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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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Link: http://finance.yahoo.com/news/how-your-boss-will-run-your-life-in-a-few-years-165905475.html

It's pretty typical of left-wing types and their unwitting acolytes to generally have a positive view towards government and a negative view towards businesses. When you read an article like this, you begin to see how upside-down that thinking is.

It reads like a slackers lament, woe will be us drones who corporate overseers expect to work and will find ingenious and technologically inexpensive ways to find out if we are actually doing anything. Newman's opening sentence, "You might think the typical workplace is pretty Orwellian these days," may get smirks from twenty-somethings who compare corporate culture to college, but to those of us who have worked in corporate America for many years, that thinking is upside-down. It's not so much that corporations are any less draconian than they used to be, but the opportunities for employees to disengage from work and engage in play are increasing like never before. Internet, phones, and social media provide outlets for non-work behavior on-the-job just about anywhere, and the temptation to substitute facebook time for productivity time does not let up. To the extent that companies are trying to correct those impulses, it is only deserved.

Newman outlines some specific gripes. Let's look at them:

  1. Companies will monitor employees like lab rats. Actually, I would expect that apart from your own home, private businesses will be one of the few places where government CCTV cameras won't be able to intrude. Newman says the monitoring will ostensibly be about employee health, but really be about productivity. I think people would welcome checks on productivity, as long as firms are up-front about it.
  2. Performance will be computed like an SAT score. Hip, hip, hooray! I've been dying for this. Who among us is not dismayed by the lack of objectivity and specificity of today's "performance reviews"? What better way to avoid workplace discrimination? Slackers may hate it, but most people want their employers to see them shine and recognize it. Pay for performance. Justice has arrived!
  3. Corporate indoctrination (aka brainwashing) will intensify. In the future, "rigorous recruitment processes [will] ensure new employees fit the corporate ideal"? Another winner! Who wants to work where they don't fit in?
  4. Contract employees will displace full-timers.More flexible labor contracts make for a more efficient labor market. The easier it is for a company to let you go, the easier it is to get hired. You won't be stuck in that job you took right out of college because you were always afraid of losing your benefits or being on unemployment for eons. It will be like someone being on a set meal plan (like in prison) suddenly able to make a different meal every night.
  5. Specialized skills will continue to bring top dollar. That's because specialization (i.e., the division of labor) is what gave us the wealth of nations. If it brings top dollar to business, business should pay top dollar for it.
  6. Workers with commonplace skills will struggle. Who would complain about this? I know: the guy who says, "I just want a commonplace skill." Humanity thrives on individuality, and now they will be paid for it!

Really, only the first of these has any kernel of "run your life" in it. Numbers 2, 3, and 4 are technological breakthroughs that will be more beneficial and helpful to workers than not. And numbers 5 and 6 are natural and necessary matching of value and compensation.

But the real point is, ultimately businesses only have as much power over you as you give to them, while ultimately governments have unlimited power over you despite your input. Your employment (if you work for someone else's business) is a mutual agreement that you give your time and effort towards some business goal in exchange for a bundle of pay and benefits. If a business wants a stricter interpretation of "your time and effort," and you don't like that, you can always leave. In most cases you can leave them more easily than they can leave you: workers have more power than employers in this regard. Government, on the other hand, you can not leave. Though some may say that it's really not that easy to quit one job and move to another, it is orders of magnitude more difficult to quit one country and move to another. And while there are thousands of employers to choose from (not to mention the possibility of creating wealth yourself), there are less than 200 countries. And given that an individual has a one-in-a-gazillion chance of having his single vote affect an election, the idea that democracy allows you to change your government is a joke.

If Mr. Newman or anyone else is afraid of having their lives controlled, government is the real menace. Imagine an employer who says, "you have to put 12.4% of your pay into my pension plan, where I determine the investments, that pays next to nothing, that won't pay at all if I go bankrupt or have other commitments, and where I can change the rules and increase your contribution at any time". Now imagine that that is every employer. Now realize that it is your government, in what is its least unpopular program. Who's the bogeyman now?

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

An excellent article about the problem of poverty and the problem of undeserved guilt.

Caplan contrasts American poverty, which is largely (or somewhat) deserved, with African poverty, which is largely (or somewhat) undeserved.

Even if you maintain that African and American poverty are both forgivable, then, you should still concede that African poverty is more forgivable than American poverty. While the African poor could sharply improve their lives with better choices, even perfect choices are not a reliable way for them to escape poverty. Poor Americans, in contrast, can reliably avoid poverty with basic prudence: finish high school, work full-time, delay child-bearing, and stay sober. "I couldn't escape poverty even if I tried" has to be more forgivable than "I could have escaped poverty if I tried, but I sadly wasn't raised to try."

An excellent closing paragraph:

In addition, though, blame helps us correctly identify "problems." If your suffering is entirely your own fault, the main "problem" is not your suffering. The main problem is that the guiltless may feel guilty for failing to help you. Thus, if a woman catches her husband cheating and resolves to divorce him, the morally relevant danger isn't that the husband will feel sad, but that the wife will feel sorry for him. If your habitual drunkenness destroys your family and career, the morally relevant danger isn't that total strangers fail to help you, but that the fallout of your vices will weigh on the consciences of innocent passersby.

Here's a riddle for you.

Andy and Brett both started work at the same age. They both earned the same starting salary. They both got a $1,000 raise every year. Both are still alive and still work for the same company they started with, and have no additional income. But Andy earned twice as much as Brett last year. How is this possible?

If you are confounded by this puzzle, don't despair. You fall into the same trap that intelligent and even Nobel-prize winning economists fall into all the time. Hint: Brett is following in Andy's footsteps. Give up? Andy is 60 years old and Brett is 30.

The obvious fact that annual income statistics will necessarily include people who are young and old, inexperienced and experienced, part-time and full-time, is routinely ignored or dismissed in the one area of economics where differences in income among people are the primary focus: studies of economic (in)equality.

Consider another mental exercise.

Everyone in society E starts work at age twenty with a salary of $20,000. Everyone receives a raise of $1,000 each year (so that, their annual salary is always their age times $1,000). They retire at age 60, earning $60,000 in their final working year. In total, each and every person earns $1,640,000 in their working lives.

Economically, is E an equal society? One could argue that this society is by definition equal. Let us also assume that there are an equal number of people in this society of each working age (one million people of age twenty, one million of age twenty-one, etc.). Now, if in any given year we gather the annual income statistics, we shall find disparities of income: one million people earn $20,000 while another million earn $60,000, with many levels in between. Using annual income statistics without separating for age gives the appearance of an unequal society. The Gini coefficient (a summary statistic used extensively in economic equality studies, where 0 is perfect equality and 1 is perfect inequality) is 0.171. But in our fictitious society of equals this is terribly misleading. Yes, there is income inequality, but it is because people are at different stages of their lives and careers, not because of any permanent or chronic economic disparities among them. If we measured income on a lifetime basis, rather than (the somewhat arbitrary) annual basis, the Gini coefficient would be zero.

Of course, some of the inequality measured by annual income statistics is due to differences among people apart from age. Some people make more money over their lifetime than others. Even though lifetime income differences may be deserved, or may be the result of choices these individuals intentionally make, it is this kind of disparity that concerns most people.

What if a researcher told you that there were vast differences of height among people in America? Would you be thinking, "Oh, that's because babies are short and adults are taller"? Probably not. A normal person would think that fully grown people had height disparities. Would you expect that the researcher had limited the data to adults? You probably would. And the researcher probably would. Yet this is the same sort of problem involved with annual income data. When economists make claims about inequality based on data that is not normalized for age, they are either being incompetent or deceptive. They are making people believe there are differences between the skilled and unskilled, or the lucky and unlucky, or the "rich" and the "poor," when much of these differences are between the old and the young—differences that most everyone will experience.

How much of measured inequality is due to age and how much is due to real differences in lifetime earnings? American economist Morton Paglin tried to figure this out. In a ground-breaking journal article, he took the standard inequality summary statistic, the Gini coefficient, and broke it into two parts: (1) the "Age-Gini," which measured income differences attributable to age, what he called "intrafamily" inequality; and (2) the "Paglin-Gini," which measured real income differences among people, what he called "interfamily" inequality. He suggested that use of cross-section data such as annual income statistics should be broken down in this way to separate innocuous inequality due to annualized statistics from true inequality which reflects differences among people apart from age. Further, he found that "estimates of inequality have been overstated by 50 percent" and concluded that "the overstatement of inequality has lent false urgency to the demand for rectification of our income distribution."

That article was published in 1975. Paglin's method was subjected to criticism, both from a technical standpoint and a conceptual one. There was concern that the method did not make the split cleanly enough, and critics said that in any case inequality in the broader sense (inclusive of differences due to age) was what economists wanted to measure. The dispute between Paglin and his critics was never resolved. As a result, through confusion and willful ignorance, Paglin's method was shelved by most economists who measure inequality, though it does reappear from time to time.

Some might say that the absolute size of inequality, as measured by statistics like the Gini coefficient, is not really at issue. Rather, how the Gini of one country compares to another, or the increase in the Gini in recent years, is the real story. Yet here we have a fallacy of division. Increases in overall annual income inequality do not necessarily imply an increase in true income inequality alone, or an increase in both age-income inequality and true income inequality of equal or similar degrees. It is possible that much of the increase in measured income inequality in recent years is due to age-inequality, i.e. that the ratio of average income of people in middle-age over income of people in their early 20s has been increasing. In fact, it is possible that age-inequality is responsible for all of the increased inequality, and that true inequality has not changed at all. Or that true inequality has actually decreased, and age-inequality increases have been more than total measured inequality increases.

Not only is age-related inequality innocuous, but we might even consider it good. I believe that the differences between these two components of inequality are so distinct that we might call the intra-family (age-related) component "good inequality" and the inter-family component "bad inequality."

Why is "good inequality" good? First, it his how we as individuals get richer, even if society on average does not. Consider again society E above. Would anyone in society E bemoan the development (e.g., through a technological breakthrough, or a better work ethic) of everyone getting a $2,000 raise each year instead of $1,000? And yet, the $2,000 raise is all age-related inequality that increases inequality measured by annual income statistics. Inequality, as measured today, will never be meaningfully reduced or eliminated unless people stop earning more. To achieve equality, as it is commonly defined and measured, there can be no raises, no higher pay for experience or seniority, no personal growth. That entry-level pay you got at your first job at Wendy's is all you can ever aspire to. Second, numerous studies have shown that people derive happiness from personal growth, and specifically income growth. But growth and inequality go hand-in-hand. In a society of differently-aged people, you can not have income growth without inequality. In a growing economy, the more inequality of annual incomes there is, the more growth there is. Ergo, to have happiness there needs to be annual income inequality due to age, i.e. good inequality.

Why is "bad inequality" bad? To the extent that it occurs, some may say that it simply reflects different efforts and abilities, that it is deserved. That may be true, or it may not. But it is hardly arguable that the differences in people's abilities or efforts that cause these inequalities are not lamentable. Some may argue that we should attack the causes of these inequalities, but not the symptom of inequality itself, while others may argue that we should redistribute income to ameliorate the symptom. But this kind of inequality is certainly the inequality that people have in mind when the topic is discussed, and it is this kind of permanent class inequality that is bemoaned, justly or not. Therefore, inequality among lifetime incomes may be considered a "bad inequality."

There is good reason to think that a large portion of measured inequality increases are due to age-inequality. One approach is to use age-cohort income data to see if income differences among age groups have been increasing. And they have. Consider the following graph constructed from US Census CPS income data:

The figures are in constant 2012 dollars. I included the entire date range (1974-2012) of the Census dataset, but let's look at the generally alleged time period of inequality expansion, 1980-2010. The 15-24 age cohort's average income has stayed essentially flat over this period ($14,265 to $14,305, an increase of 0.3%). But the more aged (and thus more experienced) wage-earners have seen substantial income growth: 25-34 saw 14.2%, 35-44 got 25.6%, 45-54 got 29.1%, and 55-64 got 41.9%. (These were the increases, over 30 years, of the average income for the age cohort, not for incomes of people within the cohort; those were much larger. For instance, people in the 15-24 cohort in 1980 would be in the 45-54 cohort in 2010, so the average income of those actual people increased from $14,265 to $51,712, an increase of 162.5%. That is some perspective for the "income stagnation" thesis. More on that in a later column.) What this shows, then, is that as the U.S. economy grows, people at the beginning of their working lives, with entry level experience, can expect the same pay for their unskilled jobs as people in that same position thirty years ago; and since it is entry level work, this is hardly surprising. But to the extent that people have more job experience, and are closer to the end of their careers, they have seen real rewards to their experience increase by a much greater amount than the premium for experience received thirty years ago.

To some readers, this should cause the metaphorical light-bulb to blink over their heads. The graph also shows that the cohort plots are bunched closer together in 1980 than in 2010. This (roughly) illustrates the inequality due to age in 2010 is greater than in 1980. And this inequality appears not because any one age group is losing out. Rather, it is because as people age they are making more money at a faster rate than they did in the past.

This is pretty solid evidence that at least some (and perhaps most) of the income inequality increase over the past thirty years is age-related and not "timeless" inequality among classes or individuals per se.

The age-income relation is a real problem for using standard annual income data when discussing income inequality or when deriving inequality summary statistics like the Gini. But it is not the only problem. Economists have also pointed to problems with using "market income" rather than "disposable income", i.e. using pre-tax and pre-benefit income data. They have pointed to problems with using "households" or "families" instead of "individuals" as the unit of analysis. Then there is the problem of including part-time workers along with full-time workers. Or the misuse of statistics, such as starting with cyclical economic nadirs and ending with cyclical peaks (among other deliberate tricks). All of these are valid criticisms. But the age-income relation is perhaps the biggest, least reported, and least appreciated problem for the income inequality hysterics. And while there are some economists who may intentionally ignore it, there are others who may be ignorant of it.

There is bad inequality and good inequality. Bad inequality is the differences between people's skills and consequent earning ability that results from differences in their education, effort, and serendipity. Though these differences may be deserved, it is hard to argue that they are not regrettable. Good inequality is the opportunity for growth that results in all people earning more as they grow older with more experience and productivity. It is mathematically impossible to have income growth in a society of differently-aged people and not have greater inequality.

Progressives often use a ladder analogy to describe what they see as growing inequality: "the rungs on the ladder are getting farther apart." The analogy is not inapt, but their interpretation is. Everyone generally starts at the bottom rung of the economic ladder. But increases in annual income inequality, where they do occur, may be the result of people climbing more rungs faster than in the past. Progressives see a rise in annual income inequality and see what they want to see: an ugly story of one class in society dominating another. But what if it simply means that people are getting more rich over their lifetimes than they were before? What if it is the beautiful story of people starting off poor and becoming rich?

Link: http://cafehayek.com/2014/08/quotation-of-the-day-1084.html

A good insight by Don Boudreaux in the attached Cafe Hayek post.

I think most free-market advocates attuned to the inequality debate are aware of the argument that Hayek makes in the quote from LLL that Boudreaux includes in his post: forcing equality of condition demands treating people unequally; you can have equality before the law or equality of condition, not both.

But Boudreaux matches this up with the notion that economic injustice will result in political upheaval. While Piketty and other leftists are quick to claim that economic inequality begets economic injustice begets political strife, Boudreaux says redistribution is economic injustice which begets political strife. And, he claims the modern world is more susceptible to political revolution from the latter than the former:

n short, if large differences in monetary incomes and wealth are likely to spark revolution, why will not the inevitable differences in the way that governments must treat people in order to make them more materially equal not spark revolution? As I assess matters, the latter differences are far more likely than are the former to give rise to revolutionary anger.

Witness Eastern Europe, Soviet Union, so forth.

Link: http://www.marketwatch.com/story/congress-wants-to-revive-lower-advertised-airfares-2014-07-30?siteid=rss&rss=1

Who could be against that?

The reason the VAT gets so much resistance from the right-wing is that the way it is done in Europe, business are forced to give you a net price only. If they gave you a retail price and added the tax on at POS (like we do with sales taxes in America), people wouldn't slouch into 20% VAT rates, they would be outraged. Same principle applies here.

Link: http://townhall.com/columnists/jackkerwick/2014/07/30/jesus-todays-church-and-inequality-n1871555/print

I thought this was a pretty good article, explaining that Christian sympathy for the poor does not translate into advocacy for the political project of reducing inequality.

Sympathy for the poor does not necessitate envy and hate for the rich. It doesn't even necessitate begging from the rich, let alone taking from the rich by force. It means giving of one's own time, resources, wisdom, and compassion in helping the poor and helping them help themselves.

Link: http://www.stlouisfed.org/on-the-economy/wealth-inequality-bigger-problem-us-income-inequality/

I have often pointed out the importance of the age-income relation in understanding income inequality. About a third of income inequality is due to age and life-cycle effects, and the greater these effects the better. So income inequality is a mixed bag of good and bad (article on this forthcoming).

So I noted with appreciation the St. Louis Fed's linked article (summary) that came out today about a study they did on income and wealth inequality in the U.S.

The income inequality takeaway was nothing new, apart from a short-hand metric they used to quantify it:

Waller and Ricketts used a simple measure to see how income inequality in the U.S. compared to other countries around the world (which will be discussed on this blog Thursday) and how it compared to wealth inequality in the U.S. They used the ratio of the median income of the top 10 percent of the income distribution ($203,900) divided by the median income of the bottom 10 percent ($9,900). “The resulting ratio of 21 quantifies the substantial divide between the rich and the poor in the U.S.”

And they measured wealth inequality the same way:

Using income distribution, Waller and Ricketts calculated the same ratio as used above. The median net worth of the top 10 percent of the income distribution ($1.194 million) divided by the median net worth of the bottom 10 percent ($3,100) yields a wealth inequality ratio of 385, notably higher than the ratio of 21 for income inequality.

Of course, to those familiar with the literature, there is nothing surprising that wealth inequality (as measured this way or in any way similar to income inequality) is wider than income inequality. However, the summary appears to indicate that this apples-to-apples comparison means that "wealth inequality is a much greater dilemma" than income inequality, which is just not the case. Wealth inequality has been and will always be more pronounced than income inequality. That alone does not make it a greater dilemma.

But I was pleasantly surprised to see the following:

Waller and Ricketts explained that some wealth inequality is a function of age, allowing people to maintain a stable path of consumption over their life spans. Young people have little wealth and tend to be unskilled, so they borrow money for school and their first home. In middle age, they start paying down their debt and accumulating wealth while entering their peak earning years. As they get older, they start spending down the wealth they accumulated. Waller and Ricketts said, “This natural life cycle of wealth accumulation hasn’t changed much, and most Americans will progress along a similar path. While the process is the same for most people, at any one point in time you’re going to have relative inequality: poor, middle and rich based on age alone. While this natural inequality doesn’t account for the entire wealth disparity across the population, it is important to understand that some inequality isn’t inherently bad.”

Thank you. Now, can we have the rest of the economics profession apply this same clear thinking to income inequality?

Link: http://www.usnews.com/opinion/economic-intelligence/2014/07/28/obamas-minimum-wage-data-leads-to-a-misleading-conclusion

Prof. Don Boudreaux and Liya Palagasvili note a new tack from minimum wage proponents:

Earlier this month, President Obama seized upon fresh data from the Labor Department to argue for a higher minimum wage. According to the president and a subsequent Associated Press report, the 13 states that raised their minimum wages in January of this year are now enjoying, on average, faster job growth than the other 37 states.

The conclusion that Obama (and each of the many media outlets that breathlessly repeated this finding) wants us to draw is that a higher minimum wage not only does not price some workers out of jobs, it positively enhances workers’ job prospects.

And then they skewer them:

It’s true that employment in the 13 states that raised their minimum wages in January was, on average, 0.85 percent higher in June 2014 than it was in December 2013. It’s also true that, over this same time span, employment in the 37 states that did not raise their minimum wages rose by only 0.61 percent. (These are the very figures that minimum wage proponents are now trumpeting.) But if we shorten this time span by just one month — looking now at January 2014 to June 2014 — we get a very different picture.

In June, the number of jobs in the 13 minimum-wage states was, on average, only 0.59 percent higher than it was in January, while, for the same time period, the number of jobs for the 37 states that did not raise their minimum wages was higher, on average, by 0.69 percent. Job growth since January (the month that these 13 states actually hiked their minimum wages) was slower in states that raised the minimum wage than in states that did not.

We don’t report these particular statistics as evidence that raising the minimum wage slows job growth. Our point instead is that finding simple trends, especially those that are highly sensitive to the time period analyzed, and then drawing policy conclusions is scientifically illegitimate. Using such a method makes it far too easy to cherry-pick from the data those numbers that support your preferred policy. So just as our comparison of January 2014 to June 2014 employment data is no evidence that raising the minimum wage reduces job growth, Obama’s comparison of December 2013 employment data to June 2014 data is no evidence that raising the minimum wage enhances job growth.

What happened was they cherry-picked the data. They found a drop of statistics that favors their cause in a sea of unfavorability ... and then claimed that their opponents were drowning.

Why don't the media do this fact-checking?

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