Kruse Kronicle

Calmly Considered: Scarcity or Abundance-- Which Is Our World?

Last month, Dr. Allan Bevere and I got together to discuss the nuances of "scarcity and abundance" from theological perspectives. Too often people from the two fields talk past each other with unfair characterizations on this topic. Our conversation hopefully shines some light.

Calmly Considered: Global Living Conditions-- Better or Worse?

Are global living conditions getting better or worse?

There are three simultaneous truths:

1. Living conditions are awful for a great many.
2. Living conditions are better than they ever have been, by far.
3. Living conditions can be improved and the trajectory is in a positive direction.

Join Allen Bevere and me as we calmly consider global living conditions.

Calmly Considered: Socialism vs. Capitalism-- Getting Beyond the Memes

"In this month's episode of "Calmly Considered" Michael Kruse and I discuss the complex realities of socialism and capitalism that are so often distorted by simplistic social media memes, caricatures, and politicians seeking re-election."

Thanks to Allan Bevere for hosting another fun discussion. Below the video are three articles related to our discussion you may find useful.

"Capitalism vs. Socialism is the Wrong Way to Frame Today's Economic Debate" https://www.bushcenter.org/catalyst/capitalism/streeter-reeves-capitalism-vs-socialism.html

 

"Capitalism vs. Socialism: What's the Difference?" https://www.investopedia.com/ask/answers/020915/what-are-differences-between-capitalism-and-socialism.asp

 

"Capitalism with Scandinavian Characteristics" https://www.startribune.com/capitalism-with-scandinavian-characteristics/505916412/

Calmly Considered: Economics, the New Testament, and the 21st Century (in podcast & videocast)

This is the first installment of a once-monthly series called Calmly Considered, in which Allan Bevere and I will be discussing topics related to faith and economics. In this episode, we discuss Peter Oakes'  Empire, Economics, and the New Testament. We barely scratch the surface but hopefully some meaningful dialog. 

The Numbers And Economics Of COVID-19

Last Thursday, Dr. Allan Bevere interviewed me about my thoughts on the coronavirus pandemic and the economic costs. Thanks for an enjoyable time, Allan. Be sure to follow his blog Allan R. Bevere, Faith Seeking Understanding. 

Billionaires do NOT pay an overall tax rate lower than the bottom 50%.

Two months ago, the New York Times uncritically ran an article claiming billionaires pay lower tax rates than the bottom half of American earners. (I see this and related pieces circulated by my progressive friends.) The unsubstantiated and yet-to-be-reviewed data came from economists Emmanuel Saez and Gabriel Zucman, a tease to promote their soon-to-be-released book. Their claim is contrary to other economic entities that monitor and study taxation. Once the book was released, the methodology became public. The methodology conflicts with the methodology they used just a few years ago in peer-reviewed research.

I am not a tax expert, but I have tried to follow the discussion. Econofact gives one of the best summaries of the claim. (Are Taxes (And Also Spending) Progressive?) A couple of observations:

"In their book, Saez and Zucman reach conclusions that are at odds with a variety of previous studies. … What explains the difference? Relative to previous estimates, the current choices and assumptions made by Saez and Zucman generate higher estimates of income among high-income households, and of taxes on low-income households."

"Considering only positive tax payments gives an incomplete picture of the tax system. Some taxes are "refundable" and actually offer credits, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). These credits can create negative tax liability for households. For example, if a household pays $1000 in a given year but receives $1,500 in an earned income tax credit, on balance, they have paid negative taxes. Conventional analyses count programs such as the EITC and the CTC as negative taxes, but Saez and Zucman exclude these credits from their analysis, making the tax system look more regressive than other studies show."

Taking this a step further, assume you have an income of $10,000 and tax credits that net you $5,000. You have $15,000 to spend. Assume the local sales tax is 10%. You pay $1,500 in local sales taxes. But these economists don't count the credits. So the tax rate is effectively 15% because the denominator by which you divide $1,500 is $10,000, not $15,000. It artificially inflates the tax burden even more. They do other "unique" things, like count health insurance premiums as taxes. 

On a further note, these two economists are key economic advisors to the Elizabeth Warren presidential campaign, and this book was written and released to support her political objectives, not as a scholarly analysis.

I am not defending billionaires or the present tax system. A factual claim was made concerning billionaires and taxes. Is it true? Outside of these two economists writing with a clearly partisan objective and using unorthodox methods, there is no support for the claim. A disdain for billionaires and a passion about inequality does not make the claim accurate.

The Keynesian Revolution and Our Empty Economy: We're All Dead - Book Review

The Keynesian Revolution and Our Empty Economy: We're All Dead  (Quotes are from the e-book version.)

Is economics value-free? Can it be? In the nineteenth century, economics emerged alongside other social sciences, aspiring to apply the scientific method to study human behavior. Economists distinguish positive and normative economics - positive being descriptive and normative being prescriptive. The latter requires value judgments, making it beyond the realm of science. While an economist may wish to offer their perspective on what should be done, economics eschews prescriptive behavior. But is that the way economics works?

In The Keynesian Revolution and Our Empty Economy: We're All Dead, Dr. Victor Claar, professor of economics at Florida Gulf Coast University, and Dr. Greg Forster, Director of the Okonomia Network at Trinity International University, argue the story economists tell about themselves does not match reality. Simply reading the book title, one might assume this is another installment in the ongoing battle between Keynesianism economics and other economic theories. It is not. The authors say something transformative happened in the 1930s with the rise of John Maynard Keynes' economics, misshaping the discipline. Virtually the entire discipline (including the free-market Chicago school and Austrian economics) battles about a means to an end from within the Keynesian framework. The authors conclude with thoughts on a reforming agenda but first take us on a rich historical journey.

"Economics" Before the Nineteenth Century

Until the nineteenth century, "economics" was part of moral philosophy - political economy. Philosophers and theologians made normative appeals for economic behavior. Human existence has ultimate purposes. They inseparably connected their normative prescriptions to teleological realities. The authors identify a succession of three ethical paradigms related to economic thought over the millennia.

Nature paradigm – Classical philosophy. "What sets classical thought apart is the idea that nature has purposes, and human excellence is fulfilling those purposes." Wisdom comes from correctly understanding nature and its purposes. From this wisdom, we shape our daily affairs, including economic activity.

God paradigm – Judeo-Christian theology. "It began with the assumption that human beings are created by and under the authority of God and are placed both within and over nature by God. Their economic needs and behaviors are structured by God's design in creation and are being restored to that design through the redemption of the world in Christ, so conformity to God and his purposes was their standard for economic thought."

Reason paradigm – Born in Enlightenment philosophy. "It began with the assumption that human beings are rational, and their economic needs and behaviors can be understood and arranged rationally, so conformity to reason and its purposes (they understood 'reason' to include moral reason, including teleology or purposes) was their standard for economic thought."

Claar and Forster revisit these three historic paradigms throughout the book, demonstrating their normative and teleological components in contrast with Keynes emerging philosophy in the 1930s. The authors identify a fourth paradigm with Keynes, the Consumption paradigm. So how did the Consumption paradigm emerge?

The Beginning of Modern Economics

As scholars labored to establish economics in the late nineteenth century, there was substantial intra-disciplinary conflict about how to proceed; differing on what roles historicism, theory, and science should play. (The book gives some great history.) John Neville Keynes, John Maynard Keynes' father, assumed the role of peacemaker. He popularized the "positive versus normative" frame and worked to move scholars beyond endless squabbling toward productive research, thereby gaining credibility for the discipline.

Despite these ambitions, economics was not born in a vacuum. From the 1890s to World War I, societal gatekeepers saw themselves as stewards of a moral and cultural order, envisioning evermore progress and human improvement in keeping with the Reason paradigm. Decades before, John Stuart Mill had introduced homo economicus, human beings as rational, utility-calculating machines. Mill and these later economists retained at least a sense of the progress teleology, even as they began to apply the scientific method to evaluating behavior. Homo economicus was a knowingly simplified anthropology, but with research, one might imagine revision and nuance could be brought to bear over time. A variety of social changes in the years before and through World War I rocked confidence in the progress narrative, leaving the discipline adrift. Enter John Maynard Keynes.

The Keynesian Revolution

We frequently view John Maynard Keynes as a tedious academic. In reality, Keynes was a core member of the highly influential Bloomsbury Group in London, a collection of intellectuals and artists including Leonard and Virginia Woolf, E.M. Forster, Clive and Vanessa (Woolf) Bell, Duncan Grant, and Lytton Strachey. In Keynes's words, they embraced an "immoralist" philosophy devoted to pursuing pleasure. "Though they weren't sure what the highest forms of pleasure might be, their sense was that they could be found only among their greatest loves—in intimate relationships and in things like the arts, theater, and music—rather than in more pedestrian forms of enjoyment."

The Bloomsbury Group was disdainful of traditional values. This included values like diligence, frugality, and self-control, found in the Reason paradigm. Wealth accumulation and consumerism were dehumanizing influences obstructing the pursuit of pleasure. However, they believed only a select few could pursue pleasure as they envisioned. A materialistic bourgeois existence was the best for which the rest of humanity could hope. It was the task of the elite to shepherd the masses toward this end as the elite went about their higher pursuit of pleasure. Claar and Forster walk us through how Keynes' economics reflects this philosophy, but I will jump to a couple of takeaways for the sake of brevity.

The most revolutionary effect of Keynes' influence is his reshaping of means and ends. Mill introduced homo economicus as a rudimentary construct to aid in economic inquiry, not a characterization of human essence. Within Mill's construct was an assumption that we will rationally discern and pursue certain ends. Reason is the means for choosing between various courses of action to achieve those ends. These ends include teleological ends.

Keynes retains the idea of homo economicus but with substantial revision. With Keynes, there is no teleological purpose to guide economic behavior. "Animal spirits" drive human behavior, not reason, in pursuit of meaningful action. Reason is how each individual can best satisfy animalistic desires. Consumption to meet these desires takes center stage. For Keynes, homo economicus is not simply a methodological construct. It is an anthropological given. We must base economic policy on this premise.

In the General Theory [Keynes seminal book), economics abandons its nineteenth-century ambition to moral neutrality. It no longer seeks a place alongside chemistry and physics as a detached, disinterested, purely positive observer. It becomes, once again, a practical discipline with a moral vision.

But now the moral vision is radically different. Instead of the virtue, piety, or the progress of humanity, the moral vision of the General Theory is an animalistic homo economicus whose only economic goal is to satisfy his own consumption appetites. …

Another aspect of Keynes' influence is his introduction of "the economy." Before Keynes, economics was microeconomics. It was focused on how individuals, firms, and other players make decisions. Keynes introduced macroeconomics, focusing on the aggregate economic phenomenon for a nation or other large societal entity - money supply, interest rates, aggregate employment, gross domestic product, etc. Macroeconomics dominated the discipline to the point that when people hear "economics" today, they think of macroeconomic concepts.

For Keynes, "The economy" is a machine-like entity employed by elites like himself and members of the Bloomsbury Group in transmuting humanity to an elevated state. Keynes was sympathetic to socialist aims, but he writes:

It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.

The authors note:

Keynes shares Marx's goal of giving the state control over our economic lives, which is to say, over all the most intimate and important decisions we make. He just thinks the state can accomplish this control without seizing ownership of assets.

The authors paraphrase Keynes' view this way:

In an ideal state, we would 'transmute' human nature, raising people not to care how much money they end up with after playing the "game" of money-making. However, for now we need to keep the game going. If we stop, we'll have nothing to eat; the economy runs not on productive work but on satisfying consumer appetites. Thus it is the responsibility of government to keep the game going. Keeping the game going involves all the players being highly motivated and playing to win—"strongly addicted to the money-making passion." The wise and prudent statesman will therefore "manage" human nature, keeping it in a state of socially beneficial greed , rather than attempt to "transmute" it toward real selflessness, at least so long as we live in the current state and not the ideal state.

Keynes has a vision of where he wants to take feckless humanity. His superior wisdom and that of people like his Bloomsbury peers will lead us there. Pragmatically, it must be done with manipulation. Moreover, some will never be transmuted. Keynes had an answer for that. He was chair of the British Eugenics Society from 1937-1944. He deemed eugenics to be the most important branch of sociology.

Keynesianism and Its Rivals

Claar and Forster explain Keynes was not particularly eloquent in expressing his ideas. Articulate acolytes popularized his economic constructs. For decades, Paul Samuelson, Nobel economist and author of the leading economics textbook, was probably the most important figure in advancing Keynesian ideas. However, these advocates made substantial qualifications to give us what we know as Keynesianism today.

The Keynesian advocates muted Keynes' crusading vision and reclaimed the idea of economics as a value-free science. However, they continued to embrace the view that people are bundles of appetites driven by animal spirits – Keynes' version of homo economicus. The goal should be to maximize consumption, enabling people to satisfy their appetites. Economists should guide the economy machine in these pursuits. This was the Consumption paradigm. It effectively institutionalized Keynes's homo economicus while eschewing teleological judgments.

The Chicago School (and the older but smaller Austrian School) emerged as the primary competition to Keynesian economics, rejecting Keynesian interventionism in favor of free market systems. They resisted "economics" as purely about large aggregate concepts and called for greater attention to microeconomic decision-making. Claar and Forster write:

However, the attention-grabbing conflict between these schools conceals a deeper uniformity. Both counter-revolutions accept most of the key elements of the Consumption paradigm. Most importantly, they accept Keynes' redefinition of the purpose of economic systems: to maximize consumption possibilities. They also accept Keynes' redefinition of Mill's homo economicus, which lay at the heart of the new focus on maximizing consumer satisfaction—they accept the instrumental rather than substantive understanding of rationality, and they accept the reversal of the relationship between gaining wealth and enjoying wealth.

The Keynesian constructs became so dominant that even schools that emerged to challenge aspects of Keynesian economics have internalized core Keynesian concepts.

The Consequences

The consequences extend well beyond an intra-disciplinary dispute. To a degree unparalleled by other social sciences, economics has succeeded in exerting influence over public policy and commerce, which has had ripple effects on other societal institutions. With varying degrees of resistance, homo economicus is largely how we institutionally treat our existence.

The problem, the authors would argue, is that we are not homo economicus. Human beings are meaning-makers. We see ourselves inside teleological narratives. We want not only to experience pleasure but also to participate in activities with lasting significance. We have not only consumption preferences but also production preferences. The impact of homo economicus is a world with greater prosperity, but that is largely vacant of meaning. In an existential sense, "we are all dead." This lack of meaning has people restless and increasingly impatient with societal institutions. A consequence is the rise in populism ranging from Donald Trump to Bernie Sanders, amassing power by feeding on palpable anger and frustration.

The empty economy produces polarization, because our daily economic activities no longer convey meaning and purpose (leaving us to seek those things in extreme movements) and because our daily economic activities no longer establish shared, public moral commitments (leaving us convinced we have no common ground with our neighbors). 

A Way Forward

"What would it look like to study economics on the assumption that people really do have higher purposes in life, but that we need not agree about everything concerning those purposes?"

The authors argue that the way forward is to escape the Consumption paradigm with its "animal spirits" anthropology and revisit teleological and anthropological assumptions. We may not thoroughly agree on every value across nations and cultures or even within them, but our values have much more in common than we may think. Some things are good whether everyone chooses to do them.

* People have production preferences as well as consumption preferences, including a desire to participate personally in the production of the intrinsically good. A sustainable economic life must account for both types of preferences (production and consumption) at the individual and cultural level.

* Production preferences can also be understood as stewardship preferences, meaning a desire to leave the world with more intrinsic good than it had when we arrived. A sustainable economic life must account in complex ways with the long-term time frames within which people make cost-benefit calculations, at the individual and cultural level.

* People are substantive reasoners who have the right and responsibility to discern the intrinsic good for themselves and participate personally in its production. A sustainable economic life must make this personal process of discernment and participation, not impersonal aggregate metrics, the goal of economic policy and discourse.

To conclude the book, the authors write:

In the long run, we are all dead—but life will go on when we are gone. We all know this, and in our economic lives we do not always behave as shallow, short-term consumers who don't care what we leave behind. If the discipline of economics wants to understand economic behavior as it really is, it must come to terms with the moral reality of human life. To ignore normative and teleological realities is to ignore the human, and to ignore the human is strange way to conduct a scientific study of how humans behave.

If we do not care what kind of world we are leaving, our economic systems will continue to be wracked by moral anxiety and the outrage it produces. Nationalists and socialists have their own reasons for wanting to block any movement toward a moral renewal that would restore confidence in our systems, but the rest of us should be seeking such a renewal with all the energy that the urgency of our situation demands. A return to economic vitality must begin with a restoration of confidence in our economic systems and practices, on the basis of a sustainable moral consensus for a pluralistic society.

We love economics. We love it because it matters—a lot. Tough new questions that overturn old certainties are already being asked in the discipline. We look forward to finding out what comes next.

Assessment

In short: teleology matters. Claar and Forster pack a lot into this book. My summary only scratches the surface. It is well worth the read for economists and those who think more broadly about economics and values. While I work to be conversant with economics and the history of economic thought, I am not an expert in either of these fields. People with better bona fides must evaluate the veracity of details presented in this book. Yet based on what I know, the overall argument rings true.

The history of how the Consumption paradigm came to dominate economics - with economists simultaneously fixating on consumption and claiming to be value-free - is helpful. There is no way to do social science without anthropological models and value assumptions. Economics is no exception. Homo economicus may be useful as a methodological tool for aspects of economic research, but it is insufficient as a model for grasping the complexities of human decision-making. I do not think that economics has so much rejected teleology, as it has uncritically embraced a teleology that is inadequate and subhuman.

I sense a discussion has been building on this topic in recent years. As with other social sciences, there seems to be an ongoing clash between those pursuing a grand unified theory and those who prefer more modest research into micro-level behavior from which larger models of human behavior can be derived. Unlike other social sciences, economics is unique in that "economics" and the concept of "the economy," a machine that can be directed toward particular ends by skillful elites, has gained considerable credibility in broader society. That likely makes challenges to macroeconomic models more difficult, but the importance of economics in policymaking also underscores the importance of getting underlying models of humanity right.

The book's most critical point is that "we are all dead." Human beings have a desire for the transcendent, to be a part of something meaningful, to pass on a legacy. Teleology matters. To use the authors' words, there is a production preference and a consumption preference. The Consumption paradigm is dehumanizing in that it robs people across economic strata of meaning-filled work. Resurrection of meaning in daily life will have to come from moral institutions outside of economics, but we cannot realize that ambition of understanding human decisions without economics. If economics is a study of human behavior, can it be said to be to accomplish its mission if it ignores the production preference aspects of human decision-making?

I appreciate the authors' advocacy for finding common ground on teleology across human cultures. Maybe a first step is for those of us invested in moral institutions to clarify our own values. As someone who has invested decades of service to Mainline Protestantism, it strikes me that there is a profound need for Christian theology to engage economics genuinely and respectfully and to move away from what all too often is a sophomoric and adversarial posture. Repeatedly, I encounter theologians and Christian thought leaders pontificating on economic issues, demonstrating they have not made the most rudimentary attempts to grasp basic economic concepts or represent those concepts faithfully. Theologism is all too common, but that is a conversation for another day. For now, we have this thought-provoking tome by Claar and Forster as a point of engagement. It is well worth the read.

 

Why Population Control Is Not The Answer to Climate Change

Population control is sometimes championed as a way to fight climate change. Bernie Sanders recently raised this idea. The world population is growing. There are 7.7 billion people today. According to United Nations estimates, there will be nearly 11 billion in 2100. Extra people mean extra CO2 emissions. While two children per woman may seem reasonable, women in the poorest countries can average five or sex. Sanders and others believe this excess fertility is why the world population is growing. Fewer children will mean less CO2. Unfortunately, this perception is decades out of date.

We are already at "peak children." Globally, there are 680 million children under the age of five. U.N. projections show a peak of 700 million in about 2060. There are projected to be 650 million children in 2100, fewer than today. Yet the overall population will grow by nearly 50%. How can that be? The compounding effect of people already born will drive population growth over the next century, not excessive birth rates.

Trends in Fertility

Assume women have two children over their lifetime. They replace themselves and one other. Population size will be stable from generation to generation. (The actual replacement fertility rate for an affluent nation is 2.1 children per woman.) Throughout history, the total fertility rate has been six or seven children. One-quarter of children died before their first birthday. Another sizable percentage died before age five. Many of those who made it past five died before marrying and having children. High fertility rates ensured a couple of children would survive to continue the family.

As affluence emerged and health practices changed (first in Europe and then spreading elsewhere), more children survived into adulthood. We needed fewer births to perpetuate a family, but it took a while for customs related to fertility to adjust downward. That lag between declining death and fertility rates led to the population explosion that began two centuries ago. That growth accelerated into the twentieth century and continues into its final stages today. As recently as the 1960s, the global total fertility rate was as high as five children per woman.

Today, the global total fertility rate is about 2.4 and dropping, but the rate is not evenly spread worldwide. Europe, the Americas, China, Japan, and other regions have fertility rates below the replacement rate, well below it in many nations. A handful of smaller poor countries have fertility rates of five or six, but they also have some of the highest child death rates. The world average is fast approaching the 2.1 replacement rate. However, because the global fertility rate has usually been higher than the replacement rate for most of us now living, it means the cohort of people born one year is usually larger than those born the previous year. So let us think about what that means for the future.

The Compounding Effect in Future Fertility

To keep things simple, assume going forward that we birth the same number of children each year, the death rate stays the same, and no one lives past one hundred years. Now say there are 100,000 people aged 100. By next year, all will have died. The group that was 99 will now be 100. Because more of them were born, there will now be maybe 105,000 people 100 years old. After two years have passed, the new group of 100 hundred-year-old people will be the people who are 98 years old today. They will be a still larger group. That will continue for one hundred years.

At the other end of the age continuum, we have the largest number of children ever born in a year and the largest age cohort alive. A year later, this youngest age cohort will replace a smaller cohort a year older than them. But keep in mind that the number of women of childbearing age will increase yearly for the next forty-five years. Therefore, each year the total fertility rate will need to fall slightly below the replacement rate if the population is to stabilize. It can then rise to the replacement rate after forty-five years. This will continue until 2120, when each age cohort is the largest age cohort that has ever existed for that age. This is the primary driver of population growth in the future, but there is at least one other key factor. (Clearly, I am oversimplifying to illustrate my point. We are not down to replacement rate fertility, so there is still some marginal population growth due to "excess" fertility.)

Furthermore, actual global death rates are not constant. They are dropping. People are living longer. So not only is each age cohort larger than before, but it is also living slightly longer. This, too, contributes to population growth over the coming decades.

Therefore, we would need considerably less than replacement-rate fertility to limit global population growth substantially. In fact, there are credible projections of a population peak of fewer than nine billion. Demographers once assumed transition to low fertility and death rates would stabilize at about the replacement rate. Instead, the fertility rate has dropped well below the replacement rate in nearly every affluent nation, in some cases nearly one child per woman. This may look like a good thing from the narrow view of CO2 emissions. From a holistic standpoint, many social scientists are troubled. Depopulation can be as destructive to human well-being as overpopulation.

The Depopulation Problem

A vibrant society needs a critical mass of productive workers relative to its dependents (primarily children and the elderly.) This is the dependency ratio (dependents divided by workers multiplied by 100). With excessively low fertility rates, it is possible to have a great imbalance with many seniors and too few workers to provide for society. We have already seen that current U.N. projections say we will have nearly the same number of children now as in 2100, but the overall population will be almost 50% larger at eleven billion. That growth is a consequence of a burgeoning number of elders. A smaller population of nine billion may mean fewer total people but an even worse dependency ratio.

Modest help may come from lengthening the number of years people work or a higher participation rate in the workforce for working-age people but at some point, that will be insufficient. Then consider the possibility of medical breakthroughs that cure cancer or dramatically reduce heart disease. That means more people living longer, intensifying the dependency ratio imbalance.

As an ever-shrinking number of people (potentially a minority of the population) is expected to support everyone else, improving living standards will begin to stall and possibly reverse, making the world ripe for any societal dysfunctions. It will not take eighty years for this challenge to become real. Japan is already struggling with these issues. China is already headed down this road. One can envision China opening up to immigration from the remaining regions with the highest fertility rate and investing its resources in growth economies. However, if every nation is headed to fertility rates well below the replacement rates, it is only a temporary fix. The dependency ratio for a world with eleven billion people is already a challenge. The only way to get a peak population under nine billion people is to achieve fertility rates well below replacement rates, substantially intensifying the dependency ratio imbalance just a generation or two down the road. (For more detail, see the Brookings' piece, How will we cope when there are too few young people in the world?)

Decoupled Economic Growth

At the most basic level, climate policy must be about economic growth decoupled from CO2 emissions. Population growth is one issue driving this need for economic growth. But also consider people are advocating for a $15 living wage for every worker in the United States. That would put nearly every U.S. worker in the top 10% of wage earners in the world. Meanwhile, despite astonishing improvements in human well-being around the world and the dramatic reduction in extreme poverty, there are still hundreds of millions of people in extreme poverty. A couple billion more have more stable lives but still live well below standards we would consider tolerable. If it is a matter of justice that everyone in the U.S. has a $ 15-an-hour living standard, then it is only just that all citizens of the world have something approximating that standard. The only way that happens is through economic growth. Measures like population control are shortsighted and potentially disastrous. The principal mission is decoupling economic growth from fossil fuel consumption and other disruptive measures like decoupling land use from agricultural production.

Why I Have Never Met a Neoliberal

I recently rediscovered this excellent blog post I read last year, The problem with "critical" studies. Joseph Heath's observations about the term neoliberal are spot on. This explains why I have never met one, and likely neither have you.

"For instance, I had noticed a long time ago that the term "neoliberal" functions as the most important piece of cryptonormative vocabulary in critical studies. For those who don't know, here's the basic problem with "neoliberalism." It's a made-up thing. It's just a word that Foucault popularized, to talk about economic ideas that he didn't really understand. There is no group of people out there who actually describe themselves as a neoliberals. Because of this, there are no constraints on what it can refer to, and there is no one to answer any of the criticisms that are made of it. Compare that to terms like "conservative" or "libertarian." Because there are real people who call themselves "libertarian," if you write something that criticizes libertarianism, an actual libertarian might write back and contest what you say. With "neoliberalism," on the other hand, you can say whatever you want, without any fear that a real-life neoliberal will write back and contest your claims – because there are none. As a result, people who use this term in their writing are basically announcing, up front, that their intended audience is the left-wing academic echo chamber. After all, if they wanted to engage with people outside that chamber, they would have to address one or more of the ideologies that are actually, and self-consciously, held by people outside that chamber. (In this respect, people who criticize neoliberalism are the cowardly lions of academia. If you think you've got what it takes, why not go out and find an actual right-winger to argue with?)

The fact that there are no self-identified neoliberals in the world does, however, have one desired consequence. Use of the term limits one's audience to those who share the underlying normative judgment, allowing academics to feel completely unanimous in their belief that neoliberalism is a bad thing. As a result, no one ever feels obliged to say what is so bad about it."

(Photo: Wikimedia Commons)

Socialism Is A Freighted Word According To David Bentley Hart. So Why Is He Defending It?

Theologian David Bentley Hart wrote an op-ed Can We Please Relax About 'Socialism'. The byline says, "Only in America is the word freighted with so much perceived menace." As he frames it, socialism is simply about creating a more equitable economy, not about recreating the Soviet Union or Venezuela. This is what people like Sanders and Ocasio-Cortez are promoting.

What Hart is describing is social democracy, not socialism. Democratic socialism is the systematic transformation of capitalism (private ownership and market exchange) into socialism (state ownership and control of the economy), while social democrats embrace capitalism, looking for ways to make it more equitable. Social democrats and democratic socialists may dovetail on some incremental policies, but they have divergent missions.

Let's assume Sanders, Ocasio-Cortez, and others want a more equitable market system of government. Let's go further and agree with Hart's questionable protest that this is all socialism means. Hart acknowledges that "socialism" is a freighted word. Why are they using a freighted word to describe their position? People promote similar policies all over the world without using this language and have done it for generations in the United States. They choose the word precisely because it is inflammatory. They are populist demagogues.

Trump and the Freedom Caucus go out of their way to frame things to maximize enemy outrage while communicating to the base that they are the reasonable ones at war with the crazies. That is why Sanders, AOC, and Hart say "socialism." In their communication strategy, the hyperbolic Fox News response to "socialism" is not a bug. It is the objective. It maximizes their enemies' ire and stokes their base's commitment. As with Trump, the specific policy prescriptions are not serious but serve to antagonize enemies and keep a base, giving them power from which to accomplish other agendas.

Hart is wrong about Europe. While there are cadres of democratic socialists throughout Europe, there are no democratic socialist governments. There are a great many social democracies. "Socialism" is not a widely embraced term. Sweden experimented with democratic socialism from the 1970s to the 1990s before returning to their present social democratic capitalism.

Furthermore, Scandinavian countries are among the most free-market countries in the world. Their generous social safety net is oriented around capitalist self-interest, not a sense of altruism. They designed their nets to maximize the productivity of people in their capitalist economy. This is not Democratic Socialism.

The Democratic Socialists of America, to which Sanders and OAC give allegiance, has as their stated aim not to create a more equitable capitalism but the incremental and systematic replacement of capitalism with socialism. So, while I have no doubt the Fox family goes to hyperbolic lengths to stoke fears, their base criticism is legitimate. This is the Left's Tea Party/Freedom Caucus moment. The answer to our problems is a winsome person who can mobilize a sizeable majority to embrace prudent solutions, not another populist fringe to counter the right's populist fringe. Unfortunately, all I read of Hart is an audition to be a Franklin Graham or Jerry Falwell, Jr., in the Left's version of the Freedom Caucus.

(If you want to be more informed about comparative economic systems, I recommend this excellent piece by economist Timothy Taylor, Capitalism with Scandinavian characteristics. This Finnish-American offers insights into the role of the welfare system in Nordic countries, What Americans Don't Get About Nordic Countries. And from Denmark prime minister, Denmark's prime minister says Bernie Sanders is wrong to call his country socialist.)

European (Scandinavian) Capitalism is not Democratic Socialism (But is that what matters?)

Mall of Scandinavia. Wikimedia: Arild Vågen

I continue to reflect on the hype in the U.S. about "democratic socialism." I think most people who use the term are saying they want a market economy with a greater emphasis on social justice (open to varying definitions) and promoting basic human well-being. When pressed to give an example, they typically point to Scandinavian economies. Yet these countries do not consider themselves socialist in the least. In fact, Sweden embraced a move toward true democratic socialism from the 1970s until the mid-1990s. Living standards dropped, debt increased, and the overall economy fared poorly. They have now embraced market economics while providing a carefully crafted welfare system. People truly committed to democratic socialism, while appreciating some features of Scandinavian economies, find them an unsuitable compromise. These countries might be characterized as social democracies, but they are not democratic socialist. As the Democratic Socialists of America party makes clear, they seek the eventual elimination of capitalism (market exchange and private ownership) through democratic means over time. These Scandinavian economies are, at best, a step along a progression to an ultimate socialist end. Being clear about our terms is important, but my concern runs deeper.

I just came across an excellent piece about comparative economic systems, Capitalism with Scandinavian characteristics. Economist Timothy Taylor writes it. You may know him from the Great Courses class on economics. Taylor tackles some of the issues I just raised and more. But I particularly resonate with the closing paragraph of his piece.

"It seems inaccurate to me to label the Scandinavian model of capitalism as "socialism," but arguing over definitions of imprecise and emotionally charged terms is a waste of breath. What does bother me is when the "socialist" label becomes a substitute for actually studying the details of how different varieties of capitalism have functioned and malfunctioned, with an eye to what concrete lessons can be learned."

Bingo! My concern with the "democratic socialist" label is not a predilection toward etymology. We need to be clear about what we mean. If your vision is something akin to Nordic capitalism (aspects of which I find very positive), using terms like "socialism" and "democratic socialism" does not advance productive discussion.

Please read Taylor's piece. Good stuff!

Democratic Socialism IS Socialism

This article, Here's the difference between a 'socialist' and a 'Democratic socialist' has been circulating as an explainer as to why "democratic socialism" is different from socialism. Democratic socialists merely believe the government should provide a range of services – like health care and education. People circulate this article as evidence that people who suggest that democratic socialists want to end private property and usher in a state-run economy are either fearmongers or ill-informed. Did they read the article?

As the economist author notes (and as any standard dictionary will tell you), socialism at its core is state control of the economy and the virtual elimination of private property. Democratic socialism is committed to the ultimate socialist ideal but works to achieve it incrementally through democratic processes. I want to point out two quotes from the article, highlighting a key word in caps:

"In the present day, "Democratic socialist" and "socialist" are often treated as interchangeable terms, which can be confusing given Democratic socialists don't necessarily think the government should IMMEDIATELY take control of all aspects of the economy."

"As the DSA's website states: "At the root of our socialism is a profound commitment to democracy, as means and end. As we are unlikely to see an IMMEDIATE end to capitalism [i.e., market exchange and private ownership] tomorrow, DSA fights for reforms today that will weaken the power of corporations and increase the power of working people.""

Immediate means not now but eventually. Democratic socialism has state control of the economy and the abolition of private property as its endgame. Democratic Socialists of America say so in their own words! And fully-realized socialism inescapably leads to totalitarianism, not democracy.

Despite sympathizing with the notion of a greater state role in meeting basic needs, I will adamantly contest socialism. Market exchange is paramount to generating and sustaining human well-being. It has led to the "great divergence" from a world where the overwhelming majority had a subsistent existence during short difficult lives into a world where extreme poverty is on the verge of elimination. Life expectancy has more than doubled recently, and well-being indicators are improving on nearly every front. Furthermore, I'll say that the freedom to own property, truck and trade, partner with others in productive enterprises, and reap the rewards is a basic human right. Not absolute, but a right, nonetheless.

Advocating for a social safety net that cares for the most vulnerable is a matter of social justice. Advocating for private stewardship of property and market exchange is as well.

Recycle Or Not? The Need To Test Good Intentions

This article from October 2015, asks, Are We Recycling Too Much?

Our study made the first known attempt to combine these various costs and benefits into one analysis to estimate what recycling rate is best. Our conclusion was that recycling up to 10% appears to reduce social costs, but any recycling over 10% costs the environment and the economy more than it helps. The environment and economy suffer as we transport some recycled materials to destinations as far afield as China.

These provocative results certainly require confirmation from future independent and objective research before broad policy goals can be adjusted. Also, many of the benefit and costs associated with waste disposal and recycling vary across regions of the country and world, and thus optimal recycling rates may also vary. For example, we used municipal cost data from Japan for this study because the United States and most European countries do not keep such data.

But if these results hold for other developed countries, then society should collectively rethink how to approach recycling.

And

But the substantial environmental benefits outlined above of using recycled materials in production vary substantially across materials. Aluminum and other metals are environmentally costly to mine and prepare for production. Paper, too, is costly to manufacture from raw sources. But glass and plastic appear relatively easy on the environment when manufactured from raw materials.

These differences are vital. Although the optimal overall recycling rate may be only 10%, the composition of that 10% should contain primarily aluminum, other metals and some forms of paper, notably cardboard and other source of fiber. Optimal recycling rates for these materials may be near 100% while optimal rates of recycling plastic and glass might be zero. To encourage this outcome, a substantial subsidy offered only on those materials whose life cycles generate positive environmental benefits should be applied.

The article illustrates once again that whether we are talking about tax cuts, living wages, rent control, tariffs, or recycling, good intentions unsupported by empirical evidence can be counterproductive.

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Number of Job "Wanters" is About 14 Million (Not The President's 94 Million)

Last night, the president said there are 94 million people "out of the labor force" needing a job. No.

The number of people wanting a job is about 14 million people.

Let us do the math:

• US Population = 330 million
• Population age 16 and older = 254 million (non-institutionalized)
• Adult population in the labor force = 160 million (7.6 million unemployed)
• Adult population not in the labor force = 94 million (254-160=94)
• Adult population wanting a job but not looking = 6 million (aprox.)
• Adult population not wanting and not looking for a job = 88 million
• Adult population wanting a job, looking or not = 14 million (aprox.)

Who are the 88 million adults not wanting and not looking for a job? Some examples:

• High school students ages 16-18
• College students
• Stay at home parents
• Adult caregivers
• Retired people
• Disabled people

The president said 1 in 5 working prime working age adults (25-54) are not working. Well, yes. This includes:

• Stay at home parents
• Adult caregivers
• Disabled persons
• People who retired early
• Older adults who have gone back to school

The unemployment rate for this age segment is 4.1%, which means 1 in 25 people who want a job and are actively looking for one are "not working."

The number of people without a job and wanting one, whether they are looking or not, is about 14 million people. Trump overstates the problem by nearly seven-fold. (94/14=6.7) He has been called on this repeatedly, yet he continues to repeat an incorrect number that would flunk a high school economics student. One of two things is true. A) He is incredibly ignorant of the most basic of economic concepts and is unwilling to listen to correction or B) he is being willfully and cynically deceitful. (Some of his mistakes can likely be attributed to off-the-cuff remarks that, while inaccurate and unwise, may just be mistakes. This issue has been raised multiple times.) Neither bodes well for becoming a swap-draining renewal president.

Sources:

Trump's Address to Congress

Bureau of Labor Statistics

 

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History Doesn't Repeat Itself ...

... but sometimes it rhymes.

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Polarity Management Versus Problem Solving

Question. When it comes to breathing, do you prefer inhaling or exhaling?

I have asked this question many times, and it always elicits a chuckle. Clearly, if you choose one over the other, you end up dead. And if your body decided that this ongoing struggle between inhaling and exhaling was a problem to be solved, you would end up dead. Breathing is not a problem to be solved. It is a polarity to be managed.

Polarity management has a much wider application than biology. It applies to a wide range of features in human systems. Economist John McMillian (Stanford) wrote an insightful book called, "Reinventing the Bazaar: A Natural History of Markets." McMillian makes the case that the never-ending struggle in political economy has been to find the right mix of centralization and decentralization. If power becomes too centralized, then it will become oppressive and destructive. Yet, without centralized power, local tyrants emerge, injustice proliferates, and warring factions square off, sending society into chaos. In this sense, political economy is a polarity to be managed, not a problem to be solved.

Writing in the Atlantic, Eric Liu makes an important observation (emphasis mine):

"We don’t need fewer arguments today; we need less stupid ones.

The arguments in American politics today are stupid in many ways: They’re stuck in a decaying two-party institutional framework; they fail to challenge foundational assumptions about capitalism or government; they center on symbolic proxy skirmishes instead of naming the underlying change; they focus excessively on style and surface.

Americans can do better. Remember: America doesn’t just have arguments; America is an argument—between Federalist and Anti-Federalist world views, strong national government and local control, liberty and equality, individual rights and collective responsibility, color-blindness and color-consciousness, Pluribus and Unum.

The point of civic life in this country is not to avoid such tensions. Nor is it for one side to achieve “final” victory. It is for us all to wrestle perpetually with these differences, to fashion hybrid solutions that work for the times until they don’t, and then to start again.

"America is an Argument." Bingo! You will find the same is true in all human structures, including church and family. Part of facilitating better discussion and arguments is appreciating we are often wrestling more with polarities and less with virtue and vice.

Socialism. You Keep Using That Word …

Many Americans, especially progressives, are now "socialists." The rise of Bernie Sanders has had much to do with it. Yet, when I hear them talk, I keep hearing Inigo Montoya, "You keep using that word. I do not think it means what you think it means."

According to Marxian theory, socialism is a transitional economic system between capitalism and communism. Capitalism (i.e., private property ownership and the distribution of goods and services through market exchange) will run its course. One day, a classless society with no private property will evolve. The workers will hold things in common, and goods will be distributed according to need.

Some Marxists believed they could accelerate this evolution through violent revolution and the imposition of communist principles. We saw that tactic attempted several times in the last century. Others believed economic evolution should run its course. People could work for greater social justice within the system as they methodically brought every aspect of the economy under the control of the government, eventually ending private ownership of the means of production. From there, it would be just a few more steps to communist utopia. This transitional system is socialism.

Socialists called themselves "social democrats" or "democratic socialists," advocating "social democracy." The emphasis here is democracy. Since communism is inevitable, there is no need to short-circuit the process through violent revolution. People will choose their way into communism.

During the last century, it certainly became clear that relying on markets and philanthropy alone was not an optimal strategy for a just and flourishing society. Government has assumed control of some functions to ensure the broader welfare of citizens in all of today's capitalist societies. These functions have been "socialized." But the broader context is still private property and market systems. "Socializing" selected functions is not a tactical progression toward communism. This is welfare capitalism.

However, a funny thing happened to socialism along the way through the last century. It was mugged by reality. It has become clear that socialism is fatally flawed. Market systems provide a real-time information feedback loop, matching ever-changing demands with an ever-changing supply. Markets empower countless strangers to benefit each other through specialization and exchange. There is simply no way a centralized entity can manage the production of goods and services. Assuming those with sufficient information could be trusted to have the wisdom and ethical courage to make optimal decisions, the endless churn of supply and demand makes sufficient information utterly impossible. (Other insurmountable barriers exist, but that is for another day.) The "inevitable" road to communism was wrong.

Most political parties, variously named "democratic socialists" or "social democrats," have become advocates for expanding welfare capitalism. For precisely this reason, the word "socialist" has fallen out of favor in many regions. So, in short, we have learned that neither pure libertarianism nor socialism is workable. We are all welfare capitalists now: We rely primarily on private ownership and market exchange and quibble about what societal functions might be better if socialized.

So let us look for a minute at Bernie Sanders, the "socialist" icon for hipster intellectuals. Sanders talks of making America more like Denmark –  or the Nordic economic model. Are Nordic countries socialist? Finnish-American journalist Anu Partanen, author of The Nordic Theory of Everything: In Search of a Better Life, recently noted:

The problem is the way Sanders has talked about it [Nordic economic model.] The way he’s embraced the term socialist has reinforced the American misunderstanding that universal social policies always require sacrifice for the good of others, and that such policies are anathema to the entrepreneurial, individualistic American spirit. It’s actually the other way around. For people to support a Nordic-style approach is not an act of altruism but of self-promotion. It’s also the future.

In an age when more and more people are working as entrepreneurs or on short-term projects, and when global competition is requiring all citizens to be better prepared to handle economic turbulence, every nation needs to ensure that its people have the education, health care, and other support structures they need to take risks, start businesses, and build a better future for themselves and for their country. It’s simply a matter of keeping up with the times.

In a recent address at Harvard University, Denmark's prime minister, Lars Løkke Rasmussen, made this observation:

I know that some people in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy. … The Nordic model is an expanded welfare state which provides a high level of security to its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish.

Are you getting that? A robust welfare system is a means to a robust market economy! And that raises another issue: markets.

Paraphrasing Partanen, progressive Americans see Nordic social policies as anathema to market capitalism. They argue that allowing corporations to rig the system in favor of a few, allegedly an inherent feature of capitalism, is social injustice. It makes no sense. If corporations are rigging the system, then it is not truly a market! The socialist answer would be for the government to assume ownership of corporations. If you just want to end inordinate privilege for big business, then what you are advocating is – wait for it – freer markets!

In reality, there is no such thing as "free markets." Market economies are based on the premise that absent fraud, misinformation, and externalities, people will make the best and most efficient decisions about what to consume and produce for their own needs, mediated through price information generated by supply and demand. Producers who produce well will be rewarded, and those that do not will eventually fold. The reality is that there is always incomplete information, and there are nearly always some externalities inherent in trade. Taxes and regulations are also necessary. But generally speaking, trade unencumbered by planners or by gamers of the system leads to higher living standards.

Big-business capitalists use political power to block competition and preserve economic power. They constrain markets. Writing 240 years ago, Adam Smith wrote, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Free markets are the answer to powerful economic players conspiring with the government to choke off competition and preserve their privileged status through subsidies, tariffs, and onerous legislation.

Socializing some aspects of society is not antithetical to market economics. We cannot deliver some social goods through markets, or at least not deliver them well. But we must have a robust market economy to generate tax revenue and sustain socialized services. Denmark is the top-rated country in the world for business and trade. The other Nordic countries are right behind them. This is not the Sanders model.

Sanders wants to institute protectionist policies, raise taxes on corporations (the USA is already on the high side), set a minimum wage 50% higher than other developed countries, and do a host of other trade-unfriendly measures. Meanwhile, taxes for all but the wealthiest will stay low (taxes in Nordic countries are high for everyone.) He wants to expand the safety net golden egg while strangling off the goose that lays it. He thrives on populist anti-market and anti-business sentiment. Curiously, Clinton is probably closer to the Nordic model, embracing an expanded and smarter welfare model while championing (at least in the past) trade and business. Yet she dismisses Denmark as contrary to this vision. Partanen speculates Clinton knows her plans are more like Denmark than are Sanders' but avoids association with the Nordic model because of public misconceptions. I think that is true.

So why are so many supposedly well-educated people now calling themselves socialists? One big reason is surely economic illiteracy. Going back to at least the 1930s, conservatives warned of "socialism" with the advent of Social Security. Same with Great Society programs in the 1960s - now with ACA and talk of single-payer healthcare. To some degree, left leaners just decided to own the moniker. Simultaneously, enough libertarian-leaning folks falsely used free markets to rationalize away ANY government involvement in anything; so many lefties just owned this misconception of "free market." They want a more robust version of welfare capitalism and less big-business domination. Economic illiteracy is my generous reading of why people call themselves socialist. But I have a less generous reading as well.

Partanen writes:

Americans are not wrong to abhor the specters of socialism and big government. In fact, as a proud Finn, I often like to remind my American friends that my countrymen in Finland fought two brutal wars against the Soviet Union to preserve Finland’s freedom and independence against socialism. No one wants to live in a society that doesn’t support individual liberty, entrepreneurship, and open markets. But the truth is that free-market capitalism and universal social policies go well together—this isn’t about big government, it’s about smart government. …

Like the Finns, countless Americans fought to free America from the totalitarian ideologies that emerged in the last century. They largely won. They considered it a legacy to pass on to future generations of America and the world. Rightfully so. So why would people seeking a more robust welfare state and less big-business domination call themselves socialists?

Inigo Montoya is wrong about many of the new "socialists." They know exactly what the word means! They know the emotion it stirs. The misuse is intentional. Calling yourself "socialist" is the left's version of Trumpist politics: Stir up tribal rivalry with incendiary language. Raise your verbal middle finger to your opponents. When they call you on it, roll your eyes incredulously that people would accuse you of advocating totalitarianism. "After all, we just want to improve the safety net and end rein in corporate greed like any good social democrat." So, to my "socialist" friends who cannot fathom the origins of anger in Trump voters, part of the answer is staring at you in the mirror. Sow the wind and reap the whirlwind.

If your sole concern is fomenting tribal political battles, then the above is mostly irrelevant to you. Calling yourself a socialist is effective for your purposes. If you care about clarifying the truth to pursue a greater good for humanity, you will use language faithful to what is being described. Whether through illiteracy or insolence, "socialism" fails that standard. You really need to stop using that word.

 

 

Rosling Univeristy (How to be smarter than a chimp)

Are you smarter than a chimp? There is a good chance you are not when it comes to knowledge about global socioeconomic trends. For years, Swedish global health expert, Hans Rosling, has been giving Ted talks and making presentations about global trends. One of his favorite teaching tools is to ask people a question like this:

Globally, over the past 20 years, the rate of extreme poverty has:

1. Doubled.
2. Stayed the same.
3. Decreased by more than half.

Now chimps will randomly select, giving each answer a 33% chance. Yet when Rosling asks audiences, at least half will say A, a sizable percentage will say B, while a few will say C. Yet C is the correct answer! This is the case with one variable after another. Audiences routinely score worse than chimps, choosing the most negative option.

An old adage states, "It isn't what we don't know that gets us in trouble. It's what we know that ain't so." That we routinely pick the wrong answer more often than chimps shows that we have bias.

In the Ted talk, How not to be ignorant about the world, Hans' son Rosling notes that part of the problem is our education system. Teachers go to college at a particular point in time and learn the state of the world at that time. But they tend not to learn about ongoing developments. The data has often been hard to come by and hard to interpret. So teachers are biased by what they learned years ago. (Reporters have the same problem.) But there are other factors.

During our evolutionary history, our brains became wired to notice threats. Hunters walking through the brush who were attentive to the possibility of tigers lying in wait likely survived those who went about carelessly enjoying a beautiful day. So when we reflect on broad human trends, we fixate on perceived threats. What was useful for us in the wild is counterproductive as we try to interpret socioeconomic trends. If you want to outscore a chimp on an exam about global well-being, Ola Rosling suggests that you must drop your predispositions and adopt these four rules of thumb:

1. Assume most things are improving.
2. Assume most people are in the middle of a distribution, not a binary of rich and poor.
3. Assume social development precedes becoming wealthy. (Don't assume that a population must be rich before meeting basic social needs.)
4. Assume you are exaggerating the threat if the topic is something you personally fear.

Additionally, Hans, Ola, and others have been working to build the Gapminder website to provide you with data that can be presented in meaningful ways. But one of the most important contributions the Roslings have made is their collection of entertaining and informative videos. In this post, I include every video I can find with a brief annotation. (I'll add more as I find any.) Many videos overlap or cover similar data but are all well worth viewing. So here is your resource for becoming smarter than a chimp. Don't say I never gave you anything.

(This link also has links to most of these videos, including some shorts not listed here: Gapminder Video)

Hans Rosling's 200 Countries, 200 Years, 4 Minutes (2010)

If you are just getting acquainted with Rosling, I'd begin here. This four-minute presentation gives you a quick sense of what he is talking about.

 

Hans and Ola Rosling: How not to be ignorant about the world. TED June 2014

This is the second video to watch. The front half is Hans making his case that the world is improving, and the back half is Ola explaining, as I recounted above, why we are so disinclined to see positive change.

 

Hans Rosling: The magic washing machine. TED December 2010

This is the third one to watch. This is one of my favorites. While fully embracing the concern about the environmental impacts of economic growth, Rosling shows the importance of economic growth through the story of the washing machine.

 

THE REST ARE IN CHRONOLOGICAL ORDER

Hans Rosling: The best stats you've ever seen. TED February 2006

The TED presentation that kicked it all off. He focuses on the positive changes underway in the world. He points to his efforts to liberate, integrate, and animate data and to find ways to present data the public finds understandable.

 

Hans Rosling: New Insights on Poverty. TED March 2007

Rosling shows that social development tends to precede economic development. He addresses the issue that, unfortunately, economic development has always been based on fossil fuels. Higher yields, technology, and markets are key to ending poverty, but more dimensions like human rights, environment, governance, economic growth, education, health, and culture need our attention. The ending has a great surprise!

 

Human Rights and Democracy Statistics- Gapminder c. 2008

Rosling describes why human rights are so hard to describe and evaluate.

Source

Yes they can! - Gapminder c. 2008

Rosling explains that poor nations will one day become prosperous, and we should welcome that.

Source

Poor Beats Rich in MDG Race - Gapminder c. 2008

Rosling shows that countries that have developed from poverty to well-being have done so faster than Western nations. Poor countries today can make the transition much quicker because of what previous countries have learned.

Source

What stops population growth? - Gapminder c. 2008

Small families are the key to ending population growth, and the key to small families is childhood survival.

Source

Hans Rosling: Insights on HIV, in stunning data visuals. TED February 2009

Uses Gapminder data to show nuances in how AIDS has spread and what it takes to defeat it.

 

Hans Rosling: Let my dataset change your mindset. TED June 2009

This is the third video you should watch. Rosling deconstructs the dichotomy of wealthy and developing nations and challenges the idea of thinking in sweeping terms like "Africa."

 

The Joy of Stats with Professor Hans Rosling - Gapminder c. 2010

Rosling shows how making data available and animating empowers people to make better decisions, sometimes without realizing they are using statistics.

Source

Hans Rosling: Asia's rise -- how and when. TED Nov 2009

Rosling forecasts when China and India will catch up with the USA and UK.

 

 Hans Rosling: Global population growth, box by box. TED June 2010

 Rosling says that child survival is the new green. This video explains why.

 

Hans Rosling: The good news of the decade? We're winning the war against child mortality. TED September 2010

Rosling breaks down the remarkable trends in child mortality. Education of women accounts for at least 50% of the drop.

 

 

Hans Rosling: Religions and babies. TED April 2012

Religion is not a factor in family size. There is no significant difference between Islamic and Christian countries regarding births per woman. The defining difference is economic well-being.

 

 DON'T PANIC — Hans Rosling showing the facts about population. BBC November 2013

 A one-hour investigation into the dynamics of population growth using stories about real live families interspersed with Rosling's entertaining presentation of data.

 

Don't Panic - How to End Poverty in 15 Years. BBC September 2015

No embed is available.

You can view the video here.

Here is a link to a series of short videos on how to use development data visually.

An introduction to visualising development data

 

Minimum Wage, Nativism, and the Illiberal Roots of Progressivism

Virginia Postrel has an interesting article at Bloomberg, "Progressive and Racist. Woodrow Wilson Wasn't Alone," a book review of Thomas Lenoard's Illiberal Reformers: Race, Eugenics and American Economics in the Progressive Era. Here are a few key quotes:

The progressives believed, first and foremost, in the importance of science and scientific experts in guiding the economy, government, and society. Against the selfishness, disorder, corruption, ignorance, conflict and wastefulness of free markets or mass democracy, they advanced the ideal of disinterested, public-spirited social control by well-educated elites. The progressives were technocrats who, Leonard observes, "agreed that expert public administrators do not merely serve the common good, they also identify the common good." Schools of public administration, including the one that since 1948 has borne Woodrow Wilson's name, still enshrine that conviction.

Later, she writes:

Advocates similarly didn't deny that imposing a minimum wage might throw some people out of work. That wasn't a bug; it was a feature -- a way to deter undesirable workers and keep them out of the marketplace and ideally out of the country. Progressives feared that, faced with competition from blacks, Jews, Chinese, or other immigrants, native-stock workingmen would try to keep up living standards by having fewer kids and sending their wives to work. Voilà: “race suicide.” Better to let a minimum wage identify inferior workers, who might be shunted into institutions and sterilized, thereby improving the breed in future generations. ...

... Clark's theory is now a foundation of mainstream labor economics. In his day, however, it was highly unpopular. "A key element of resistance," writes Leonard, "was that many progressives were reluctant to treat wages as a price," rather than a right of citizenship and social standing. Informed by their beliefs in scientific racism, most progressives preferred wages to favor some groups over others: men over women, whites over blacks, and most prominently, native stock over immigrants.

Although they generally assumed black inferiority, progressives outside the South didn't worry much about the "Negro question." They were instead obsessed with the racial, economic, and social threats posed by immigrants. MIT president Francis Amasa Walker called for "protecting the American rate of wages, the American standard of living, and the quality of American citizenship from degradation through the tumultuous access of vast throngs of ignorant and brutalized peasantry from the countries of eastern and southern Europe," whom he described in Darwinian language as "representing the worst failures in the struggle for existence."

So restricting immigration was as central to the progressive agenda as regulating railroads. Indeed, in his five-volume History of the American People, Wilson lumped together in one long paragraph the 1882 Chinese Exclusion Act and the 1887 Interstate Commerce Act as "the first fruits of radical economic changes and the rapid developments of trade, industry, and transportation" -- equal harbingers of the modern administrative state. With a literacy test and ban on most other Asian immigrants enacted in 1917 and national quotas established in 1924, the progressives bequeathed to America the concept of illegal immigration.

The first paragraph is the preface for what follows. It relates to why I eschew the label "progressive" despite sympathizing with some aspects of what today's progressives espouse. In my estimation, "progressivism," then and now, contains substantial hubris - believing that we are justified in moving heaven and earth to bring about a brave new world through dispassionate logic, science, and a superior moral locus. Institutions and practices that have emerged through time as practical ways of making the world work be damned! I believe most change should be modest reform, not revolution. It is in this sense that I would claim the term conservative. We want to conserve the good as we seek improvement. We aren't that smart, and we aren't that noble when it comes to redesigning the world.

The minimum wage piece is particularly interesting. While the impact of minimum wage increases is notoriously complex and difficult to summarize with precision, most economists agree that substantial increases in the minimum wage dampen job growth over time. Some studies show, just as the early progressives logically surmised, that increased minimum wages negatively impact the employment of minorities, particularly young black men.

I am going to read this book!

6 New Rules of Business for the Next Industrial Revolution

Alan Murray at Fortune summarizes a lengthier piece by Geoff Colvin called Why every aspect of your business is about to change. Here is my summary of Murray's summary:

1. You don't need a lot of physical capital. ...

2. Human capital will matter more than ever. ...

3. The nature of employment will change. For the rest of your employees, gig work will grow. ...

4. Winners will win bigger, and the rest will fight harder for the remains. ... McKinsey Global Institute puts it: "tech and tech-enabled firms destroy more value for incumbents than they create for themselves."

5. Corporations will have shorter lives. The average life span of companies in the S&P 500 has already fallen from 61 years in 1958 to 20 years today. It will fall further.

6. Intellectual property knows no natural boundaries. 

Fascinating stuff.

Double-Edged Denmark: What we Should Learn

Denmark became a central topic during the Democrats' debate last week. Bernie Sanders calls himself a democratic socialist. Hillary Clinton loves Denmark but dismisses the idea that America can be Denmark. This inspired several articles by various commentators about the truth behind Denmark's economic model (or the Nordic model more generally.) Progressives like the high taxes, low inequality, and high government spending. Conservatives counter by noting that the Nordic countries rank among the countries highest in free trade and low corporate taxes. I've been linking articles on Facebook, but I thought this piece in Niskanen was the best. Double-Edged Denmark

Right-leaning arguments about the free-market marvel that is Denmark cut both ways. Denmark shows us that a much larger public sector and a much more robust social-insurance system need not come at the expense of a dynamic market economy. In other words, Denmark shows us that capitalism and a large welfare state are perfectly compatible and possibly complementary.

The lesson Bernie Sanders needs to learn is that you cannot finance a Danish-style welfare state without free markets and large tax increases on the middle class. If you want Danish levels of social spending, you need Danish middle-class tax rates and a relatively unfettered capitalist economy. The fact that he's unwilling to come out in favor of either half of  the Danish formula for a viable social-democratic welfare state is the best evidence that Bernie Sanders is not actually very interested in what it takes to make social democracy work. The great irony of post-1989 political economy is that capitalism has proven itself the most reliable means to socialist ends. Bernie seems not to have gotten the memo. But Bernie Sanders isn't the only one failing to come to terms with the implications of Danish social-democratic capitalism.

The lesson free-marketeers need to learn is that Denmark may be beating the U.S. in terms of economic freedom because it's easier to get people to buy in to capitalism when they're well-insured against its downside risks. That's the flipside irony of free-market "socialism. ...

... the reason the U.S. is lagging so far behind big-government Denmark on free trade, corporate taxation, ease of doing business, and more may very well be that the American safety net isn't good enough, and economic insecurity at the bottom and middle makes free-market policies a tough sell to anxious American voters.

I don't know that this is true. But, then again, libertarians and free-market conservatives don't know that it's not. Mostly, ideological American capitalists really badly want to believe it's not true that we're falling behind Denmark as capitalists because we're not redistributive enough. (I mean, the previous paragraph made me feel like I was channeling E.J. Dionne, which was … unsettling. But let us put away childish things.) Because if it is true, and social insurance and capitalism are complementary in this way, then champions of economic liberty will be forced to face up to the possibility that attacking the welfare state undermines support for laissez faire economic policy. Some of us might even be forced to choose between our love of capitalism and dislike of the welfare state. Awkward. ..."

Economic development always includes, in some broad sense, an embrace of trade and freedom from arbitrary interference in market activity. Yet when you look at the various nations that rose to affluence in the last century, diverse paths were taken to get there. The particular way toward trade and freedom seems less important than the stability issue. When the various players in the economy and society behave in predictable patterns, they can better predict and coordinate their behavior, even if the patterns are not optimal regarding trade and freedom. The imposition of trade and freedom that generates too much instability may be worse than simply staying with less effective economic models in the short run and letting things evolve.

This need for security and stability is a piece that most libertarians frequently undervalue at both the macro and micro levels. Economic historians will tell you that one of the pivotal developments in history (among several) was the emergence of limited liability. People could pool their resources and form joint ventures without risking their entire assets. Bad choices or unforeseen developments would not leave you destitute.

If the aim is a dynamic, risk-taking economy leading to high productivity and economic growth, then we need security and stability for citizens. With a basic safety net in place (here, I'm thinking mostly of a guaranteed minimum income as opposed to our wasteful welfare industry), people would become less risk-averse, knowing that trying new stuff doesn't lead to destitution if you fail.

But if libertarian conservatives are blind to security issues, progressives are blind to productivity and economic growth. Take the living wage debate. It is said that Walmart's low wages are possible because taxpayers subsidize the workers through the welfare system. Nonsense. Welfare support drives up wages. If the wages aren't at least comparable to welfare options, then why work?

Furthermore, while each business should have the aim of helping their employees flourish (improving their skills and providing opportunities to gain more responsibility in a safe environment), businesses are neither benefactors nor aid agencies. They are the institutions responsible for transforming matter, energy, and data from less useful forms to more useful forms on a sustainable basis. Sustainability means creating more value than the value of resources being used. Wages artificially set above the economic value contributed by labor are unfavorable to productivity and sustainability.

I know of no country, including the Nordic countries, which presumes that every job in every circumstance should provide a "livable" income "unsubsidized" by the government. The minimum wage is a temporary introductory wage people earn as they develop skills and experience. Few earn it for more than a period of a few months. Excessively high introductory wages compel businesses to adapt in ways that reduce the amount of this labor they use and decrease the opportunities for the least-skilled to find an on-ramp into the economy.

So while precisely replicating the Danish or Nordic model in a large, diverse nation like the United States may not be feasible, there are lessons here. To the degree the Nordic models have worked, they have done so because they have successfully married security and growth. This is a managed polarity for them, like breathing embraces both inhaling and exhaling. In America, our partisan factions grasp one polarity pole and demonize the other. To the degree they succeed, we are in deep trouble. That is the lesson I learn from double-edged Denmark.

 

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How Nobel winner's work links international aid and poverty

AP: How Nobel winner's work links international aid and poverty

Angus Deaton has dug into obscure data to explore a range of problems: The scope of poverty in India. How poor countries treat young girls. The link between income inequality and economic growth.

The Princeton University economist's research has raised doubts about sweeping solutions to poverty and about the effectiveness of aid programs. And on Monday, it earned him the Nobel prize in economics. ...

... He also hit upon what the Nobel committee called an ingenious way to discover whether families in poor countries spent less to care for daughters than for sons. Among other things, he studied how much households spent on "adult" items, such as beer and cigarettes, to see whether families consumed things differently depending on the sex of newborn children.

His surprising conclusion: They didn't.

Another Deaton study challenged the once-popular notion that malnutrition caused poverty by making people too weak to find work. He found the relationship worked the other way: Being poor caused people to be malnourished. ...

I'll need to read more.

Fair Trade: Does It Help Poor Workers?

From Marginal Revolution University.

'Great Decoupling' of Wages and Productivity Driven by New Technology

Huffington Post: 'Great Decoupling' of Wages and Productivity Driven by New Technology

Interesting chart.

The Illogic of "Buy Local" Bookstores

I recently linked an article about What Buy Local Gets Wrong. I quote Jason Soren's observation:

"If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller."

I came across this quote in a recent article on the surprising rise of independent bookstores.

When you buy a book at one [independent store], you keep your money in the local economy, something that appeals to many shoppers. You're also more likely to find a unique selection of curated books and personalized recommendations from the store's employees, who are usually enthusiastic evangelists of the written word.

The second sentence points to a critical issue. The only way you compete in business is to be the low-cost provider or offer a premium with your product, for which people are willing to pay more. The second sentence is a good example of stores finding a premium.

While the first sentence may accurately describe motivations for some people to shop at Indy stores, it is an irrational and destructive mindset. People say it is ALWAYS better to buy things in the local economy - books, in this case. Let's follow that logic for a moment.

First, let's say local is anything within ten miles of my house. I'm going to buy local, so I go to the indy bookstore and buy my book. Where did the bookseller get the book? Does the author live within ten miles? Was the paper in the book from trees grown and harvested in the community? Was the pulp producer located in the community? How about the chemical producers and processors who made the ink and glue? How about the printing company? If so, was the digital printing and binding equipment  - and all the parts - made and bought locally? How about the currency used to buy the book? I can go on, but you get my point.

If we were to apply "buy local" reasoning consistently, we would all be much worse off. All things being equal, buying a product simply because it is local is illogical unless you wish to diminish everyone's standard of living. No matter how big you define local as anything short of global, this is true.

God made us for community. Face-to-face community has irreplaceable benefits in some aspects of life, but we were also made for the community of commercial society. By specializing in our labor according to gifts and looking to the needs of others as reflected through price in a market exchange, we all benefit.

What "Buy Local" Gets Wrong

Ethics and Economic Education of New England: Buying local and blocking out the sun

Incorporating the lens of opportunity cost into decision-making is probably one of the contributions of economic thinking. Failure to include it often leads well-intentioned movements into destructive outcomes. Jason Sorens does a good job illustrating this with the "Buy-Local" movement.

So return to the example of the plastic bins [Buying bins for $1 at Wal-Mart vs. local for $2]. If I buy them from Wal-Mart, I save $1. I can use that dollar to buy other things or to invest in producing things (by saving). I am better off than if I buy the bins at $2 each from the local retailer, Wal-Mart is better off, and whoever would benefit from my spending or saving that extra dollar is also better off. Only the local retailer is worse off.

Do the gains from buying from Wal-Mart rather than the local retailer in this example outweigh the losses? Yes. To see this, imagine that everyone bought local, all the time. Cars, airplanes, software, clothing, food… everything would have to be made and exchanged in the town where you live. What would happen to everyone's standard of living? It would fall dramatically. (How many skilled airplane manufacturers does your town have?) The same principle applies at the national level, or any other geographic level you choose. If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller.

Now, that's an extreme example, but it illustrates the principle. Some things are impossible to make locally (airplanes). Other things are difficult and costly to make locally (shipping and retailing of plastic bins). A few things will be most efficiently and affordably made locally, and you will want to buy them locally without having to be goaded into doing so – they'll simply be the best products for the price. Goading your community into buying shoddier or more costly products just because they're local or American or whatever just makes your community poorer.

Read the whole thing.

The Danish Don't Have the Secret to Happiness

The Atlantic: The Danish Don't Have the Secret to Happiness

A common meme in economic discussions is that we must make America more like Scandinavian countries, where things are more equal, and people are happier. Denmark, the land of my ancestors, is often the poster child.

There is much to debate about economic policy, but few seem to question what is meant by "happy." "Happy" is one of those words everyone knows the meaning of until you try to define it. Happiness is shaded different ways in different cultures.

Michael Booth writes:

These rules set out the Law of Jante, a kind of Danish Ten Commandments, the social norms one should be aware of if one is planning a move to the north:

1. You shall not believe that you are someone.
2. You shall not believe that you are as good as we are.
3. You shall not believe that you are any wiser than we are.
4. You shall never indulge in the conceit of imagining that you are better than we are.
5. You shall not believe that you know more than we do.
6. You shall not believe that you are more important than we are.
7. You shall not believe that you are going to amount to anything.
8. You shall not laugh at us.
9. You shall not believe that anyone cares about you.
10. You shall not believe that you can teach us anything.

The truth is, Sandemose really nailed the Danes. My experience has been that Jante Law, which has become a national social manifesto of sorts, operates everywhere in Denmark on some level or another.

On the face of it, the Danes have considerably less to be happy about than most of us. Yet, when asked, they still insist that they are the happiest of us all.

What is one to make of this?

The obvious response is, "Define happiness." If we are talking heel-kicking, cocktail-umbrella joie de vivre, then the Danes do not score highly, and I suspect not even they would take their claims that far. But if we are talking about being contented with one's lot, then the Danes do have a more convincing case to present.

Over the years I have asked many Danes about these happiness surveys—whether they really believe that they are the global happiness champions—and I have yet to meet a single one of them who seriously believes it's true. They appreciate the safety net of their welfare state, the way most things function well in their country, and all the free time they have, but they tend to approach the subject of their much-vaunted happiness like the victims of a practical joke waiting to discover who the perpetrator is.

On the other hand, these same Danes are often just as quick to counter any criticism of their country—of their schools, hospitals, transport, weather, taxes, politicians, uneventful landscape, and so on—with the simple and, in a sense-argument-proof riposte: "Well, if that's true, how come we are the happiest people in the world?" (This usually accompanied by upturned palms and a tight, smug smile.) The happiness argument does come in handy sometimes, I guess.

Newspaper editor Anne Knudsen had an interesting theory relating to why the Danes continue to respond positively to happiness surveys: "In Denmark it is shameful to be unhappy," she told me. "If you ask me how I am and I start telling you how bad I feel, then it might force you to do something about it. It might put a burden on you to help me. So, that's one of the main reasons people say things are all right, or even 'super.'"

Here's another convincing theory, posited by a Danish friend of mine: "We always come top of those surveys because they ask us at the beginning of the year what our expectations are," he said. "Then they ask us at the end of the year whether those expectations were met. And because our expectations are so extremely low at the beginning of the year, they tend to get met more easily."

Later he writes:

With that in mind, I had a standard question that I asked most of my interviewees: "What are your fears for the future of Denmark?" One word cropped up more than any other in their responses: complacency. Many of my interviewees were worried that the Danes had it too good for too long, that they were now content to sit back in their Arne Jacobsen San armchairs and watch the plates wobble and fall. Worryingly for the Danes, the latest OECD Better Life Index of life satisfaction saw them plummet to seventh place, behind Norway and Sweden, among others. ...

... Danish society appears to have reached maturity, some would argue to a state of perfection, others to a perilous halt. The fear is that the next stage will be stagnation and decline. What happens when you develop a genuinely almost nearly perfect society in which there is nothing left to achieve, nothing to kick against, or work for?

But I had one other question I always asked, which, in its way, was even more revealing. Whenever I asked my Danish interviewees whether they could think of a better country to live in, the answer was invariably a thoughtful silence.

My point is not so much about which society is better, America or Denmark. The point is that I think "happiness" and how we report it, is different. It strikes me that Denmark is more about keeping expectations low and being content with things staying mostly as they are. That is what will make you happy. While in America, I am not "happy" with my life as it is, but I am "happy" that I have an unalienable right to "life, liberty, and the pursuit of happiness" and that I will one day have a "happier" life. Happiness is found in striving and achievement. I'm painting with broad brushes, but hopefully, you see my point. Consequently, comparing surveys about how "happy" people say they are, is not as clarifying as advocates of Scandinavian economics would make it seem.

What Good Are Economists?

Project Syndicate: What Good Are Economists?

"... One reason may be the perception that many economists were smugly promoting the “efficient markets hypothesis” – a view that seemed to rule out a collapse in asset prices. Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing. After both markets crashed spectacularly, the profession’s credibility took a direct hit.

But this criticism is unfair. We do not blame physicians for failing to predict all of our illnesses. Our maladies are largely random, and even if our doctors cannot tell us which ones we will have in the next year, or eliminate all of our suffering when we have them, we are happy for the help that they can provide. Likewise, most economists devote their efforts to issues far removed from establishing a consensus outlook for the stock market or the unemployment rate. And we should be grateful that they do.

In his new book Trillion Dollar Economists, Robert Litan of the Brookings Institution argues that the economics profession has “created trillions of dollars of income and wealth for the United States and the rest of the world.” That sounds like a nice contribution for a relatively small profession, especially if we do some simple arithmetic. There are, for example, only 20,000 members of the American Economic Association (of which I am President-Elect); if they have created, say, $2 trillion of income and wealth, that is about $100 million per economist.

A cynic might ask, “If economists are so smart, why aren’t they the richest people around?” The answer is simple: Most economic ideas are public goods that cannot be patented or otherwise owned by their inventors. Just because most economists are not rich does not mean that they have not made many people richer. ..."

 

Why employees earn more at big-box chains than mom-and-pop shops (and other observations)

PBS News Hour has a piece Why employees earn more at big-box chains than mom-and-pop shops.

Contrary to widespread belief, big-box stores and chains have increased wages in the retail sector as they have spread, according to “Do Large Modern Retailers Pay Premium Wages?” (NBER Working Paper No. 20313). Retail wages rise markedly with the size of the chain and the individual store, according to the study by Brianna Cardiff-Hicks, Francine Lafontaine and Kathryn Shaw. As retail chains’ share of establishments has risen from one-fifth in 1963 to more than one-third by 2000, the number of jobs that pay better than traditional mom-and-pop stores has proliferated.

Half of the difference in wages between large and small retailers appears to be attributable to differences in the average skill level of workers in the two groups of firms. On average, better workers find their way to the bigger companies. With more levels of hierarchy than small stores, larger establishments also allow better workers to move into management positions, increasing their pay even more.

“The increasing firm size and establishment size that are a hallmark of modern retail are accompanied by increasing wages and opportunities for promotion for many workers,” the authors write. “While retail pay is considerably below that in manufacturing, pay in retail is above that found in service jobs… [These results] contradict the image of the retail sector as one comprised of the lowest paying jobs in the economy.” ...

An anti-consumerism Dickensian narrative frequently emerges among critics of big box stores. Walmart (or another big box) moves into an area, drives out virtuous small businesses and their owners, drives down wages, and throws people into the cold, uncaring machinery of the greedy behemoth. The narrative is wrong at several levels.

First, considerable nostalgia and romance are built into the preference for small businesses. In reality, relative to big box stores, small businesses vary widely in the quality of management. Management and personnel policies are often subject to the quirky whims of the owners. Cross-training to improve skills and opportunities for advancement are minimal. Family nepotism frequently triumphs over meritorious performance. Wages are lower. Big box stores are better on all these fronts.

Second, stores like Walmart do not tend to drive out small businesses. Walmart’s major disruptive impact is on other discount store chains. In fact, Walmart can be a boost to small businesses. By creating high-traffic areas, small specialty businesses can open nearby and draw from the traffic generated by Wal-Mart.

Third, rather than drive down wages, these stores actually pay better wages than the mom-and-pop enterprises. They also offer substantially greater opportunities for learning and wage growth, even management opportunities. And if you think the stores are monolithic soul-sucking monstrosities, I’d invited you to read about Charles Platt’s experience as an editor for Wired, who went to work for Walmart to find out what it was like. See Life at Wal-Mart.

Finally, there is an additional indirect but significant, Walmart impact. Your standard of living can improve in two ways: Increased wages and lower prices. The article makes clear that big box stores like Wal-Mart raise wages. But Walmart also offers a wide range of quality goods at low prices. It particularly does so for food, clothing, household goods, and medicine. These items make up a much higher percentage of the monthly budget for low-income people. Through low prices, big box stores positively impact living standards that disproportionately benefits low-income people.

When Walmart stores open, it is not uncommon to have ten times as many applications as jobs. Wal-Mart tried to open a store in Chicago five years ago, and one source published a map that shows support for the idea by Ward (See here.) The strongest support came from the poorest wards, and support decreased as you moved up the economic scale. The big box stores offend the aesthetic and ideological sensibilities of the wealthy, but low-income people overwhelmingly embrace them.

I do not give a blanket endorsement to the big box stores, but if my wealthier and more intellectual friends are truly concerned about justice and poverty, they may want to dig a little deeper than their moralistic, anti-consumerism narratives take them.

Prudent but not puritan (Religion and Spending)

Economist: Prudent but not puritan

...  After using a lot of fancy statistical tools, they came up with some expected findings, and some rather unexpected ones. Households "with a strong commitment to faith"— demonstrated by higher spending on religious activities—are less likely to be weighed down by excessive mortgage outgoings or loan payments for cars. Compared with other households, they are more likely to be home owners but their property tax burden tends to be less—suggesting that "some moderation in [the] selection of home in terms of extravagance or location...."

Devout households seem keener on mitigating risk and therefore spend more on life insurance and health insurance; they lay out less on alcohol and tobacco and more on domestic appliances, including cooking utensils. Such homely behaviour is most heavily correlated with religious belief in the American South and Midwest, which are also the regions with "the most conservative interpretation of scripture," Mr Showers notes, in an article in the Interdisciplinary Journal of Research on Religion. (The research more-or-less conflates the term "religious" with "Christian" or "Judeo-Christian" which in the American context is only a smallish distortion.)

But religious families do allow themselves some earthly pleasures. Indeed, they are if anything a little more likely than other households to spend spare money on clothing or jewellery, although the amount each household splurges on jewellery is a bit less. Some of that jewellery, of course, might be devotional: silver crosses or stars of David. They are as likely as anybody else to be spending money on child support or alimony—a proxy for failed marriages—and they are as inclined as other folk to incur interest payments on credit cards. ...

What Critics Misunderstand about Abundance and Cooperation in Economics

Critics of economics, particularly in the world of religion, frequently charge that the discipline is grounded in a mindset of scarcity and competition versus what they champion: abundance and cooperation. The critique is considerably overblown.

First, economists recognize the world for what it is. Virtually nothing we use comes in usable form directly from nature. Everything we use requires human transformation from a less useful form into a more useful form. Economists study how human beings (individually and corporately) prioritize and decide what to make, how to make, and how to distribute. Economics is focused on how people create abundance out of scarcity, not on competing over a fixed set of existing goods, as many critics imagine economists advocating.

Second, economists mean something specific when they speak of competition. Timothy Taylor recently wrote in his post, Competition as a Form of Cooperation:

"… The kind of market competition that economists typically invoke is not about wolves competing in a pen full of sheep, nor is it competition between weeds to choke the flowerbed. The market-based competition envisioned in economics is disciplined by rules and reputations, and those who break the rules through fraud or theft or manipulation are clearly viewed as outside the shared process of competition. Market-based competition is closer in spirit to the interaction between Olympic figure-skaters, in which pressure from other competitors and from outside judges pushes individuals to strive for doing the old and familiar better, along with seeking out new innovations. Sure, the figure-skaters are trying their hardest to win. But in a broader sense, their process of training and coming together under agreed-upon rules is a deeply cooperative and shared enterprise."

Competition is not a creation of economists or capitalism. Competition is the natural order of the world God created. At any given moment, we have a fixed amount of resources available and a fixed number of daily hours. We cannot do everything at once and do not all share the same priorities on what to do next. Those resource limits and differing priorities put us in competition, not some economic theory. So the abundance-seeking economist might ask how we make more goods with fewer resources. How might we improve the productivity of each hour? These lead to a greater abundance of goods and choices.

Markets do not create competition. Markets are a human response to focus the competition God has placed in the world toward greater abundance and cooperation. They aren't perfect, but they have no parallel for many decisions that must constantly be made. Economics recognizes the existence of scarcity and competition while seeking a world of abundance and cooperation.

Why Are So Many Low-Income People So Overweight? (It's Not Food Deserts.)

Pacific Standard: Why Are So Many Low-Income People So Overweight?

... More recently, in Slate, Heather Tirado Gilligan cites peer-reviewed research to conclude: "[M]ore fresh food closer to home likely does nothing for folks at the bottom of the socioeconomic ladder. Obesity levels don't drop when low-income city neighborhoods have or get grocery stores."...

... That said, I worry about this counter-argument's implications. If healthy food is available and affordable, and if obese, low-income consumers aren't choosing it, it becomes very, very easy to blame the overweight victim in this scenario. In a country that places a big rhetorical premium on individual responsibility, we tend to not only do a lot of blaming the victim—we also seem to kind of enjoy it. ...

... The recent rebuttal to the conventional wisdom that food access doesn't necessarily equal healthier choices—in essence, that poor people could eat well but don't—hardly gives us license to rant, as another commenter did, that "the fact they can't feed themselves is THEIR fault." Instead, it suggests the need for a more nuanced way to think about why so many Americans end up trashing their bodies with corn dogs and cookies when other options are on hand. It's an opportunity, in other words, to rethink the very nature of eating.

We might begin this process by trying to understand diet as a psycho-socioeconomic phenomenon rather than as a matter of food access. There's a critically important aspect to McMillan's story that's essential to this shift in perspective: the people she profiles live lives defined by persistent scarcity—not necessarily food scarcity, but a generalized and even traumatizing kind of material instability. Absolutely nothing about their lives is secure. ...

... The subjects pictured and videotaped in McMillan's story are not just overweight. They're scared out of their minds.

And being scared out of your mind affects how you eat. In their book Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir write that "scarcity captures the mind." Scarcity, they note, "has its own logic." It doesn't take much imagination to hypothesize that, if your entire material existence teetered on the edge of loss—that is, if you were obsessed with scarcity because you had to be—that you'd likely blow your limited food budget on a bag of cookies and fried gizzards rather than a peck of apples and sweet potatoes. Nobody's saying such a choice would be advisable in terms of maximizing personal or public health. To the contrary, buying crap over carrots means that you are driven to eat by a scarcity-induced craving for the most immediate and gratifying satiation—the kind that sugar, salt, and fat excel at providing. But you remain, in fact, a victim. ...

Reading this post, my mind immediately returned to a post I wrote seven years ago, reviewing Charles Karelis' book, The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor.

... Karelis asks us to imagine being on a picnic when suddenly we are stung by a bee, on the hand, let's say. Our mind is now directed toward the pain in our hand to the exclusion of whatever other physical discomfort we may be experiencing. Karelis has one dab of salve at hand, and he applies it to our bee sting. Our pain is relieved. The salve has a high degree of utility for us.

Now instead of one sting on the hand, we are stung on the hand and the neck. There is still only one dab of salve. Its application to one sting will decrease pain but still be left in considerable distracted discomfort. A second dab of salve would have more marginal utility than the first.

But now let's say we have six bee stings at various locations on our body and still only on dab of salve. The one dab of salve provides minimal relief for us. But each successive dab supplies an increasing quantity of relief.

So what if you woke up daily with six bee stings and had been supplied with six dabs of salve to cover your next six days? Would you allocate them one a day across the next six days, or would you use them all in one day to have at least one day out of the six pain-free? The chronically poor routinely choose the one blissful day. ...

... Therefore, the poor are rationally inclined to spend a small pile of money in one big bang. Buying expensive clothes gets you esteem for at least a moment. Entertainment, gambling, or substance abuse provides at least temporary distraction and relief. Experience tells you there is an inadequate supply of relievers around, so when you have the fortune to get an amount that gives you complete temporary relief, do it! ...

I suspect something similar is at work with food. Food provides comfort from chronic fear and pain. Better to buy some really satisfying food that relieves pain at the moment than to make healthy food choices aimed at long-term health. And that points to another challenge. The chronically poor typically have no long-term time horizon. Debates go on about whether poverty leads to a short-term horizon or the other way around, but expanding time horizons is a piece of the puzzle, as well as finding stability.

Does Socialism Lead to Moral Decay?

Social Science Research Network: The (True) Legacy of Two Really Existing Economic Systems

Abstract:

By running an experiment among Germans collecting their passports or ID cards in the citizen centers of Berlin, we find that individuals with an East German family background cheat significantly more on an abstract task than those with a West German family background. The longer individuals were exposed to socialism, the more likely they were to cheat on our task. While it was recently argued that markets decay morals (Falk and Szech, 2013), we provide evidence that other political and economic regimes such as socialism might have an even more detrimental effect on individuals' behavior.

Conclusion:

... If socialism indeed promotes individual dishonesty, the specific features of this socio-political system that lead to this outcome remain to be determined. The East German socialist regime differed from the West German capitalist regime in several important ways. First, the system did not reward work based to merit, and made it difficult to accumulate wealth or pass anything on to one's family. This may have resulted in a lack of meaning leading to demoralization (Ariely et al., 2008), and perhaps less concern for upholding standards of honesty. Furthermore, while the government claimed to exist in service of the people, it failed to provide functional public systems or economic security. Observing this moral hypocrisy in government may have eroded the value citizens placed on honesty. Finally, and perhaps most straightforwardly, the political and economic system pressured people to work around official laws and cheat to game the system. Over time, individuals may come to normalize these types of behaviors. Given these distinct possible influences, further research will be needed to understand which aspects of socialism have the strongest or most lasting impacts on morality.

On a related note, I would add that there is a correlation between trust in (and care for) strangers and the degree to which a country is market-oriented. It isn't clear whether trusting people are more inclined to engage in market exchange or market exchange makes people more trusting. One thought is that market exchange makes people interdependent and more attuned to the plight of others than does a centralized economy or a highly distributed economy where people are constrained to cooperate within face-to-face community.

The Hockey Stick of Human Prosperity

From MRUniversity, Everday Economics:

"We are pleased to announce a brand new course at MRUniversity, Everyday Economics. The new course will cover some of the big ideas in economics but applied to everyday questions. The first section, premiering now and rolling out over the next several weeks, features Don Boudreaux on trade. Tyler will appear in a future section on food. You can expect more from me as well. Indeed, you may spot both Tyler and I in some cameos (ala Stan Lee) in some of Don’s videos!

Here’s the first video on trade and the hockey stick of human prosperity."

The Value of a Person Versus the Value of Labor (Part 4)

(Part 1) (Part 2) (Part 3) (Index)

I concluded my last post with this summarization:

So summarizing to this point, human beings are made in the image of God. As such, we have intrinsic value apart from any economic consideration. Our labor and the goods we produce have instrumental value and that relative value is set by the community through exchange in the market place, incorporating subjective and objective information into a real-time feedback loop. The market is far superior to the alternatives in setting value but it is far from perfect. That means there is "noise" in the feedback loop. But from the standpoint of Christian ethics, market imperfection isn't the only source of noise in the market.

So what is the additional "noise" to which I am referring? Sin. I began this series noting that according to the biblical narrative, we were created for service as priests in God's holy temple (creation) and appointed vice-regents over creation, bringing the world to full flourishing. The vision is of a world where we are in communion with God and the whole community flourishes.

I have argued that the development of market exchange in creating a real-time feedback loop to coordinate human action beyond face-to-face communities is truly a remarkable achievement. What needs to be made explicit here is that the market greatly facilitates all varieties of human action … from the noble to the vile. The market system that efficiently eliminates famine through the efficient distribution of food is the same market system that makes pornography abundant and inexpensive. If the aim is a shalom-filled world, then clearly, this amplification of sin is "noise" in the system.

Sin manifests itself in other ways. Some people will game the system for themselves against others through deceit, theft, discrimination, and any number of nefarious tactics. Strong legal systems are needed to protect against this behavior. Yet those legal systems are frequently used by those with power to protect their interests from competitors and market forces. These also feed "noise" into the market feedback loop.

So we are left with a market system that, while a substantial improvement over any alternative we know to date, is imprecise. And as Harvard economist Greg Mankiw recently noted, the field of economics is where medicine was two hundred years ago. Economics gives us considerable insight, much more than we would have without it, but our understanding is so imprecise that it is not always possible to predict consequences with high levels of certainty. So there is an epistemological challenge.

We are also left with a market system that amplifies detrimental desires every bit as well as virtuous desires. This means injustice will be present. The impulse is to block undesirable behavior. But who ultimately decides which things are not acceptable? One person may support legal marijuana while wanting to ban genetically modified organisms. Others may support genetically modified organisms but think prostitution should be illegal. Yet others may think prostitution should be legal but nuclear power should be illegal. And on it goes. And even when a majority agrees about the undesirability of a particular practice, does banning it actually improve matters? Think prohibition of alcohol during the 1920s.

Jesus tells a parable about a farmer who sows wheat, but his enemy later sows tares in the same field. Wheat and tares are indistinguishable until they approach maturity, making it impossible to sort them out until the harvest approaches. Attempt to rip out the tares; you will likely destroy much wheat. Similarly, aggressive attempts to control behavior to make the market produce only "good things" by weeding out the bad stuff can often have destructive consequences.

This presents us with challenging moral issues. As G. K. Chesterton once wrote, we want to "… give room for good things to run wild." Freedom and innovation are critical to achieving greater shalom. Furthermore, virtue chosen and acted on freely is far more vibrant than virtue imposed. But freedom means the freedom to choose sin and oppression. It means the emergence of injustices, whether intentional or not. Do we just look the other way?

Adding to this moral challenge is that the Bible is from the time and culture of the advanced agrarian societies of the ancient Near East. Making direct application from biblical circumstances is problematic. Land and labor were the primary means of production. Productivity was virtually fixed, meaning the economy was a zero-sum game; someone's win was someone else's loss. Consequently, economic moral reflection was concentrated on consumption and generosity. The role of radically altering productivity, as occurred in the modern era, is not even in view. There was no "economics" in any modern sense of that word, with data analysis and theory being empirically tested. Their understanding was philosophical and pedestrian at best. How do we apply Scripture to modern economic concerns?

Then there are the technical issues. We know markets are a remarkable advance, but they are imperfect. The primary debate in economics is not over whether markets are seen as good. They almost universally are seen as such among economists. The question is over how well they work. Those with more conservative leanings tend to think that markets are very effective and will somewhat spontaneously resolve economic difficulties with minimal interference. Liberal economists are more inclined to see more substantial flaws in the market, needing more intervention from informed experts who can mitigate some of the more serious problems. (Personally, I think conservatives oversell the "invisible hand" notion of the market, but liberals overestimate the ability of experts to intervene in just and effective ways. That leaves me open to experimenting with options to improve market outcomes but deeply skeptical of grand schemes promoted by some liberals to restructure and manage the markets. Epistemological humility is the key. But I digress.)

So I return to the opening paragraph that began this four-part series:

On what basis should people be compensated for their work? Economists say the value of labor is a function of supply and demand. Wages should correspond to the economic value of work. Theologians often object. (Note: We are all theologians, but here I'm referring to those formally educated in theology.) They say it dehumanizes people. People are not faceless cogs in a machine to be differentially valued based on their economic contribution. Everyone is equal in God's eyes. Income and wealth should be shared equitably.

What are we to say?

I think what we must not do is resort to economism or trust in quasi-deities like an "invisible hand" to resolve all economic issues spontaneously. We must also refrain from theologism and quoting Bible passages rooted in the advanced agrarian societal context of the biblical era as prescriptions for economic policy today. The Parable of the Talents does not endorse capitalism any more than sharing things in Acts 2 is an endorsement of communism. Both are anachronistic readings.

I think we have to take seriously the objective reality of how prices and values are set. Having prices accurately reflect supply and demand, leading to an efficient allocation of productive resources, is more than an esoteric concern of economists. An accurate economic feedback loop is important to human flourishing. If we value justice and flourishing, we are not free to forcibly adjust prices to something we arbitrarily deem "fair."

I think we need to be ever cognizant that markets don't always work perfectly, and sometimes there are imbalances in power that may require intervention. Just because the market sets a price for a particular type of labor doesn't necessarily mean that price was justly achieved. We need to root out injustices and compensate when great imbalances emerge.

I think that seeking the common good means finding ways to empower those who cannot earn a living wage to do so or possibly to alter our business models so they create jobs that incorporate capacities that can command a livable income or at least open a path to a livable wage. And certainly, we must make provisions in society for those without the mental or physical capacity to support themselves.

So in concluding this series of four posts, I have aimed to advocate for a strong embrace of both economic understanding and theological reflection. Theologians bemoan theological illiteracy among economists. It is not without merit. They accuse economists of smuggling in values and representing them as science. That happens too. But economic illiteracy among theologians is at least as equally profound. Until the two camps are ready to stop tossing grenades across an intellectual wall at each other and begin engaging with each other to understand what is genuinely being said from both disciplines, the church has no hope of influencing the economy and culture.

(Part 1) (Part 2) (Part 3)

The "Immorality" of Economics

Alex Tabarrok writes today, The Moral Inversion of Economic Thinking:

In a delightful, short article on Economics and Morality, Timothy Taylor asks why economics has a reputation for leading to corruption:

Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting? ...

Arnold Kling gives one answer:

I think that economics is singled out for opprobrium because of the way that it challenges the intention heuristic. The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good. ...

Both articles offer some important insights, but I think Tabarrok sums it up nicely:

... Standard morality, as Kling argues, often stops at intentions while economists are interested in consequences. Consequentialist philosophers also look at consequences but economists have the tools to trace interactions as they sort themselves into an equilibrium. Equilibrium outcomes may be very far from intentions. As a result, we find that economists often places themselves and their discipline in opposition to standard morality.

Two thoughts. First, many economists routinely assume that growth and efficiency take priority in almost all circumstances. So it isn't always true that everything comes down to economists offering value-free analysis of any given topic.

Second, with the above caveat, this inattention to consequences is what is maddening with so many moralists. When an economist demonstrates that a good intention doesn't have the desired outcome, the economist is branded as immoral or guilty of economism. Theologians are fond of noting that the Bible says more about economic issues than any other topic, yet very few have ever studied any economics. Theologism is pervasive, and for that reason, the church finds itself ineffectual in shaping the culture.

4 Ways Economists Think We're All Wrong - Econ Chronicles (Bryan Caplan)

This is an excellent series of animated videos about some basic economic principles done by Bryan Caplan. (I particularly like the ones on foreign trade and the pessimistic bias.) The first video is an introduction. Each of the next four deal with a particular type of widespread bias. I'm not saying I give unqualified support to each idea presented here, but these are great conversation starters. Enjoy!

Intro

 Anti-Market Bias

 Anti-Foreign Bias

 Make-Work Bias

 Pessimistic Bias

Measuring Inequality: On Using Snapshots When Only Video Will Do

When it comes to understanding inequality, the debate is frequently burdened with many misunderstandings about data. When talking about wealth inequality, we see statements like "85 people own more wealth than the bottom half of humanity." Wealth is routinely misunderstood to mean money and things someone owns. It isn't. Wealth is someone's total assets minus their liabilities. It is common to have negative wealth. The peasant farmer in rural China who has managed to save $200 and is debt free is "wealthier" than the high-income young M. D. who has a negative net worth due to substantial student loans (i.e., she owes more than she presently owns.) I recently wrote about this in The World's Bottom 10%: 7.5% Live in North America and None Live in China … And Other True But Worthless Facts.

Then there is the constant citation of growing inequality in pre-tax and pre-transfer income in the U. S. (usually just stated as "income") and the need to rectify it through redistribution. But if you only look at pre-tax and pre-transfer income, no amount of redistribution will have one penny of impact. We could transfer $100,000 to every household in the bottom half of the income distribution, and it wouldn't matter because it would be income after taxes and transfers. When we look at after-tax and after-transfer income, we see that there has been little change in inequality between those at the 95^th percentile and those at the 20^th percentile for the last twenty years. See my post, Is Income Inequality Really the Problem? It Depends on What You Call Income.

Today, Arnold Kling reviews Chasing the American Dream by sociologists Mark Robert Rank, Thomas A. Hirschl, and Kirk A. Foster. (See Kling's post: The Longitude of Well-Being) He cites a stat that shows that homeownership rates have remained fairly constant at about 67%. Kling then asks what percentage of Americans aged 55 have owned a home. A) 50%, B) 70%, and C) 90%. Kling says he would have guessed 70% when in fact, it is 90%. The 67% number is a cross-sectional piece of data, taking a "snapshot" of homeownership at a given time. The 90% number is a longitudinal piece of data, taking a "video" of homeownership over time.

… the question that I asked concerns what demographers refer to as longitudinal information. If you follow given individuals over a long period, what sort of cumulative outcomes will you observe? In particular, over a lifetime, how many people will at some point own a home? To answer a longitudinal question, you need to use longitudinal data. To instead use time-series cross-section data risks making serious errors.

Most of the conventional wisdom about relative economic well-being, including the famous studies by Thomas Piketty and Emmanuel Saez, commits the time-series cross-section fallacy. Rank, Hirschl, and Foster did not set out to debunk this fallacy or to attack the many economists guilty of it. Instead, they took what seemed to them a natural approach for studying the evolution of wealth and poverty: longitudinal data. The result, in my reading, is that, like the boy in the fable, they have in an innocent, unintended fashion exposed statistical nakedness among many economists who are regarded as experts on the topic of inequality.

Once you think about it, the truth about homeownership rates makes sense. At some point in our lives, nearly all of us have been renters. In addition, most of us are likely to "downsize" as we grow older, and in the process many of us may choose to rent.

Kling moves on to the authors' discussion of how many years a household spends in poverty or affluence between ages 25 and 60. Kling offers an interesting alternative.

I would be interested in what the data show if, rather than looking at the extremes, one does the opposite. That is, throw out each household's lowest and highest three years of income. For the remaining years of income, take the average relative to the poverty line. If this average is below 150 percent of the poverty line, call it low. If it is above 500 percent of the poverty line (which works out to about 200 percent of the median), call it high. Then calculate the proportion of households that have high, medium, and low incomes by this longitudinal measure.

This would produce a very different breakdown. For instance, suppose that, rather than quitting my job to start an Internet business, I had kept working and that my salary had continued to increase gradually until I reached age 50. In that case, under the authors' measure, our household would be in the bottom of the income distribution, because of the "poverty" of my graduate school years and my failure to achieve the income level that they require for "affluence." However, using my approach, my household would have been somewhere in the vicinity of the boundary between high-income and middle-income. That seems much more reasonable to me.

Overall, as with homeownership data, the longitudinal view of income paints a picture in which life-cycle variation and idiosyncratic factors play a role. This role is overlooked in discussions of inequality that commit the time-series cross-section fallacy.

As I read Kling's piece, I wondered how many people have had pimples. My guess is that the answer approaches 100%. Yet we don't see headlines about acne experienced by more than 90% of people at least one year in their lives. We understand that for most people, this is a temporary life-stage issue. The universe of people for whom acne is an ongoing problem is much smaller. The same is true with poverty. I'm intrigued by Kling's idea of discarding outliers and looking at 90% of the data between the outliers.

The reality is that no set of data or particular lens can tell us the whole picture about issues like poverty and inequality. We must examine the issues from multiple angles to get to the truth. But it is incumbent on us to be aware of what lens we are using at any given time and what that lens is actually showing; in this case, knowing the difference between a snapshot and a video.

The Value of a Person Versus the Value of Labor (Part 3)

(Part 1) (Part 2) (Part 4) (Index)

Human beings were made in the image of God. Each person has intrinsic value. Our value is unrelated to the economy. But goods, resources transformed from their natural state to a more useful state, have instrumental value. The same is true for the labor used to make them. That was the subject of the first post.

In my second post, I said two factors influence the value of a good:

• The subjective value a community places on that good.
• The objective reality of the availability of that good.

The community places a value on a good through market exchange. The value fluctuates as collective priorities shift. The price mechanism creates a real-time feedback loop about community priorities.

Today, we need to look at the objective aspect of value. The availability of goods or specialized labor to accomplish some task impacts its value. Compare a bottle of water and a diamond. Water is far more important than diamonds. You cannot go more than a few hours without water, but you can live long without seeing a diamond. Yet diamonds are far more expensive. Why? Diamonds are far less plentiful and more difficult to procure than a few ounces of water. The limited demand for highly inaccessible diamonds makes the next diamond consumed expensive, while the universal demand for the next twenty-four ounces of abundant water does not.

I frequently hear conversations lamenting that teachers are paid so little while professional basketball players (CEOs, entertainers, or whoever you might want to insert) earn millions. Note that the underlying presumption is that salary should be correlated with the importance of work. What about the supply of workers who can do the work? Let us do a comparison.

The average annual salary for a schoolteacher is $56,000. Kobe Bryant, the highest-paid player in the National Basketball Association, has an annual salary of $30,000,000. Which of these two professions is more important to the life of our community? Most people say it is a schoolteacher. So if the value of the labor comes from the subjective value of the community, isn’t this compensation horribly out of line with what we say we value? Not necessarily. This is similar to saying twenty-four ounces of water should cost much more than a diamond.

There are 3.7 million schoolteachers in the USA. There are likely millions more people who could do a competent job educating children after receiving appropriate training. But each teacher can only serve a few dozen students a year. Consequently, finding one additional teacher is relatively easy, and adding one additional teacher to 3.7 million teachers has a marginal impact on the overall task of educating children.

In contrast, there are 150 positions for starting players in the NBA. Each player can potentially provide millions of people with a service (i.e., entertainment). Someone who can play exceptionally well can draw in more than the average player. The supply of Kobe Bryants (or his equal) is very scarce, and the contribution of a Kobe Bryant to the overall business is very large.

The divergence in salaries between teachers and basketball players is not because someone is more important and not because someone’s labor meets a more important need. It is driven by the labor supply to meet each type of need. Furthermore, reducing the size of NBA salaries will not lead to an increase in teachers’ salaries. The dynamics of a relatively large supply of potential teachers, with each additional teacher having only a marginal impact on the overall service, still doesn’t change.

In summary, then, the price of goods and labor is set by the collective value of the community as it interacts with the objective supply of these things. The fact that human beings have intrinsic value does not mean their labor has intrinsic value.

Furthermore, and this is key, the market system is the only mechanism we have that directly connects what gets consumed and produced in real time. In the past, the price was set by custom, some notion of intrinsic value, or to suit the appraisal of some official. These methods, as well as communist models that seek to eliminate the market, require some form of conjecture that inevitably leads to chronic oversupplies and shortages. The market system is unique and vastly more efficient in coordinating economic activity between countless participants.

Now it would be very easy to stop here, singing the praises of market exchange. Many do. But there is much more that needs to be said.

Markets are a poor substitute for face-to-face community where people know each other and can coordinate economic decisions incorporating personal knowledge. For instance, suggesting that all family interactions be conducted on a market basis is an inferior form of family decision-making. But once communities grow beyond a few dozen people (more than 100 probably stretches the limit), it is humanly impossible to maintain intimate connections. Markets allow for coordinating behavior between countless strangers.

Markets are a remarkable human achievement, but markets are far from perfect. Ideally, markets have complete transparency, participants have complete mobility, and there is no coercion. These qualities never perfectly exist. There are some circumstances where markets do not work well at all.

Public goods - Weather forecasting … incorporating satellites, radar, countless weather monitoring devices, computer technology, etc. … greatly benefits a whole community. But if one person specializes in this work, everyone benefits for free, and all the cost ends up on the one specialist. The practical way to overcome this is to assess a levy to the whole community to cover the costs.

Market power - Sometimes, there is inordinate market power in the form of monopoly (one seller, many buyers) or monopsony (one buyer, many sellers). Those with market power can distort the price of goods or labor because they know the other party has no alternatives.

Externalities - This is where part of the cost of a transaction fall on someone external to the transaction. When a factory dumps pollutants in a river, it degrades the river’s use for people who live downstream. The people downstream end up bearing part of the cost of a transaction between the factory owner and the factory’s customers, to which people downstream had no say or benefit. Alternatively, when my neighbor hires someone to landscape his yard, he increases the value of my home. His aesthetic improvements spill over to the value of my property. There is likely some measure of positive and negative externalities to almost every transaction. They are incidental in most cases, but they seriously distort valuation in some cases.

Information Asymmetry - Sometimes, one party has better information than the other just by the nature of the product or industry. That can lead to the less informed party making an erroneous valuation relative to what they thought they were getting.

Even with a world of perfectly virtuous people, the market alone would be insufficient for managing our economic processes. But it is equally true that we could have nothing approaching the modern world without robust market exchange. If we all lived in self-contained face-to-face communities of a few dozen people, we might know each other well enough to manage our economic issues without prices or currency. But when we talk about cooperation beyond face-to-face communities, there must be a dynamic information loop, and the market uniquely meets that need. Critics of the market are quick to point out market limitations. Fair enough. But they are not serious about economics or justice unless the critic can offer an alternative method by which a dynamic economy can function.

To summarize, human beings are made in the image of God. As such, we have intrinsic value apart from any economic consideration. Our labor and the goods we produce have instrumental value, and that relative value is set by the community through exchange in the marketplace, incorporating subjective and objective information into a real-time feedback loop. The market is far superior to the alternatives in setting value but far from perfect. That means there is “noise” in the feedback loop. But from the standpoint of Christian ethics, market imperfection isn’t the only source of noise in the market. (continued)

(Part 1) (Part 2) (Part 4)

Deirdre McCloskey vs Thomas Piketty - a clash of the inequality titans

The Spectator: Deirdre McCloskey vs Thomas Piketty - a clash of the inequality titans

Well, I think I might have met his match. She's called Deirdre McCloskey. ...

... McCloskey on the other hand, who is meant to be the conservative one, has the zeal of a revolutionary. She describes herself as an ex-Marxist, Christian libertarian. She is the most notable transgender economist in the world (I can’t recommend strongly enough Crossing, A Memoir, her moving account of her journey from Donald to Deirdre.) She is an entertainer and storyteller; one of the few serious economists who is as likely to quote the poetry of Robert Burns in support of an argument as she is to quote wheat prices in the 15th century.

But forget the characters. It is the intellectual contrast which gets to the heart of the debate between those who worry about in-equality and those who don’t. ...

...  McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists. ...

...  The answer to that question determines what should be done about inequality. Piketty wants a progressive tax on wealth to prevent high returns entrenching the power of the richest. McCloskey, needless to say, is not keen on redistribution. Taking from today’s rich may give you a one-off uplift in the incomes of the poor of, say 30 per cent, she says; but that is nothing to the uplift from innovation and growth, which can double incomes every generation.

So much for the central disagreement between them. Here’s my problem. Many people with strong views on inequality consciously or unconsciously think of this as a binary choice: profits go to either a deserving or undeserving rich, depending on your view. It’s all about capital, or all about wealth creation. But I struggle to see it that clearly. I’d like to know how much of the return on capital that so concerns Piketty is actually income earned from entrepreneurial wealth creation. I’d also like to know how important that income is to innovation.

Piketty is well aware of this vulnerability in his argument. ...

...

She is admirably pure in her view, but is it as black and white as she portrays it?

Bill Gates or Liliane Bettencourt? They co-exist, of course, and have both had a pretty good time of it in recent decades. The question is which one better characterises the very rich. And also which risk you would rather take: taxing the Bills at the risk of deterring them from creating Microsofts? Or not taxing the Lilianes, at the risk of letting them become ever wealthier and more powerful while sitting at home doing nothing?

I know that the 99 per cent of the population have no difficulty coming to a view. I’m in the sad 1 per cent, who can see both sides.

Very interesting article! I lean more in McCloskey's direction. I think the impact of innovation is invisible to so many and it is radically underappreciated by others who acknowledge it. But I also share the ambivalence so well expressed by the author in this article. Here is a clip of McCloskey:

"Buying ‘Fair trade’ coffee is not really helping the very poor"

Economist: Not so fair trade

BUYING ‘Fairtrade’ coffee is not really helping the very poor, new research suggests. By comparing living standards in Fairtrade-certified producing areas in Ethiopia and Uganda with similar non-Fairtrade regions, four development economists from the School of Oriental and African Studies (SOAS) in London found that Fair Trade agricultural workers often earned lower incomes.

After four years of fieldwork in the coffee, tea and flower sectors in Ethiopia and Uganda, where they gathered 1,700 survey responses and conducted more than 100 interviews, the SOAS researchers found people living in ordinary rural communities enjoyed a higher standard of living than seasonal and casual agricultural workers who received an apparently subsidised wage for producing Fairtrade exports. Women’s wages were especially low among producers selling into Fairtrade markets, according to the researchers. ...

... PS: The Fairtrade Foundation has published a lengthy reply: "We note the innovative methodology and large sample size that SOAS’s research project has used to answer its three research questions, only one of which focuses on Fairtrade. We also note however that the study has not sought to evaluate the impact of Fairtrade’s model and interventions as it has not followed an impact evaluation methodology."

The Value of a Person Versus the Value of Labor (Part 2)

(Part 1) (Part 3) (Part 4) (Index)

I began this essay by noting that humans have intrinsic value. However, goods (and the labor entailed in making them) do not. Goods and labor have instrumental value. Let us explore this in more detail. Two clarifications before we begin.

First, I want to distinguish between goods and natural resources. Goods are the things we use to meet our particular wants and needs. Resources are the materials, energy, plants, and animals we form into goods. Nearly all goods have an element of human labor contributing to their value. While natural resources are abundant, the quantity of goods is directly connected to humans' productivity, transforming natural resources (and, more recently, data) from less useful forms into more useful forms.

Second, there is a difference between the value of any particular good to a particular individual and the value of a category of goods to the community. The value attributed to a stapler may vary considerably from individual to individual at any given moment, but the market price tells us the collective value the community places on particular goods at a particular time. (More to follow.) For our purposes here, I'm concentrating on the communal value as reflected in a market price.

So what value do goods have? It has long been a confounding question. Some people have said that goods have intrinsic value and can be stated in terms of a market price. Other people have seen more subjective factors at work, believing the more important a good is, the more value it should have. Still, others have observed that the supply of a good is key to understanding its value.

Many thinkers have wrestled over the years with making sense of value's subjective and objective aspects but not to very satisfying conclusions. Since most economies before the seventeenth century were relatively stagnate and trade played a smaller role, life seemed to move along just fine without the precision of thought in this area.

From the late Middle Ages of Europe into the early stages of industrialization, thinkers began to appreciate that the value of goods and labor was not as fixed as previously thought. Economic data began to be collected and scrutinized. Accelerating Change in productivity, coupled with the Enlightenment's push to make rational sense of human affairs, pressed thinkers for a more precise understanding of how value is determined by the eighteenth century. Thinkers, most notably Adam Smith, saw labor as the key issue. One hour of labor by any person was seen as mostly interchangeable with an hour of labor by any other person. An hour of labor was understood to have intrinsic value. Price was not inherent in the thing itself; instead, the price of a good was set by the amount of labor applied to creating it. This was the labor theory of value. (Both Adam Smith and Karl Marx subscribed to this idea.)

However, by the late nineteenth century, a profound reality dawned on thinkers: The communal value of a good is whatever price the buyers and sellers agree to through exchange. This was not a new idea. Thinkers of the past had stumbled upon it. Several Scholastic philosopher-theologians had written about this, dating back to Thomas Aquinas in the 13^th Century, but they seemed to have little influence on economic affairs.

This revolution in understanding meant that goods, and the labor that produced them, have only instrumental value. Instrumentality is a subjective judgment. But these more recent theorists understood that an objective reality also influences a good's value. The intersection of two variables determines the general price of a good:

• The subjective value a community places on that good.
• The objective reality of the availability of that good.

This means that the value is dynamic. It is subject to the changing needs and wants of the community and the quantity of goods available for use. But when we understand the value of things this way, something even more remarkable occurs. Prices (i.e., value stated in terms of a currency) form a continuous feedback loop between buyers and sellers. Why is that important?

On any given day, each individual has a fixed number of hours, a fixed level of technological understanding, and a fixed number of resources available for producing goods. The latter two can be altered over time, but on any given day, they are all fixed. A community's productive capacity (whether a village or the entire planet) is the sum of these individual capacities. Priorities must be set because capacity is limited. Otherwise, we will end up with too much of some things and too little of others. Material resources and labor will be wasted, and needs will go unmet. This is a challenge for any society.

Management of economic activity may not pose a particular challenge in a face-to-face community of a couple of dozen people. If there is community solidarity, each individual is likely known to the others. All individual needs can be known and considered. It will be clear how well each person is working, who is incapacitated, and who is best suited for which jobs. It will be known who needs what and how much.

However, this natural information system breaks down when communities grow much beyond a few dozen people. There is no way to be well acquainted with hundreds of people, much less thousands or millions. Not only is it beyond our capacity to know so many people but each of us has economic priorities that are constantly shifting. Discerning and planning for the community becomes unmanageable. Prices derived through market exchange become the real-time communication channel through which we can coordinate our work with the world beyond our face-to-face communities to meet each other's needs. Distorted prices mean distorted communication.

Imagine we own a factory that makes toy wagons. Two workers make wheels. The workers are equally earnest employees who work the same hours each day. But one worker meticulously crafts perfectly square wheels while the other worker, with equal diligence, makes perfectly round wheels. Are we to say that each hour of labor has intrinsic value and each worker should be compensated the same? No.

The labor of the worker making round wheels is clearly offering something of value that the other worker is not, to us as the employer and ultimately to the consumer. While the square versus wheel example is an extreme case to make a point, the issue is that one hour of labor is clearly not identical to any other hour of labor. Compensating the workers according to the value of their work motivates them toward an activity that the community values and away from activity it does not. The maker of square wheels has the incentive to alter her labor to provide products that bring more value to others, while the maker of the circular wheels has the incentive to get even better at the craft and earn more.

If a genuinely open market exchange happens, then the price of goods and labor will reflect the community's priorities. Attempts to distort the prices up or down will lead to some distortion of what the community has said it values in favor of some individual or group, possibly leading to waste and poorly met needs.

Please note that I began the first sentence of the above paragraph with "if." That is a huge "if." Furthermore, are we saying that the community always values all things correctly? And what about those who simply can't offer labor that earns them enough to sustain life? All good questions, and we will come to them. But we first need to finish the discussion of value. I've opined on the subjective value component. Now we turn to the objective aspect of value. It adds a significant wrinkle to our discussion.

(Continued)

(Part 1) (Part 3) (Part 4)

The Value of a Person Versus the Value of Labor (Part 1)

(Part 2) (Part 3) (Part 4) (Index)

On what basis should people be compensated for their work? Economists say the value of labor is a function of supply and demand. Wages should correspond to the economic value of work. Theologians often object. (Note: We are all theologians, but here I'm referring to those formally educated in theology.) They say it dehumanizes people. People are not faceless cogs in a machine to be differentially valued based on their economic contribution. Everyone is equal in God's eyes. Income and wealth should be shared equitably.

What do you think? How do we sort this out? Is one right and the other wrong? My short answer is that human beings are created in the image of God. We have intrinsic value that transcends any instrumental purpose we might serve. The goods we produce do not have intrinsic value. Value is set by the interaction of a community's subjective desire for a good and the good's objective availability with an hour of labor. God sets the value of people, while the community sets the value of particular types of labor. The value of a person's labor is not an indicator of a person's intrinsic value. And that leads to some important theological and economic challenges. Let us unpack this.

Humans are unique. We have a hybrid existence. On one side, we are like creation and unlike God. We are material beings. We share much in common with other mammals. We have bodies subject to the laws of thermodynamics, just like the rest of the material world.

On the other side, we are like God and unlike creation. We are spiritual beings. We have the ability to love, to see beauty, to reason, to create, and to discern morality and meaning. We are meant for eternal life.

We are a body and spirit fusion. These two realities must be held together. We are not spirits inside of bodies. Ultimately, we believe in "the bodily resurrection," not transformation into spirits. In the language of Genesis 1:27, we are the image of God … eikons … in the created order. Not eikons in the sense of lifeless statues, but rather as God's agents, discerning and acting in ways so integrated with God that God's character and purpose are evidenced through us.

As agents, we have a mission. Genesis 1 and 2 give us the grand stories of creation that highlight that mission, but we often seem to miss the point due to our preoccupation with what these stories might say about origins. I'm persuaded that origin is not the driving subject of these stories. These stories aim to articulate God's sovereignty and our mission.

I think analogy is the best way to understand Genesis 1 and 2. Imagine creating a garden in your backyard. There are two phases. First, we take a plot of ground that is "formless and void" of the vision we have in mind. We remove rocks and weeds. We loosen the soil. We might add some fertilizer. We plant some seeds. Maybe we put a protective border around the garden and a fence to keep animals out. Having done so, we are done with the first phase, and we "rest" from "creating" the garden. But the garden is not done.

In the second phase, the garden must be continually weeded. The fence must be monitored and repaired as needed. Plants must be protected from hard freezes or hail. There will be occasional watering. Some plants may need regular pruning, and others will yield fruit that needs to be harvested periodically. Only when the garden has come to full flourishing can we say the garden is complete.

Genesis 1 and 2 are phase one of God's garden project. When God is finished creating, Genesis says God rested. Phase 1 was done. Now it was time to enjoy bringing it to fullness. In keeping with this narrative, Hebrews 4:1-11 says that God has been living in this seventh day of rest since creation. But this second phase of work is not work God has chosen to do alone.

At the end of the sixth day of creation, God creates eikons of God's self and gives them the mission of exercising dominion over creation. Despite various perversions of "dominion" as a right to do as you please, the idea here is that human beings are God's agents participating with God in realizing God's vision. I will not unpack this all here, but in view is humanity as God's vice-regents over creation and creation as God's temple in which we serve as priests. Human beings are intended for loving communion with God as they and God go about bringing "the garden" to its full potential.

Now I do not understand the early chapters of Genesis to correspond to historical events. They are stories that relate profound truths about God's vision and mission and humanity's role in that vision and mission. In short, God is sovereign over creation, and human beings are God's image-bearing agents in the world, participating with God and each other to realize God's ends. Genesis 3 and onward reveal humanity's sin and failure to embrace this mission. The biblical narrative is the story of God's redemption and reclamation of that vision, even as God continues to "work the garden" and bring us into that work. Revelation records that in the end, "You have made them [redeemed humanity] to be a kingdom and priests to serve our God, and they will reign on the earth." (Rev 5:10) Priests and vice-regents.

Let us return to the question of value. Value is subjective. Nothing has value without someone to do the valuing. This is true in all cases but one. God alone has intrinsic value. No one can set God's value. "There is one God who is father of all, over all, through all and within all." (Eph. 4:6) All value ultimately extends from God.

The biblical narrative tells us that God values creation, but humanity is valued in a way that is apart from the rest of creation. Human beings are God's image bearers, springing forth from the love and communion of the Trinity. Human beings have immeasurable value in God's eyes. Because God values human beings, we have intrinsic value, by extension. God intends that human beings, individually and corporately, should thrive. Consequently, the measure of a shalom-filled community is one where all members thrive together. All human beings are precious in God's eyes. As Christians thinking theologically and economically, a key end must be a community where all have resources and opportunities to thrive. Sharing in material abundance is a component of that vision. But it is not the only component. … 

(Part 2) (Part 3) (Part 4)

Is Income Inequality Really the Problem? It Depends on What You Call Income

Are the rich getting richer and the poor getting poorer? Stories about inequality typically talk about how the rich, especially the top 1%, are seeing their incomes grow rapidly while people at the bottom are seeing their incomes stagnate and drop. A gap is widening between the top and the bottom. Is that true?

The Federal Reserve Bank of Minneapolis has just published an interesting report that studies the relative income performance of households from 1967-2012. It compares households at the income distribution's 95th, 50th, and 20th percentiles. The report's distinction between two types of income is revealing: Market income and disposable income.

Market income (pre-tax and pre-transfer income) is what we typically see reported. But when we adjust for taxes (which substantially decreases the income of the wealthy) and add in transfer income like social security, unemployment, and welfare payments (which substantially increases the income of people in poverty), we get disposable income. Disposable income paints a much different picture than market income. Let's look at two important graphs:

The top line in the chart is the ratio of market income (pre-taxes and transfers) of households at the 95th percentile as a ratio to households at the 50th percentile. For example, it appears the households at the 95th percentile made 2.7 times as much as those of the households at the 50th percentile in 1967. By 2012, they were making about 3.6 times as much. The bottom line tells a different story.

Disposable income (after taxes and transfers) follows a similar pattern until about 2000, when the ratio leveled out at just below 3.0, and has remained between 2.9-3.0 ever since. That means that despite market income having risen faster for the 95th percentile compared to the 50th percentile, inequality in terms of what people have to spend at the end of the day hasn't really changed for almost fifteen years.

Then there is this chart:

This chart shows the ratio of the 50th percentile to the 20th percentile. Note the ratio of market income continues to widen with each business cycle. The recessions, shaded gray, result in spikes of unemployment. That expands the ratio, and then the ratio contracts a little as employment improves. The sharp jump at the end correlates with very high unemployment and underemployment.

But the striking thing is the disposable income line. It is flat from 1983 onward (until a slight increase since the 2008 financial meltdown.) There has been virtually no change in inequality between the 50th percentile and the 20th percentile for thirty years!

Some observations:

1. The debate around inequality typically points to the widening gap in market income between the top and bottom. More transfer of wealth is proposed to balance out the income people receive. Market income and disposable income are conflated. If a household with a market income of $15,000 gets transfers of an additional $15,000, for a total of $30,000 in disposable income, they still have a market income of $15,000! Pointing to market income statistics as an indicator that the distribution of income is insufficient is erroneous. By this reasoning, a $15,000 household could get $1,000,000 in transfers, but they would still be "living in poverty" because transferred income is not considered in the income calculation.

2. This analysis focuses only on households in the top 5%, not the top 1%, where so much debate has been. For reasons reported in the article, the data did not lend itself to a study of the very top 1% or 0.1%. The ratio of disposable income of the very top to lower percentiles may be increasing. But the ratio of disposable income is certainly much lower than market income.

3. This study suggests that public policy has been doing a very good job of preserving disposable income ratios for many years. We may want to debate if these ratios are just, but they are not widening.

4. The fact the market income ratio continues to widen, meaning it takes more transfers to keep disposable income constant, suggests that low wages and unemployment, not insufficient transfers, are becoming the problem. Left-leaning figures like Robert Reich argue that the decline of union bargaining and failure to raise the minimum wage are the culprits. Companies aren't paying employees relative to their economic contribution. That leaves taxpayers to subsidize the work that these companies get from low-wage workers. Other economists suggest the labor market is more efficient than that and that most employees are being compensated relative to their economic contribution. While very modest minimum wage increases are likely without much impact on the total labor market, substantial jumps in the minimum wage are likely to lead to automation and off-shoring, thus more unemployment and even more need for transfers than the alleged subsidization of low-wage workers today. Who knows exactly where the truth lies.

We do know that technology and the economy are rapidly changing. That means we need a workforce with the human and social capital to take advantage of such changes. Strong families and educational systems are central to developing that capital, and we know these institutions have weakened for some time. That doesn't help the market income challenge.

The bottom line is that disposable income inequality is not getting worse for the bottom 95%, and it seems likely that whatever inequality is growing between the top 1% and the rest is substantially less than the widely reported market income. Maybe present distributions of disposable income are unjust. That is worthy of debate. But that is different from saying inequality is growing. Market income inequality continues to rise, and what is unclear is if there is a policy fix for this or if this market income inequality is inherent in a post-industrial and digital economy.

Economics Links

1. Huffington Post: Financially Speaking -- Are We an Illiterate Nation?

... Champlain College's Center for Financial Literacy released its '2013 National Report Card,' which quantifies what states are doing to promote financial literacy in the classroom. Only seven of 50 states surveyed came away from the study with an "A" rating. That's right, a paltry seven states! Of these seven states, only four have a standalone course -- Utah, Tennessee, Missouri and Louisiana.

Thirteen states received a "B" rating, and the remaining 30 states received a "C," "D," or "F" rating. In fact, eight states received an "F" rating. Ask yourself, as a parent, would you be content to have your children bring home similar grades? ...

2. Huffington Post: 40 Financial Things You Should Know by 40

3. Carpe Diem: World market cap reached record high in March, and is $2.4T above pre-recession, pre-crisis level

4. Businessweek: Why Factory Jobs Are Shrinking Everywhere

... But the U.S. jobs slide began well before China’s rise as a manufacturing power. And manufacturing employment is falling almost everywhere, including in China. The phenomenon is driven by technology, and there’s reason to think developing countries are going to follow a different path to wealth than the U.S. did—one that involves a lot more jobs in the services sector.

Pretty much every economy around the world has a low or declining share of manufacturing jobs. According to OECD data, the U.K. and Australia have seen their share of manufacturing drop by around two-thirds since 1971. Germany’s share halved, and manufacturing’s contribution to gross domestic product there fell from 30 percent in 1980 to 22 percent today. In South Korea, a late industrializer and exemplar of miracle growth, the manufacturing share of employment rose from 13 percent in 1970 to 28 percent in 1991; it’s fallen to 17 percent today. ...

5. Forbes: High Tech And Robots Can Create More Low Skilled Jobs, Not Just Destroy Them

As we all wait anxiously for the robots to come and steal all our jobs an interesting finding in a study on the effect of ever higher technology on the demand for low skilled labour. Contrary to what everyone seems to be assuming it is possible for that higher tech to actually increase the demand for that low skilled labour. For the higher tech enables that lower skilled labour to perform tasks that could only previously be done by highly skilled labour. And as the costs associated with whatever the task is fall then we quite naturally demand more of that task to be done. Thus, in certain cases at least, higher tech increases the number of jobs, not reduces them. ...

6. Business Insider: Why Food Prices Are Surging

... In a new report, Morgan Stanley commodities analysts led by Adam Longson attribute the surge in prices to a number of factors, "from weather (in the case of sugar, soybeans and coffee) to disease (in the case of hogs) to geopolitics (wheat and corn)."

The Morgan Stanley analysts don't believe this will continue. ...

7. Atlantic: How You, I, and Everyone Got the Top 1 Percent All Wrong

8. House of Debt: Measuring Wealth Inequality

9. Conversable Economist: An Inequality Chartbook: Long-Run Patterns in 25 Countries

This is an interesting chart from chartbook of income inequality.

10. Brookings: Income Growth and Income Inequality: The Facts May Surprise You

... The broadest and most accurate measures of household income are published by the CBO. CBO’s newest estimates confirm the long-term trend toward greater inequality, driven mainly by turbo-charged gains in market income at the very top of the distribution. The market incomes of the top 1% are extraordinarily cyclical, however. They soar in economic expansions and plunge in recessions. Income changes since 2007 fit this pattern. What many observers miss, however, is the success of the nation’s tax and transfer systems in protecting low- and middle-income Americans against the full effects of a depressed economy. As a result of these programs, the spendable incomes of poor and middle class families have been better insulated against recession-driven losses than the incomes of Americans in the top 1%. As the CBO statistics demonstrate, incomes in the middle and at the bottom of the distribution have fared better since 2000 than incomes at the very top.

11. Wall Street Journal: Ignoring an Inequality Culprit: Single-Parent Families

Intellectuals fretting about income disparity are oddly silent regarding the decline of the two-parent family. ...

12. Mother Jones: What If Everything You Knew About Poverty Was Wrong?

... A sociologist at Johns Hopkins University, Edin is one of the nation's preeminent poverty researchers. She has spent much of the past several decades studying some of the country's most dangerous, impoverished neighborhoods. But unlike academics who draw conclusions about poverty from the ivory tower, Edin has gotten up close and personal with the people she studies—and in the process has shattered many myths about the poor, rocking sociology and public-policy circles. ...

13. Forbes: Thank Goodness We Have Walmart If American Shoppers Are This Poor

... The economic background is that sure, WalMart makes good profits out of what it does. Yes, this includes minimising costs such as the wages they pay out, what they’ll let suppliers charge them. It even includes desiring to put other less efficient retailers out of business, those Mon and Pop stores, and to make those that remain more efficient through that competition with them. But there’s another effect of course: consumers save money through those lower prices.

We call this saving the consumer surplus. It’s not something that ever appears in the normal economic statistics, one good reason being that it’s rather hard to calculate. ...

... A 25% reduction in food expenditures just from the existence of WalMart is an amazingly large sum. It’s also considerably larger than the profits that WalMart makes out of its actions. And that’s from a decade ago recall (the paper is from 2005, the data up to 2003) and it is only recording the consumer surplus from WalMart’s move into food retailing, leaving the impact of the other parts of the company aside. ...

14. Atlantic: How the Rich and Poor Spend Money Today—and 30 Years Ago

15. AEI - James Pethokoukis: No, Walmart isn’t ripping off taxpayers

... I think I’m supposed to be outraged that Walmart isn’t paying some employees enough that they don’t need government anti-poverty benefits. But businesses generally aren’t going to pay workers more than they are worth. If a worker can only generate $8 in value to a company, then the firm isn’t going to pay them $10. Nor should they for some humanitarian reason. If American society thinks some of their fellow Americans deserve higher living standards than their skill set currently warrants, then society should pitch in and subsidize their wages through the Earned Income Tax Credit or even a new, broader direct wage subsidy. ...

16. PBS: How nonprofit workers get squeezed when minimum wages increase

Not everyone who supports raising the minimum wage is in a position to pay their employees more. Nowhere is that more true than in the nonprofit sector. ...

17. NPR: Subminimum Wages For The Disabled: Godsend Or Exploitation?

... Executive Director Gus van den Brink says the Sertoma Centre and other agencies do work to find jobs for disabled people in the community, but the focus should not be on shutting down all sheltered workshops. He says it would be nearly impossible for some people with severe intellectual disabilities to get a job at all. It's sheltered workshops, he says, that give them a chance to work and earn a paycheck.

"Some of the individuals may not even completely understand what the value of that paycheck is," van den Brink says. "But they know they are receiving a paycheck, so they are getting a lot of self-esteem. They are very proud of it."

Even so, Assistant Attorney General Samuels says the Justice Department will work with other states to make sure some workers with disabilities have the opportunity to do their work, as she puts it, at "real jobs for real wages."

18. PBS: What’s the welfare initiative uniting liberals and conservatives?

Some conservatives and liberals are uniting around the idea of a basic income because the current welfare system, they say, is an ineffective bureaucracy that doesn’t respect poor people’s ability to make their own decisions. ...

19. Atlantic: Women's Wages Are Rising: Why Are So Many Families Getting Poorer?

Start by looking at what's happening with men's wages. ...

20. Huffington Post: Gender Inequality in the Labor Market: Don't Call It a Wage Gap

When President Obama announced the Paycheck Fairness Act on Equal Pay Day this week, we applauded his efforts to address the so-called "gender wage gap" but, from a data point of view, mourn the fact that he, like many others before him, is building his case around a flawed number. The oft-quoted statistic that women only earn 77 cents for each dollar earned by a man, is not actually very accurate and distracts legislators and the public at large from coming up with solutions to the real problem -- the gender jobs gap. ...

21. Fortune: Corporate America's foreign cash machine: Signs it may be slowing

As governments coordinate to fix international tax laws on overseas earnings, companies may have to pay more taxes. ...

22. Forbes: How The Wealthiest Families Make And Lose Their Money -- Part 5

... Well-accepted research shows that about one-third of companies in the United States make it to the second generation.  Only around 10% reach the third generation.  If wealth were preserved during this movement away from the privately held business into the publicly traded markets, we would expect to see a greater portion of overall wealth being inherited.  But, the numbers tell us that only about 5% of wealth in the U.S. is inherited.  On the other hand, the wealthiest families of Europe hold two-thirds of their wealth in private companies and only one-third in publicly traded securities.  When we then look at inherited wealth, approximately 85% of European wealth is in its third or older generation.  One-third of European wealth is in its fifth or older generation.  This is an astounding result. ...

Stop Obsessing Over Exorbitant CEO Pay

Slate: Stop Obsessing Over Exorbitant CEO Pay

It’s grotesque, but income inequality isn’t as harmful as we think. ...

... But as New York Times economics writer Eduardo Porter noted recently, claiming that wealth inequality is unambiguously harmful is more about ideology than evidence. He cites the struggles of Harvard scholar Christopher Jencks, a leading chronicler of the middle class, to complete a planned book on income inequality. After years of research, Jencks was convinced that the only true statement about whether and how income inequality harms society is “It’s hard to tell.” Progressive economist Jared Bernstein has also found that we can’t prove the assumption that inequality leads to slower growth, given available evidence. It may be true, Bernstein wrote, but we do not have enough concrete proof.

The work of Jencks and Bernstein complicates the neat narrative of robber barons and a new Gilded Age harming the middle class. Because those views lack black-and-white simplicity, however, they tend to receive less attention. Which is a shame, because they’re probably closer to the truth.

The assumption of a causal link between excessive pay at the top and low growth and stagnant incomes fuels the drive to reframe the tax code toward greater redistribution. There is a strong moral case for that, especially insofar as massive gaps between the rich and the rest can be so insurmountable as to severely dent the idea of equality enshrined in the founding of the U.S. That said, even aggressive redistribution will not fundamentally solve what now ails us. ...

... The top 100 CEOs in the survey took home a total of $1.5 billion. That’s rather nice for them, but redistributing, say, $1 billion of that would do almost nothing to help the 100 million people at the bottom of the economic pyramid in the U.S. Even if you included upper management and got to, let’s say, $100 billion, the extra income distributed across American society would barely improve living standards. Boards could mandate that, say, Larry Ellison of Oracle should be less wealthy so that Oracle employees could be more wealthy, but Oracle employees are already on the winning side of the global economic equation. They are not the ones who need help.

Let’s say then that you created an inequality tax, as Robert Shiller of Yale has proposed. That could certainly generate some extra billions, which could then be redistributed. But even there, the super-rich would only become slightly less super-rich, while those whose incomes are stagnating or those tens of millions underemployed and caught in a web of structural unemployment would see marginal improvement at best. In short, measures to reduce inequality might be modestly helpful, but they wouldn’t solve much. ...

This piece highlights once again that for those truly interested in working for a just and prosperous world you have to move beyond populist "bumper-sticker" economics.

The Myth of the Monolithic 1%

The top 1% versus the 99% is again emerging as a popular topic. I wonder how many people genuinely reflect on who makes up the 1%. I believe many people see the 1% as a highly cohesive static population segment. It isn't.

Social scientists use two different types of analysis when analyzing data about populations. There is a cross-sectional analysis. These studies are a snapshot-in-time look at a given population. There is also longitudinal analysis. These studies measure the characteristics of a population over time. Cross-sectional studies are like looking at a photograph, and longitudinal studies are like looking at a series of photographs compiled together to give a motion picture.

Let's say we had unfettered access to I.R.S. data. We could analyze each person's income for each year over many years. A cross-sectional analysis would allow us to see who was in the top 1% in 2010. But how many of these people are genuinely wealthy in the sense of an ongoing lifestyle of riches and influence? There is no way to know from this analysis. Longitudinal analysis is needed.

So let's imagine two extremes over ten years. At one extreme is the idea that income is totally random. In that case, we would see no pattern in who makes up the top 1%. At the other extreme is the idea that the people in the top 1% are the same people in the top 1% ten years earlier, with a few adjustments for dropping people who died and adding people, mostly heirs, who took their place. The populist references to the 1% suggest something much like the latter is reality.

Mark Rank, professor of social welfare at Washington University, is one of the authors of a new book, Chasing the American Dream: Understanding What Shapes Our Fortunes. Last week, he wrote a piece in New York Times called From Rags to Riches to Rags. Based on the research in the book, here is some of what he wrote:

... Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking.

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What's more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.

Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.

It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60). ...

... Likewise, data analyzed by the I.R.S. showed similar findings with respect to the top 400 taxpayers between 1992 and 2009. While 73 percent of people who made the list did so once during this period, only 2 percent of them were on the list for 10 or more years. These analyses further demonstrate the sizable amount of turnover and movement within the top levels of the income distribution. ...

... Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. ...

Other studies I've read show that even among those who make a high income for a string of years, it is difficult to stay at the top for more than a generation or so. Children rarely repeat the type of income production their high-achieving parents did. Studies show it is exceedingly difficult for a corporation to dominate top spots on the corporate hill for over a decade or two. Once decline sets in, only a small minority can recover past glory. We can probably count on one hand the number of corporations that have recovered three times in the past century or so. The point is that top spots in income for individuals and corporations are more precarious than is often appreciated. And it is also true that there is considerable variation in income over the lifetime of individuals found in the bottom 99% in any given year.

Raging against a monolithic unchanging 1%, sucking up all the wealth, and condemning the masses to a perpetual Dickensian dystopia, is way over the top, but it makes for pithy bumper stickers and effective sloganeering for certain ideological camps. Genuine interest in understanding and addressing economic challenges ... unemployment, stagnating wages, automation ... requires a significantly more nuanced approach.

The Limits of Economics

Greg Mankiw is an economist at Harvard and the author of economics textbooks. He recently wrote an excellent piece in the New York Times, When the Scientist Is Also a Philosopher. I appreciated this excerpt. 

...We economists often have only a basic understanding of how most policies work. The economy is complex, and economic science is still a primitive body of knowledge. Because unintended consequences are the norm, what seems like a utility-maximizing policy can often backfire.

So, what is the alternative? At the very least, a large dose of humility is in order. When evaluating policies, our elected leaders are wise to seek advice from economists. But if an economist is always confident in his judgments, or if he demonizes those who reach opposite conclusions, you know that he is not to be trusted.

In some ways, economics is like medicine two centuries ago. If you were ill at the beginning of the 19th century, a physician was your best bet, but his knowledge was so rudimentary that his remedies could easily make things worse rather than better. And so it is with economics today. That is why we economists should be sure to apply the principle "first, do no harm."

This principle suggests that when people have voluntarily agreed upon an economic arrangement to their mutual benefit, that arrangement should be respected. (The main exception is when there are adverse effects on third parties — what economists call "negative externalities.”) As a result, when a policy is complex, hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it. ...

This is the point I've tried to make on so many occasions. My opposition to many policies is not so much grounded in ideological fidelity as epistemological humility. I have severe reservations about the proponents' ability to accurately understand secondary and tertiary consequences that can result from massive interventions.

The World’s Bottom 10%: 7.5% Live in North America and None Live in China … And Other True But Worthless Facts

Back in January, Oxfam published a statistic saying that eighty-five people have more wealth than the bottom half of the world population. It has become a widely circulated stat in the debate about inequality. (Forbes recently countered that the number is actually sixty-seven people.) But what do these numbers mean? I know full well that when most people hear “wealth,” they envision how much money and stuff people own. That is incorrect. These are assets. Wealth is your assets minus your liabilities (i.e., debt). What difference does that make?

Felix Salmon, a writer at Reuters, did some digging into the Oxfam report to find the data upon which they based their claims. (See: Stop adding up the wealth of the poor) It comes from Credit Suisse’s 2013 Global Wealth Databook and here is a graph Salmon clipped showing another take on the data:

Notice the top left corner of the chart. It shows that 7.5% of North Americans are in the bottom 10%. If you look further down, you will see that virtually no one from China is. How is that possible?

Take two hypothetical people:

 1. American Physician – A new physician with a salary of $150,000 a year. She has $125,000 dollars in student loans and a car with a $25,000 loan. That totals $150,000 of debt. She is renting an apartment. Her total assets including cash, car, and other items equal $50,000. That means her wealth is -$100,000.

2. Chinese Peasant Farmer – A Chinese farmer who earns the equivalent of $3 a day, or $1,400 a year. He has managed to save $50 in cash, and he has property worth about $250. He has no debt. His wealth is $300.

The physician would likely be found in the lowest decile while the farmer would be in the third or fourth decile. By Oxfam’s reasoning, the farmer is much wealthier than the physician! That is technically true, but does this have any correspondence with what most people think of when they think of "wealth?"

Just as advanced economies have upper-income levels that far outstrip the upper levels of emerging nations, so do they also have people with huge sums of net debt that far outstrip what people would have in emerging nations. Consequently, people from more advanced economies are going to dominate at either end of the wealth distribution. (You see evidence of this in the chart by the higher percentages at the extremes for North America, Europe, and Asia-Pacific excluding China and India.) People who are unable to earn or borrow much are going to be more toward the middle of the distribution. But as with the physician, high debt doesn’t necessarily mean deprivation.

Wealth is a useful measure for some purposes, but if we want to get an accurate picture of economic well-being, we must also include measures like income. Particularly important is consumption per capita because “income” doesn’t include transfers and non-cash assistance. Statistics often show people routinely consuming as much as double their cash income because of this discrepancy. Consumption tells us much more about how people actually live. In short, Oxfam’s stat is great for sensational headlines but does little to educate us about the challenges people face.

(Related: Your New Born Is Wealthier than 60 Million Americans)

Your New Born Is Wealthier than 60 Million Americans

Robert Reich's increasingly well-traveled observation is, "The 400 richest Americans now have more wealth than the bottom 150 million of us." But think about what that means. What is "wealth?" I routinely sense that most people incorrectly think this means how much money you have, or much stuff you own, including money (i.e., assets.) No.

Wealth is the sum of your assets minus the sum of your liabilities. Consequently, the person with a $300,000 home, $25,000 car, and other assets of $50,000 (total assets of $375,000), and with a $275,000 mortgage, $25,000 car loan, and $80,000 in student loans and other debt (total liabilities of $380,000) have a net worth (i.e., wealth) of -$5,000. The homeless person living under a bridge with no assets and no liabilities is wealthier than this person. Approximately 1 in 5 households have negative net worth, meaning your newborn is wealthier than 60 million Americans.

The fact is that most of us start as young adults with very little wealth (i.e., assets minus liabilities). In fact, I suspect many high school grads are wealthier than many recent college grads because college loans create a negative net worth for many. Wealth builds over the years through saving and investment. Someone with a modest income who is 55 years old and has been regularly saving and investing will likely have hundreds of thousands of dollars in wealth, while many 25-year-olds with professional degrees and good incomes will be at break-even or even have negative wealth. Wealth inequality is part of the natural process and will always be considerably greater than income inequality.

Reich's statement may be true, but it strikes me as sensationalist without more context. A great many of the 150 million people at the bottom have considerable assets but also have much debt. Some in the top 150 million have modest assets but little debt. I suspect Reich's statement gives the impression to many that half of America lives on just a few dollars a day. I'm just saying we need to be clearer in our thinking.