Boudreaux's Time Machine

Over at Cafe Hayek, George Mason economics chair and Cato adjunct scholar Don Boudreaux has come up with a wonderful thought experiment to illustrate just how absurdly inaccurate the government's methods for calculating real wages are. Don looks at the Census Bureau report (from the depths of which the New York Times editorial page draws forth the blackest despair) and finds that real median family income has increased an unimpressive 31 percent in the 37 years from 1967 to 2004. In 1967 it was $35,379 (in 2004 dollars), and in 2004 it was $46,326.

Are we really only 31 percent–less the 1 percent a year–better off? Don's thought experiment asks us to imagine that the incomes and years are swapped, and then see how we feel. Would you rather live in 1967 on $46,000 a year (the 2004 median), or in 2004 on $35,000 (the 1967 median).

Let's take it up a notch. So, it's 2004 and you make $35,000 (let's pretend it's individual, instead of family income). A gangly professor with crazy hair drives up in a time-traveling Delorean and offers you the 1967 equivalent of $46,000 (that's a 31 percent raise!) if you'll let him drop you off in 1967, where you'll live for one year. You say, “Right on!” and take a lift to yesterday.

So now you're in 1967 with about $8,500 in your pocket, and you're ready to roll. Have you become wealthier?

Well, as Don notes, housing is smaller and more expensive. Central air conditioning, I should add, is a luxury. Your expensive and ridiculously large (but not the screen) TV gets three channels with fuzzy reception. No Deadwood (or the Wire, or Weeds, or Sports Center, or Project Runway, or Good Eats, etc.) for you! It's a darn fine year for rock & roll, but you'd like to be able to listen to Dylan on your iPod (you used to download anything you wanted to listen to on demand) or in your car. Your car! It costs almost exactly the same as a 2004 car, but is less comfortable, has no auto anything, gets horrifying gas mileage, and is a death trap without a shoulder belt, airbags, or anti-lock brakes. It handles like a whale. You start to think your Jetta back in 2004 has rather more than an $11,000 edge on this bucket. That makes you a little depressed. Which is a problem, because your Prozac prescription ran out and there's no recourse but a Freudian therapist who tells you your malaise has something to do with your mother. Trying to look on the bright side, you attempt to be grateful that you don't need Cialis, or chemotheraphy. The food is terrible. You can't get a cup of coffee that doesn't taste like cardboard. The book stores seem to have nothing. A simple calculator costs about the same as your Blackberry. You lose a contact lens, and end up with Coke bottle “birth control” glasses. You want to go home.

The professor materializes again and tells you that he lied. Ha! You're not staying for a year. You're staying for the rest of your life. But he guarantees your salary each year will be that year's inflation-adjusted equivalent of the salary that you have in the “stayed-in-2004” timeline. (In 1973, you'll get your 2010 wages, etc.) You start to cry (no Prozac!). The professor exclaims, “What's the problem, kid? You'll always be wealthier than you would have been. And besides, it's a simpler time. People bowl together!”

You get the idea. Don has a bunch of great examples of things you can't get in 1967, only some of which I stole.

How much would you have to be paid each year to agree to live the rest of your life from 1967 on? Maybe I'm weird, since my entire life would be different–and almost certainly worse–if it wasn't for the Internet. (I almost certainly wouldn't have most of my friends, my very cool job, and more.) There are so many things I rely upon that you couldn't buy at any price in 1967 that it's pretty hard to think of a number that's high enough to compensate for the loss. Personally, I don't care that much about improvements in TV picture quality, or even how comfortable, safe, and gadget-laden cars are now. It's the things that just didn't exist in 1967 that do it for me.

Here's another thought experiment: Suppose you get a medical procedure with new technology that saves your life. It didn't exist last year, but now it does. If you had been sick like this last year, you'd be gone. So, in a year, you went from a condition in which no amount of money would have been able to save you from death, to one in which a mere $10,000 buys you the ability to see your daughter's wedding. How much wealthier did you become in the space of that year? Is it more than 31 percent?

[Cross-posted from Cato@Liberty]

Note to Deliberative Democrats (and Iowans)

Peter Beinart hates you:

The Iowa caucuses undermine a principle that both the Clintonites and the Deaniacs hold dear: democracy. In a primary, you can vote all day; voting takes a couple of minutes; your vote is secret; and if you can't make it to the polls, you can vote absentee. To participate in the Iowa caucuses, by contrast, you must arrive exactly at 6:30 p.m., and there are no absentee ballots. (If you work the night shift, tough luck.) Once there, you must stay for several hours before publicly declaring which candidate you support. Not surprisingly, while more than 70 percent of registered Democrats participated in the New Hampshire primary in 2000 and 2004, a mere 10 to 20 percent participated in the Iowa caucuses.

Please explain to Ackerman and Fishkin how this is not only not a superior form of democracy, but is not democracy. The mind boggles.

Ahem! More people voting is not more democratic. The Greeks, inventors of democracy, didn't let just anybody vote, now did they? You obviously need to be more motivated than average to participate in a caucus. And people who actually speak on behalf of candidates, sharing their reasons, and listening to others do likewise, are more likely to be well-informed than people who just shamble into the junior high gym and pull a lever. Beinart simply provides democracy-lovers reason to think all states should have caucuses just like the great state of Iowa.

Equally Wrong

Kevin Drum attempts to answer my question about income inequality. He fails. He tries out a few hypotheses about the mechanism underlying ineuality in income growth and … he is unceremoniously dissected by Russ Roberts, a real economist. After flicking over each of Drum's ideas, Russ says:

The real problem with these theories of inequality is that they fail to see that the income distribution is an emergent phenomenon rather than under someone's nefarious control.

That's part of what I was rather longwindedly getting at in my last inequality post. The statist liberal pundits seem to be so weak on microfoundations that they end up offering simply baffling Underpants Gnome explanations. Russ quotes this nice bit from Warren Meyer of Coyote Blog:

What's bizarre about all of these statements is it treats wealth, and in this case specifically income growth, like a phenomena that is independent of individuals and their actions.  They treat income growth like it is a natural spring bubbling up from the ground, and a few piggy people have staked out places by the well and take all the water before the rest of us can get any.

The mysterious world of numinous unmoored macro forces that are somehow rigged to benefit just the rich is a world of magic and wonder. Good thing we don't live there.  

Mismeasuring Progress

It is shocking to discover just how much of the debate over politics and policy rests on semi-arbitrary government standards for measuring things. For example, if you believe the Consumer Price Index speaks with absolute authority, then you will believe obviously absurd things, like the idea that real wages have stagnated. Virginia Postrel has a nice short essay in Forbes [free reg. req.] on this aspect of the mismeasurement of economic progress. If Bureau of Labor Statistics true-believers are right, then

… you have to wonder who's buying all those flat-screen TVs, serving precooked rotisserie chicken for dinner or organizing their closets with Elfa systems. “Anybody who thinks things are getting worse should go to Best Buy and notice the type of people who go to Best Buy,” says economist Robert J. Gordon of Northwestern University.

Gordon is the author of a much-cited study showing that from 1966 to 2001 real income kept up with productivity gains for only the top 10% of earners. What the pessimists who tout his study don't say is that, while Gordon does find that inequality is increasing, he's convinced that the picture of middle-class stagnation is false.

“The median person has had steadily improving standards of living,” he says. But real incomes have been understated. The problem lies in how the U.S. Bureau of Labor Statistics calculates the cost of living.

Similarly, the American Enterprise Institute's Nicolas Eberstadt has a terrific essay on the bizarre and inaccurate method by which the government calculates the poverty rate in the new Policy Review. Eberstadt shows that the official poverty statistics often get things backwards, indicating that poverty is getting worse when it is in fact getting better according to a number of other noncontroversial measures of economic well-being:

The official poverty rate is incapable of representing what it was devised to portray: namely, a constant level of absolute need in American society. The biases and flaws in the poverty rate are so severe that it has depicted a great period of general improvements in living standards — three decades from 1973 onward — as a time of increasing prevalence of absolute poverty. We would discard a statistical measure that claimed life expectancy was falling during a time of ever-increasing longevity, or one that asserted our national finances were balanced in a period of rising budget deficits.

Journalists unfortunately tend to take government numbers as gospel, and therefore end up communicating to the public a badly distorted picture of the state of our economy and society. And far too often intellectually savvy commentators who ought to know better repair to government statistics as if they are pure data, untainted by systematic methodological bias. However, far from a neutral picture of empirical economic reality, we get a funhouse mirror. I don't think there is any intentional bias in these measurement methods. But there sure is ideological resistance to replacing them with more empirically adequate measures. Things really are getting better all the time, but “reality-based” economic measures might get in the way of some people's pet policies. And we can't have that! I think we'll eventually get better official methods for measuring real income and poverty, but not without a fight.

[cross-posted from Cato@Liberty]

What, Me Worry… about Inequality?

Ezra tries to explain to me why “liberal” economists are worried about inequality as opposed to some people's not having enough to lead a good life. Maybe it's a good sociological explanation. I don't know. But I'm afraid Ezra's explanation vexes me. Here's Ezra:

What concerns liberal economists is the relative apportionment of income. Inequality is something of a proxy for this. Take the so-called Krugman calculation which, in the early '90s, showed that 70 percent of the post-1973 rise in incomes had gone to the wealthiest 1 percent. As he put it, “when incomes at the top of the scale are rising faster than the average, incomes farther down must correspondingly grow less rapidly than the average. In an arithmetic sense, we can say that most of the growth in productivity was “siphoned off” to high-income brackets, leaving little room for income growth lower down. “

What we're worried about is what's called the “inequality wedge.” The gap in incomes is so vast and the pool of money at the top so great that growth, which once would have rushed all the way down the income ladder (rising tides, all boats), isn't making it down the distribution, instead clogging up at the top percent or two (rising tide, only yachts).

Sadly, this makes almost zero sense to me, no doubt due to a Hayek-Buchanan-Nozick gestalt switch about “distribution” that I underwent years ago, forever crippling my ability to think like, well, the staff of the American Prospect.  Ezra's picture seems mysterious to me. It looks as if, first, there is something called “the economy.” Then there is something called “growth,” which is the size of the economy getting bigger. And then there is a matter of how to divide or share this year's slightly larger pool of wealth (a gigantic pile of doubloons in the basement of the Treasury?) through the “apportionment” of income. I'm sorry, no.

What there is is an ongoing dynamic pattern of exchange, within and across national boundaries, that creates new wealth. For each exchange among the billions that create the overall pattern (labor for money, money for interest, money for capital goods, money for consumption goods, etc.) there is a surplus from exchange and a distribution of that surplus among the parties to the exchange. We can count what everybody within some semi-arbitrary geographic region gained or lost in money terms from all their exchanges between period one and period two. But there is no further question about distribution. That was all already settled when the exchanges were completed. If there was no worry for the interested parties about the distribution of the surplus of each exchange, then it is hard to see why there is a worry later about the aggregates. 

Here's why I might worry about intra-national income inequality.

Nation-states aren't completely arbitrary regions from an economic point of view because the policies of national jurisdictions change the relative price of various forms of exchange for the people living within those jurisdictions, and this partly (sometimes largely or completely) determines what particular exchanges will and won't get made. If you see a lot more exchange, or a lot more complex exchanges, going on within a national jurisdiction, that probably has something to do with the rules that govern the jurisdiction. If certain jurisdictions include a lot of people involved in a lot of inter-jurisdiction exchanges, then that says something good about the rules there.

Now, the rules that help determine what exchanges will and won't be made—policy, “institutions,” etc. — will have a definite effect on the relative size of incomes within the jurisdiction.

Let me say that I'm not going to say anything about the “distribution of income” here, because people too often equivocate between the statistical and disbursement senses of “distribution.”  Here's how I think about it. Distribution is a matter between parties of an exchange, not between co-members of a political jurisdiction. Further, your money income in a period is the sum of your money distributional shares from all the exchanges closed in that period. It is a straightforward fallacy of composition to think of that sum as itself a distributional share. So, when we're comparing incomes of co-members of a political jurisdiction I'll say we're talking about  the disposition, not the distribution, of incomes in that jurisdiction.  You are of course free to think about the distribution of income just as long as you promise to think of “distribution” in a strict statistical sense, and not as the “apportionment” of individual shares from some mysterious pooled “national income,” since that is voodoo gibberish on par with “intelligent design.”

OK! A good example of how policy affects the disposition of incomes is the disemployment effect of a high minimum wage. People whose labor is worth less than the price floor will be excluded from exchanges of labor for money, and so will have very little money income at the end of the measured period. Or, to take another example, a big business-backed regulation or legal action that pushes smaller competitors out of the market, is generally meant to ensure that the big business will be party to a larger portion of the exchanges in that domain (and if they achieve monopoly-ish status, a larger take of the surplus), so that its owners and officers will have a bigger income than they would have had in a competitive environment.       

Now, it seems pretty likely that greater inequality in the rate of income growth (a different thing than income inequality per se) for people at the top and middle of the income scale might reflect a change in exchange opportunities and the distributional terms of those opportunities for people at different points of the scale. I am worried just in case this is a consequence of rules like price controls or anti-competitive regulation that create a pattern of exchange that is distorted compared to the pattern that would have emerged in the absence of such exchange-restricting rules.

Now, I don't find it totally implausible that the decline of unions as an agent of political predation for a good chunk of the middle class has decreased the rents accruing to many middle class workers. But that's good. And I don't find it implausible that some corporations have become more efficient at gaming the regulatory and government contracting processes to increase their political rents. That's bad. So a combination of that good thing and that bad thing could be part of the inequality story. But in that case, I'm not worried about the inequality per se; the justice or injustice of the rules generating that kind of inequality doesn't flow from the inequality itself, but from interference or non-interference with the moral right to enter into voluntary exchanges with others on mutually acceptable terms.

If inequality in the rate of income growth is just a function of a change in the market value of capital, human or otherwise, then I can't see the normative upshot. If the payoff to investment and education has gotten bigger, then that's just a good incentive for people to get more edu
cation and save more. Now, if some people don't have access to an adequate education (and the public school system ensures that many people—urban minorities especially—don't), then they don't have enough, and that worries me plenty. And if unwisely anticipated Social Security and Medicare benefits suppress savings, such that people are investing too little, and missing out on potential returns to capital, that would ensure that they have enough in retirement, then that's a big problem with the jurisdictional rules of the game, and we ought to worry. But the issue just isn't inequality.  

Well, that's a mouthful.

Philosophical wrap up… My view is that materially egalitarian liberalism is not really a form of liberalism at all. It is a socialist corruption of liberalism. Liberal egalitarianism properly concerns the equality of political power—none has a natural right to rule, and unequal political power requires special justification and special limitation. In terms of the material resources we command, liberalism is concerned that we are equal in the sense that everyone's liberties have genuine value—are not “merely formal”—and this is a matter of people having enough to develop their capacities and to realize their meaningful ends. Property, rule of law, civil society, and free exchange in a well-functioning price system—backed up if necessary by minimal means-tested welfare and educational assistance—is the best way to make sure everyone has enough.  

So, I still don't understand why welfare economists should worry about inequality, much less liberals.      

[Note: By the way, the Krugman quote Ezra provides is extra-mysterious. Yes, if somebody is above average, then somebody is below. Logic! But I am not familiar with this “siphoning” in an “arithmetic sense.” Suppose height is growing fastest in the top 5% of the height distribution. Are those tall people “siphoning off” height-growth lower down the distribution? What is Krugman even trying to say? I don't know, but I suspect he is managing to confound different senses of “distribution” without even using the word.]

Questionable Tautologies?

From the incomparable, self-satirizing Stirling Newberry:

Even today there are people arguing that Ayn Rand is a major “liberal” theorist, and fighting to preserve her holy memory on the internet. This from a philosophy that starts out from two questionable tautologies and worships getting cancer. No rhapsody anywhere in Rand's books surpasses her paean to smoking.

I don't know, if I'm going to question anything, it's not going to be a logical truth! And of course, the worst thing about Rand is… what? Smoking! This guy is a master of the unedited non-sequitur brain dump. Does he give money to Josh Marshall or something?
[HT: Diana Hsieh.]

Status and Purity: Two Great Tastes that Taste Great Together

I was delighted to see two of my intellectual fixations—the taste for status and the taste for purity—bundled together in the New York Times.

The urge to achieve social distinction is evident worldwide, even among people for whom prominence is neither accessible nor desirable. In rural Hindu villages in India, for instance, widows are expected to be perpetual mourners, austere in their habits, appetites and dress; even so, they often jockey for position, said Richard A. Shweder, an anthropologist in the department of comparative human development at the University of Chicago.

“Many compete for who is most pure,” Dr. Shweder said. “They say, ‘I don’t eat fish, I don’t eat eggs, I don’t even walk into someone’s house who has eaten meat.’ It’s a natural kind of social comparison.”

Awesome. I have a longish essay forthcoming in the Center for Independent Studies' Policy magazine about the politics of relative position and status competition. One of my main points is that there is an indefinite number of culturally mediated dimensions of status competition, and competition on some dimensions is beneficial or benign, making it impossible to draw determinate policy implications out of the simple fact that we're motivated by status. Competition for purity among mourning windows strikes me as benign.

And I recently wrote a piece for Reason laying out why Democrats should stop listening to George Lakoff and start listening to Jonathan Haidt, who has done fascinating work on the psychology of purity and disgust, based in part on the work of Shweder.

I think status competition on moral dimensions can be a good thing, as long as the relavant moral emotions and principles are good. But I think it can also be distorting. I'd guess that some Islamist terrorism is motivated by status competition on Haidt's ingroup and purity dimensions of moral emotion. But this also accounts in part for very successful church charity drives. The way innate dispositions are mediated by culture is almost the whole ballgame.

Why Do Economists Care About Inequality?

The topic du jour on the econ blogs is Krugman's claim about the effect of politics on income inequality. Before I solve that problem for you in different mindblowing post, let me say that I don't really understand why economists care about income inequality qua economists. I understand why they care about income: more money buys a more preferred consumption bundle, which, by definition (not mechanism) gives you more utility.

What leaps to mind is that economists must be impressed with diminishing marginal utility (DMU) arguments for redistribution. But this is not qua economist. Orthodox utility theory is not in the business of interpersonal utility comparison, so there is no language in which to say that overall utility has been increased by redistribution. There's just one guy's utility going down, another guy's going down, and no way to say whether one compensates for the other. (This is one of the reason some economists are attracted to happiness research: they want a language in which to do principled interpersonal utility comparisons.) But, as I have noted in the past, when economists have anything interesting to say, it's usually because they are applying what I like to call economic folk morality, which plays fast and loose with the various senses of utility. Economists qua amateur moral philosophers in my experience are very impressed with DMU justifications for redistribution.

But professional moral philosophers with high-level training in economics, such as David Schmidtz, are rather better at this kind of thing than economists who occasionally indulge their philosophical prejudices on blogs and in the NYT. Schmidtz shows that even assuming everyone has the same utility function, marginal utility diminishes smoothly, there are no incentive problems, and redistribution costs nothing, it still does not follow that utility must increase when inequality is reduced.   

Schmidtz notes that DMU is precisely why some dollars are not consumed, but invested. There is a point where an extra dollar will have a higher expected utility if allocated to production than consumption, and we need enough people at that point to have the kind of production that ensures that there is anything to redistribute. From Schmidtz's Elements of Justice (which I highly recommend), where he discusses a simple example involving the redistribution of corn:

Precisely because of diminishing (that is, downward-sloping) marginal utility of consumption, production becomes a higher-valued use as wealth … rises.

Note: Production's tendency to be more desirable relative to consumption is a general consequence of consumption's DMU, and not an artifact of an odd example. The general conclusion: If a community does not have people out that far on their utility curves, so that they have nothing better to do with marginal units of corn than to plant them, the community faces economic stagnation at best.

Therefore, unequivocal utilitarian support for egalitarian redistribution is not to be found in the idea that consumption has DMU. This result in no way depends on questioning the premises of the DMU argument. On the contrary, it is grounded in DMU. A society that takes Joe Rich's second unit [of corn] and gives it to Jane Poor is taking that unit away from somebody who, by his own lights, has nothing better to do than plant it and giving it to someone who, by her lights, does have something better to do with it. That sounds good, but in the process, the society takes seed corn out of production and diverts it to current consumption, thereby cannibalizing itself.

There is much more to Schmidtz's argument, and I encourage you to check it out. Like Schmidtz and like a bad socialist, I am cold on material equality, and, like a good liberal, warm on material sufficiency. What matter is that people have enough to realize the ends that make our lives worth having. If a system that encourages those who already have enough to invest their extra in production is more likely than a heavily redistributive system to provide  everyone with enough, then a highly materially unequal society may best serve liberal ideals.

Whether we should be morally worried about inequality depends on its sources. But then the real worry is the source of inequality, not inequality per se (though the resulting inequality may exacerbate or consolidate the original injustice.) If inequality is based in predation, then the moral worry is predation. In a system like ours rife with corporate welfare, some people do get rich off political predation. (I can see K St. from where I'm sitting!) I don't know how many of the top 1% (that both includes Krugman and makes him insane with indignation) got there through rent-seeking. Maybe a lot, but certainly not all the software millionaires, and all those entertainment and sports stars. Anyway, as I've mentioned before, redoubling our efforts Krugman-style to take more money from the rich through the political system is mostly an effective way of providing the rich with an incentive to put more money into the political system to prevent having even more taken. It is in principle possible for the people with the least leverage and weakest incentive to bend the political system to their will,  just as it is in principle possible for a dog to catch its tail. The only option for separating money and political power is to reduce the desirability of political power by reducing its scope and effectiveness. My guess is that constraints on government power, such that the rich would have less incentive to try and dominate it, would lead to more people having enough, but perhaps even greater inequality.   

Why Doing is Better Than Having

Bryan Caplan on Gilbert

“Money itself doesn't make you happy,” [Harvard psychology professor Daniel] Gilbert says. “What can make you happy is what you do with it. There's a lot of data that suggests experiences are better than durable goods.”

I'm baffled. Don't many durables provide a flow of experiences? A nice T.V. is the obvious example; a fine stereo system's another. My CD collection is my pride and joy – whenever I worry about being robbed over vacation, my first thought is the sorrow of seeing my CD shelves empty.

I don't share Arnold's methodological aversion to happiness research, but this sounds like a very hasty generalization.

Two points. (1) Market egalitarianism. Qualitiative differences between cheap and expensive consumer goods is almost nil. There is almost no experiential difference between a cheap TV and a “nice” TV. If Deadwood is good on a $2000 plasma screen on HBO, it's 98% as good on your sister's giveaway used 19″, a $35 DVD player, and Netflix. The extra expenditure buys almost nothing in terms of the quality of experience. Same with the music. For $4.95 a month, I can get I'm guessing 75% of of Bryan's CD collection on Yahoo. Capitalism makes money worth much less when it comes to manufactured non-positional goods. (2) Adaptation. The mind is a novelty whore — a change detector. Consciousness loses its grip on the added quality of a premium picture, sound system, etc., very fast. The cheap, almost perfect substitute for an expensive stereo is a cheap stereo. The cheap substitute for an exquisite meal at the best restaurant in Paris is… what? IHOP in Arlington? A great memory and a great story is an ongoing flow of positive experience. Gilbert is right.