New School Politics

If you're a first time visitor, you may want to subscribe to our RSS feed, which will keep you up to date with all the latest New School Politics posts. Thanks for visiting!

The economic blogs have been buzzing about the recent column in the NYT by Dallas Reserve Bank economists Michael Cox and Richard Alm regarding economic inequality. They’re article argues that consumption is a better unit of measure for economic inequality, because it is a more accurate measure of living standards. As the tittle says, “you are what you spend.”

My reaction is that when we compare the economic conditions of people within an economy we should be looking at consumption figures, because they most accurately reflect a person’s quality of life at any given point. Given the marginal propensity to consume, it should not come as a surprise that inequality is less stark under this type of measurement (see first image below), and that savings/investment makes up the difference.

More importantly, however, is that consumption comes closer to taking into account innovative technologies which enhance standard of life across the board. These innovations are not reflected in monetary representations of income, or even consumption, which ultimately represent each individual’s “slice of the pie.” Improvement in technology does not only make everyone’s life better but it also makes living standards more equal as the changes are mass-produced and rapidly become social norm. Even Paul Krugman agrees with this point:

Yes, over the centuries economic progress has reduced some gross disparities — modern Americans are relatively unlikely to simply starve to death (though it can happen), so in that sense the gap between rich and poor has narrowed. But the question isn’t whether society is, in some sense, more equal than it was in 1900. It’s whether it is radically more unequal than it was in 1970.

Krugman, of course, holds that inequality has grown since that time. I would assume that is true, if one is to go by income distribution, or even consumption distribution since 1970. But once again, distribution is not always the best way to go about making these assessments. Keep in mind all of the advancements since 1970, and their speedy dissemination among consumers (bottom graph below). Goods like the microwave, VCR, cellphone, home computer, and internet all hit the market since that point in time, reaching between 60% and 95% of the population by the present. For instance, the microwave has made cooking food far more efficient for those who otherwise could not spare the labor and time, while internet access makes any type of information imaginable far more accessible, especially on the net, for those whose resources are otherwise more limited.

Ultimately, to answer Krugman’s question about equality since 1970, we need to weight the effects of technological advancements against the climbing inequality in monetary distribution. Such a task is difficult to exact, however, to to which Tyler Cowen proposes an alternative conclusion:

We do not know how inequality of welfare in America is faring over say the last thirty years. This is a point of overriding importance. Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we “do not know.” As in “know” and “not” put together.

Until and unless I know more, I am inclined to side with Cowen. Consequently, I think we are better off concentrating economic policy on how to raise productivity, rather than how to equal economic ends, because what we do know is that, as a former teacher of mine often cited, “a high tide does indeed raise all boats.”

Popularity: 37% [?]

Author of Freakonomics, Steven Levitt, along with Sudhir Venkatesh, released a preliminary version of their new study on the prostitution market in Chicago. My favorite discovery of all:

A prostitute is more likely to have sex with a police officer than to get officially arrested by one.

I recommend skimming the whole thing. Its interesting to see how economic laws can apply to even the taboo and fringe aspects of life. For instance, Johns pay a premium for sex without a condom; that premium is comparatively higher for more risky types of intercourse.

Moreover, the wages for the occupation of prostitute are above the national average at $25-30 per hour. The relatively high wages of prostitutes can be attributed to the significant risk associated with the job.

The new issue of The Economist features an article on the study.

Popularity: 21% [?]

Along the same lines of voter irrationality, especially on economics, here is a link to a compilation of polls on issues of international trade. Despite the fact that economic theory such as the logic of comparative advantage demonstrates how global trade is omni-beneficial–that the relative majority of economists agree that freer international trade is healthy–and that all the evidence points to more international trade corresponding with higher living standards, most people in America still believe it is a detriment. The most recent of the polls give you an indication of public opinion: 

NBC News/Wall Street Journal (12/14-17/2007)  

Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheep labor? 

Good: 28%

Bad: 58%

Equal 11%

Unsure: 3%   

Popularity: 34% [?]

According to a CNN/Opinion Research poll this week 57% of Americans believe we are currently in a recession. But, of course, we are not actually in a recession as a recession would connotate at least one (by most definitions, two) quarter of negative economic growth. This is another example of the economic illiteracy of the general public.

Bryan Caplan, a professor of econ at GMU, talks a lot about this, including in his recent book. Remember these Americans are the very ones who will be going to the polls very soon to vote for the next leader of the free world and decide future economic policy. The dichotomy between economic wisdom and conventional wisdom can at times be stark, which is why the policies of democracies and majorities can often be unwise.

Popularity: 22% [?]

Heritage Foundation Senior Fellow Robert Rector recently published an essay on the standard of living among poor Americans. Those designated as poor include the bottom 12.6% of economic agents in the US which amounts to 37 million people. Most of his data came from the Census’ annual report from the last year. I highly recommend reading the whole thing. Here’s a tasty bite:

In good economic times or bad, the typical poor family with children is supported by only 800 hours of work during a year: That amounts to 16 hours of work per week. If work in each family were raised to 2,000 hours per year—the equivalent of one adult working 40 hours per week throughout the year— nearly 75 percent of poor children would be lifted out of official poverty.

Father absence is another major cause of child poverty. Nearly two-thirds of poor children reside in single-parent homes; each year, an additional 1.5 million children are born out of wedlock. If poor mothers married the fathers of their children, almost three-quarters would immediately be lifted out of poverty.

The most dawning thing of course is that the average “poor” American is supported by just 16 hours of work per week. This naturally leads us to question, why? Well, first we should ask what simple economics would lead us to ask–what are the incentives? Incentives as they apply to the poor may be personal–they prefer to be lazy and dependant over being diligent and competitive–while others may be government induced–they prefer to work less and rely more on welfare and government transfer payments. Incentives that apply to employers include the inflated cost of their labor–everything from minimum wage to employer mandated benefits to other embedded costs of business–which discourages businesses from hiring for longer hours. Moreover, many of the poor may not be worth being employed at all due to sickness, or disability, or downright irresponsibility.

With an unemployment rate approaching full employment, its not reasonable to accuse lack of employer demand for the short work weeks. While certain leftist economists may say that the demographic in question represents a disenfranchised group of discouraged workers who have been displaced by the capitalistic system, for if our amount of worker disenchantment was high so too would our employment rate in general as their levels only logically correspond.

The breakdown of the family, specifically among poor black families is a perpetual problem that certainly has economic implications. For one reason or another there is a lack of family structure for many in poor urban neighborhoods. This simply diminishes the opportunity to create a stable and effective environment in which to raise children. The result is extremely detrimental and perpetuates a cycle of delinquency. The answer to what causes this delinquency is more broadly sociological and I do not think I am equipped to give ideas, but let me say that it is certainly an intriging issue that deserves to be explored.

But in terms of what I can recommend, there are certainly political reforms that can encourage more work among the poor. In order to amend the poor incentives that exist at present, we should eliminate the price floor on labor as well as other employment regulations on businesses and also curtail welfare as well as entitlements to as large an extent as the political process will allow us. If we remove all of the incentives not to work it is logical to assume that people will start working harder and adapting a more independent mind set to their own lives, and by weeding out the lazy yet able workers we can more accurately identify those who truly have disorders and are not able to work so that charities, for instance, have an easier time identifying those who are truly in need. 

Popularity: 52% [?]

When considering policy–or anything for that matter–remember how people react to incentives. Assuming “you” are the decision maker:

 1. When you bear the costs for someone else’s benefit, you mind the measure of the costs but not the benefits.

2. When someone else bears the costs for your benefit, you mind the measure of the benefits but not the costs.

3. When one person bears the costs of another person’s benefit, you mind neither the measure of the costs nor the benefits.

4. But when you bear the cost and the benefit, you will mind both the cost and the benefit.

Seems simple enough, no? Then why do so many insist of distorting healthcare to mimic numbers 1, 2, and 3 rather than leaving it to 4.

Popularity: 33% [?]