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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://online.wsj.com/articles/kimberley-strassel-yes-virginia-there-is-a-senate-race-1413502713

Was feeling putting Mark Warner out of a job as my home state U.S. senator was pretty hopeless, until I saw this:

Yet this past week Mr. Warner’s image began to crumble. In June, Democratic state Sen. Phil Puckett abruptly resigned, throwing control to Republicans and derailing Democratic Gov. Terry McAuliffe ’s top priority, which is to expand Virginia’s Medicaid program. Within a week, federal investigators were probing whether Republicans had dangled a job for Mr. Puckett in return for his resignation.

That investigation is now producing quite different details. The Washington Post last week revealed it was Mr. Warner who called the Puckett family to discuss the possibility of a federal judgeship or corporate gig for Mr. Puckett’s daughter, as a means of getting him to stay in the Senate.

This revelation was made worse by news that Mr. Warner seems to have been acting for the McAuliffe administration. Mr. McAuliffe’s chief of staff had left his own message on Mr. Puckett’s phone: “If there’s something that we can do [for your daughter], I mean, you know, we have a couple of big agencies here that we still need agency heads,” ran the message. “So we would be very eager to accommodate her, if, if that would be helpful in keeping you in the Senate. We, we would basically do anything.”

Sounds pretty bad for Warner (for McAuliffe more so). That's good, because I don't like their policies or their politics.

Link: http://online.wsj.com/articles/mark-perry-and-michael-saltsman-about-that-ceo-employee-pay-gap-1413150999

An excellent article debunking the pay gap myth.

The crux of the argument:

[The AFL-CIO] points to a 331-to-1 gap in compensation between America’s chief executives and the pay of the average worker.

That’s a sizable number. But don’t grab the pitchforks just yet.

The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.

The BLS reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.

Link: http://www.theamericanconservative.com/articles/why-rand-paul-is-different/

Interesting introductory article to the Pauls and their different approaches to Republican/libertarian integration.

Link: http://www.nationalreview.com/article/389125/gelded-age-kevin-d-williamson

Nicely written summary of why the inequality issue is dumb.

I thought this was a great paragraph:

The inequality-based critique of the American economy is a fundamentally dishonest one, for a half a dozen or so reasons at least. Claims that the (wicked, wicked) “1 percent” saw their incomes go up by such and such an amount over the past decade or two ignore the fact that different people compose the 1 percent every year, and that 75 percent of the super-rich households in 1995 were in a lower income group by 2005. “The 3 million highest-paying jobs in America paid a lot more in 2005 than did the 3 million highest-paying jobs in 1995” is a very different and considerably less dramatic claim than “The top 1 percent of earners in 1995 saw their household incomes go up radically by 2005.” But the former claim is true and the latter is not.

If I had a nickel for every time some idiot used that "top 1 percent" line, I'd be in the top 1 percent.

Link: http://equitablegrowth.org/research/addressing-broader-questions-economic-growth-inequality/

This article came out today from the Washington Center for Equitable Growth, a left-wing think tank that reports on income inequality issues. It reports the findings of the Census Bureau's Income and Poverty in the United States: 2013 that came out earlier this month. It is packed with lies.

For example, the author Robert Lynch states this:

None of the measures in the report indicates any reduction in income inequality in 2013 relative to 2012. By every measure, income inequality in 2013 was higher than in previous years or equally as high as has ever been reported by the Census bureau since it started collecting these data in 1967.

Here are just two cases in point. The household income at the high earning 90th percentile was 12.1 times greater than the income of the household at the low earning 10th percentile—the widest gap ever reported by the Census Bureau. Similarly, the Gini index of income inequality, one of the most commonly used measures of income inequality, was 0.476 and indistinguishable from the record high of 0.477 reported in 2012 and 2011.

...By every measure, income inequality is at a record high or on par with the record highs reported by Census in 2012 and 2011.

There are four measures in the report to do with annual household income inequality: (1) Gini index; (2) Mean logarithmic deviation of income; (3) Theil index; and (4) three Atkinson indexes. Mr. Lynch knows this--he explains these four measures in the paragraph prior to the two cited above. He also adds a fifth measure that the report includes separate from the other four: Household Income percentile ratios. Why did he add this one? Well, let's see.

Let's look at Mr. Lynch's assertion, "By every measure, income inequality in 2013 was higher than in previous years or equally as high as has ever been reported by the Census bureau since it started collecting these data in 1967." Actually, by every measure (except the fifth one he added), household income inequality in 2013 was lower than in 2012 and 2011! Gini was 0.476 in 2013 (0.477 in 2011 and 2012). MLDI was 0.578 (0.586 in 2012 and 0.585 in 2011). Theil was 0.415 (0.423 in 2012 and 0.422 in 2011). And Atkinson was lower in 2013 than in both 2011 and 2012 for all three indexes. The only measure which he can cite that supports his assertion is the measure that he added, that is not included as a "summary measure": the 90/10 ratio. Funny how that's the principal one that he illustrates with an example (the other one was the Gini, which had the most modest decline of the report's summary measures). If he exampled the data of any of the others, people wouldn't need to look at the report (as I did) to conclude he was a liar and stop reading.

Of course, in his defense he would say that the decreases in these measures are "small" or "not statistically significant". They are small, but no smaller than the typical change in these measures year-by-year. It is not like these measures have had steady increases and then just plateaued. They went down. All of them.


The bottom line is that after nearly five years of economic recovery and growth in national income most Americans have not experienced an increase in their earnings while the earnings of those at the top have largely returned to their pre-recession level. The wages of men in particular have stagnated while women, children, and people of color have suffered in disproportionate numbers from the ravages of poverty.

Actually, most Americans have experienced an increase in their earnings. Changes in society-wide averages don't reflect this because of a dynamic-slope effect: the composition of people in the average changes. And how can women have suffered disproportionately if there is a "reported improvement in the female-to-male earnings ratio, from 77 cents on the dollar in 2012 to 78 cents last year", as Lynch says earlier in his article? And how can "children" and "people of color" have suffered disproportionately if Lynch reports earlier in his article that "Almost the entire decline in poverty is attributable to a reduction in the poverty of children under the age of 18 alongside a reduction in the poverty rate of Hispanics."

The WCEG's mis-reporting of the facts is not just typical left-wing spin. It is lying.

Link: http://www.cato.org/publications/commentary/economists-arguments-against-obamacare-lawsuits-backfire?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CatoRecentOpeds+%28Cato+Recent+Op-eds%29

The linked article was in the Washington Times yesterday.


...Rather than rely on democracy to fix things, the trio is promoting something much worse than a bad health care bill; namely, the creation of new taxes and government subsidies outside the legislative process.

The Halbig and King plaintiffs make a startling yet credible case that with each passing month, the government is unlawfully handing billions of taxpayer dollars to private insurance companies, and subjecting more than 50 million Americans to illegal taxes. Agree or disagree, the need for final resolution of these cases is obvious and pressing. Only the Supreme Court can provide it.

The government’s allies know the longer it takes to resolve these cases, the more Americans will become dependent on those payments, which will prejudice the courts against the plaintiffs. To avoid prejudice, the Supreme Court should review King immediately, without waiting for lower courts to readjudicate Halbig.

Link: http://www.huffingtonpost.com/sean-mcelwee/five-reasons-why-democrac_b_5858160.html

This article caught my eye.

The author frames the situation well in the opening sentence:

One of the most longstanding hopes (on the left) and fears (on the right) about democratic politics is that voters of modest means will use their electoral weight to level the economic playing field. In a market economy, the median voter's income will invariably be below the national average creating an apparently compelling opportunity for a politics of redistribution.

The mean-income-is-higher-than-the-median is a well-known theoretical explanation for redistribution in public choice circles, but is also known as being simplistic. McElwee goes on to cite some pretty obscure reasons why the bottom half don't soak the top half:

  1. Mobility. People don't soak the top half because they believe they will be there one day. This is the best reason McElwee comes up with, and makes a lot of sense. But he argues that people over-estimate their mobility and thus should discard this reasoning; but even if they do, that's not a reason to throw it away entirely. At any positive level of mobility, progressive taxes make people worse off to the extent that they care about getting ahead in life.
  2. Solidarity. This is a confused argument along the lines that people just want to get along. Not buying it.
  3. Political misrepresentation. McElwee argues that the sentiment for redistribution is there, but it doesn't translate into policy. I don't think the sentiment is anything close to what his opening sentence believes it should be. But there is some truth to this point. Maybe the elites just know the ineffectual and counter-productive nature of redistributionist policies. Case in point: economists are generally against increases in the minimum wage, the uninformed voter is generally for it.
  4. Interest-group politics. Again, this "linkage problem" of democracy would be supported if the American people actually had a desire for redistribution.
  5. Racial conflict. Laughable. But this points to something McElwee apparently misses: people don't just vote redistribution or not, and often don't just vote their pocketbooks. A lot of downscale voters don't like redistributive parties for many reasons.

Which brings us to the number one reason that the median voter, and people below the median, don't try to soak the rich. Morality.

No matter if their morality is deontological (taking from others is inherently bad) or utilitarian (taking from others produces bad results generally), enough people know that redistribution is wrong to counter-balance the median voter theorem whereby more people are below the average income than above it. If you consider that the self-interested voter hypothesis (whereby people vote instrumentally to enrich themselves) is widely discredited, it becomes clear that redistribution, at least the more naked forms of it, has little chance even in societies with great disparities in annual income.

Actually it is not that surprising that McElwee misses the moral angle, given the fact that he is advocating straight bare-naked redistribution. Such an idea may be theoretically interesting to public choice students (where it is referred to as "redistribution as taking"), but reflects the morality of a child who has yet to learn not to steal.

Another reason he misses is the golden-egg effect. Give voters credit for seeing beyond the immediate future. They have some sense that rich people will leave, or stop taking risks, or just work less if half their money is taxed to fund giveaways to people simply based on annual income. To continue to be able to tax the rich to fund important or justifiable programs is a reason not to kill the goose to just take the eggs once at a higher rate.

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.

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