 46.4 percent lower than those in the United States.


Another feature at work was Canada’s awareness that nations have to compete to draw business. Such awareness is simply lacking in the United States. The fact that the world runs to us (buys our bonds) when the U.S. is in trouble has reinforced our provincialism. The fact that the Chinese government does so, for its own reasons, also supports our national illusions. But tax inversions reveal what the bond prices do not: U.S. tax rates are too high. Our system of worldwide taxation, taxing companies wherever they work, causes them to shift to nations like Canada, which taxes companies only for their Canadian activity.

Instead of making our corporate tax code more competitive, President Obama blasts corporations for leaving the country and calls tax inversion an unpatriotic tax loophole. Would he call an individual who left America to live someplace else, even if that individual still does business here, unpatriotic? Do we call immigrants unpatriotic when they leave Mexico or China or India to come to the U.S. to enjoy our freedoms? What if the person who leaves the U.S. was once an immigrant, and now they are simply returning to the country of their birth? Are they unpatriotic?

Patriotism in the U.S. is for the most part (to put it lightly) about our freedoms and our ideals, not our ethnicity, language, or even culture. It is about the principles that underlie low taxes. So if someone leaves the U.S. because we have betrayed those ideals, who is to blame?

Link: http://cafehayek.com/2014/08/minimum-car-price.html

Saw this from yesterday. Let's apply supply and demand principles to ... labor markets! Why people have to be told this is sadly a great failure of the economics profession.

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