Category Archives: Poverty

Markets and Mobility

25 Thursday May 2017

Posted by in Markets, Poverty

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Government aid programs tend to perform poorly, especially in developmental terms. In the U.S., anti-poverty programs keep the poor running in place, at best. Yes, they provide minimal income, but they seldom offer a way out and usually discourage it. Moreover, the administration of such programs diverts a significant share of funds to well-heeled civil servants and away from the intended recipients. Foreign aid programs are probably even worse, functioning as catch basins for funding corrupt officials. Progressives, in particular, persist in taking the paternalistic view that we must rely on government action to “care for” and “protect” the poor, able or not. Markets, on the other hand, are held to offer no promise in fighting poverty. In fact, the general assumption made by the progressive left is that markets exploit them.

The truth is that markets offer great promise for encouraging economic mobility. Arnold Kling offers a good conceptual construct in a recent post: while humans are often subject to irrational tendencies in their assessment of choices, their interactions in markets offer a way of smoothing irregularities and disparate bits of information, providing useful signals about the availability of resources and demands for their use. The result is a flow of information that best signals opportunity. Kling calls the process of market interactions the “collective mind”. Rather than encouraging individuals to fully participate in effective markets, free of intervention, we instead deny them the best opportunities for gain. The notion that the poor must be “protected” from markets is embedded in policies like wage and price controls, benefit mandates, overtime rules, drug laws, occupational licensing, and innumerable other harmful regulations. The poor should have the unfettered ability to avail themselves of the social efficiencies of Kling’s collective mind.

Last Thursday, Don Beaudroux’s “Quotation of the Day” was taken from an essay by Ludwig von Mises in which he characterized private property in a market economy as “property by consumer consensus”. In other words, consumers reward sellers who create value, and those rewards accumulate in the form of private property. Likewise, consumers punish poor performance, which has a cumulative negative impact on one’s ability to accumulate or hold onto private property. The benefits conferred by consumer preference do not stop with the owners of the firm. Others productively affiliated with the firm also reap gains in rewards, allowing them to accumulate private property. And of course, consumers are the beneficiaries in the first place: in their judgement the firm delivers value in excess of price. The key here is that free market rewards and penalties are deserved and based on productivity in meeting desires, and only the market can distribute property so efficiently. The able poor can certainly add value and thereby accumulate property, if only given the opportunity.

Jeffrey Tucker has stated that “Only Markets Can Win the War on Poverty” (ellipses are my edits):

“The default state of the world is grueling poverty, universal insecurity, and short lives. When governments do come along, they nearly always serve themselves first. … Capitalism made huge progress toward the conquest of poverty. For the first time in history, the productive resources of society turned from serving mainly the elites toward serving the common person. This change alone began to flip the power narrative of social evolution.

And this revolution continued for two some two-hundred years, during which time the average life span expanded dramatically, infant mortality collapsed, incomes rose, and the great project of universal ennoblement achieved an unprecedented boost. And this trend continues today wherever markets are given freedom to function, property rights are secure, and people can associate and trade without molestation by the elites. … In short, capitalism made huge progress toward the conquest of poverty.“

Markets are not harmful to the poor. To the contrary, as Tucker says, they have helped lift billions out of poverty around the globe. But government increasingly plays the role of big provider and arbiter of what can and can’t be traded, by whom, and at what price. The suspension of the market mechanism by this process denies the poor the opportunities made possible via participation in free markets, whereby Kling’s “collective mind” processes massive quantities of information and acts upon it spontaneously. But the “collective mind” concept, as a description of market interactions, is too simple: we know that individuals act on the signals provided by the market and are rewarded based on how effectively they do so. There is no doubt that the poor can do that too. It’s time to cast aside the paternalistic and destructive notion that the able poor must be insulated from markets.

The Progressive Underclass

09 Friday Sep 2016

Posted by in Poverty, Welfare State

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filling-out-forms

The underclass has not fared well under government policies enacted in explicit efforts to improve its members’ well being. If there is any one point on which I agree with Donald Trump, it is his recent assertion that “progressive” policies have been disastrous for minorities. Indeed, there is evidence that many public programs have been abject failures, even in terms of achieving basic goals. Some programs have managed to improve the immediate lot of the impoverished, but they have done so without freeing the beneficiaries of long-term dependency,  and perhaps have encouraged it. An underlying question is whether there is something endemic to these public initiatives that guarantees failure.

Arguments that public programs have such weaknesses are often based on the negative incentives they create, either for the intended beneficiaries (certain anti-poverty programs) or for employers who might otherwise work with them (absent minimum or “living” wages or regulatory obstacles). Then, of course, there are public services that are effectively monopolized (public schools) because they are “too important” to leave in the hands of private enterprise, with little recognition of the shoddy performance that is typical of institutions operating free of competitive pressure. And government action such as environmental policy often has a regressive impact, costing the poor a far greater share of income than the rich, and causing direct job losses in certain targeted industries.

A post from The Federalist Papers on “The Top 5 Ways Liberal Policies Hurt The Poor” is instructive. In addition to the welfare incentive trap, it highlights the failure of public schools to serve the educational needs of the poor, the minimum wage as a system of marginalization, urban gun control as a sacrifice of defenseless victims, and the extension of rights to illegal immigrants at the expense of U.S. citizens, especially low-skilled workers.

A fine essay by Kurt Williamsen entitled “Do Progressive Policies Hurt Black Americans?” focuses on three general areas of failure: public education, the workplace and welfare. He notes that certain educational innovations have met with success, yet are ridiculed by the progressive left because they promote competition.  He cites the dismal consequences for blacks of various labor and employment laws: “prevailing wage rates, the minimum wage, union bargaining power, occupational and business licensing laws, and affirmative action laws to comply with federal and state contracting requirements“. Even more astonishing is that the original motive for some of these policies, such as minimum wages and prevailing wage laws, was to keep unskilled blacks from competing with white union labor. They still work that way. Williamsen also discusses the fact that the welfare state has essentially left low-income blacks running in place, rather than lifting them out of dependency. Unfortunately, those programs have also inflicted large social costs, such as the disintegration of family in the black community:

“Welfare programs had an insidious effect on black culture — more so than white culture — because of the way they were designed. With dramatically more blacks than whites being in poverty and with less future prospects when the War on Poverty got started, young black women often had children out of wedlock, beginning a cycle of enduring poverty and welfare wherein they relied on welfare as a main source of income, as did their children. Welfare provided more money for young women with fatherless children, on average, than the same young women could have made if they were employed. If a woman became married, she would lose benefits, making it beneficial for her to either just hook up with men or cohabitate, rather than marry.“

Redistributionist policies have long been criticized for creating incentive problems among recipients of aid. Some of those problems have been corrected with the Earned Income Tax Credit, which operates as something of a negative income tax, and Temporary Assistance for Needy Families (TANF), which incorporates work requirements. However, as Vanessa Brown Colder at the CATO Institute points out, there is a need for further reforms to the many underperforming programs.

Like any large government program, redistribution also damages incentives for those who must pay the tab, generally those at higher income levels. High taxes ultimately discourage investment in capital and in new businesses that could improve the employment and income prospects of low-income segments. Here is Andrew Lundeen at The Tax Foundation:

“When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages.“

Redistributionists do their intended beneficiaries no favor by advocating for steeply progressive tax structures, which simply discourage investment in productive risk capital, impairing growth in labor income. This chart from Dan Mitchell shows a cross-country comparison of capital per worker and labor compensation. Not surprisingly, the relationship is quite strong. The lesson is that we should do everything we can to improve investment incentives. Punitive taxes on those who earn capital income is counterproductive.

Mitchell emphasizes a few other statist obstacles to empowering the disadvantaged here, including a brief discussion of how land-use regulations harm the poor. He quotes Leigh Franke of The Urban Institute:

“Restrictive land-use regulations, including zoning laws, are partially to blame for the stagnant growth… Land-use regulations may be intended to protect the environment or people’s health and safety, and even to enhance the supply of affordable housing, but in excess, they restrict housing supply, drive up home prices, and limit mobility. …More and more zoning restrictions meant less construction, fewer permits, and a restricted housing supply that drove up prices even further. …cities often have stringent zoning laws, a restricted housing supply, and high prices, making it nearly impossible for lower-income residents and newcomers, who would likely benefit most from the opportunities available, to find affordable housing.“

On the topics of local housing, labor laws, services, and regulatory burdens, Scott Beyer covers the maladies of that most progressive of cities, San Francisco. The city’s policies have helped create one of the nation’s most expensive housing markets  and have made the city’s distribution of income highly unequal. It is no coincidence that the politics of most of our declining cities are dominated by the progressive left.

Here is another fascinating example of negative unintended consequences arising from intervention on behalf of a disadvantaged group: so-called “Ban the Box” (BTB) initiatives. These laws prevent employers from inquiring about a job applicant’s  crime record, at least until late in the hiring process. Mitchell recently cited a study finding that BTB laws are associated with a reduction in employment opportunities for minorities. This disparate impact might be the result of more subtle screening by employers, demonstrating a reluctance to interview individuals belonging to groups with high crime rates. Apparently, employers are willing to give minorities a better chance when information on crime history is disclosed up-front.

Deleterious forms of intervention may vary from one disadvantaged group to another. For example, Native Americans have long been handicapped by federal control of their lands and their natural resources. Regulation of activity taking place on reservations is particularly burdensome, including a rule under which title to land must:

“… be passed in equal shares to multiple heirs. After several generations, these lands have become so fractionated that there are often hundreds of owners per parcel. Managing these fractionated lands is nearly impossible, and much of the land remains idle.“

Progressives often vouch for interventionism on the belief that thpse policies are ethically beyond question, such as climate change regulation. Of course, the science of whether anthropomorphic climate change is serious enough to warrant drastic and costly action is far from settled. The existence of high costs is deemed virtually irrelevant by proponents of activist environmental laws. Those costs fall heavily on the poor by raising the cost of energy-intensive necessities and by raising business costs, in turn diminishing employment opportunities. This is more pronounced from a global perspective than it is for the U.S., as emphasized in “Protect the poor – from climate change policies“, at the Watts Up With That? blog.

The world’s poor secure massive benefits from trade, but progressive policies often seek to inhibit trade based on misguided notions of “fairness” to workers in low-wage countries. And trade restrictions tend to benefit relatively high-wage workers by shielding them from competitive pressure. Brian Doherty in Reason talks about the nationalism of the Bernie Sanders brand, and how it undermines the poor. Donald Trump’s trade agenda has roughly the same implications. Protectionism should be rejected by the under-privileged, as it increases the prices they pay and ultimately reduces employment opportunities.

Certainly progressives always hope to assist the disadvantaged, but their policies have created a permanent dependent class. The simple lessons are these: working, producing and hiring must be rewarded at the margin, not penalized; interfering with wages and prices is counterproductive; all forms of regulation are costly; programs must be neutral in their impact on personal decisions; and property rights must be secure. Historically, economic freedom has lifted humanity from the grips of poverty. In virtually every instance, government micro-management has done the opposite. Unfortunately, it is difficult for progressives to overcome their reflexive tendency to “do something” about the poor by invoking the ever-klutzy power of the state.

The Inhumane Minimum Wage Fantasy

22 Monday Feb 2016

Posted by in Minimum Wage, Poverty

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min-wage ball n chain

An analysis by the Economic Policy Institute (EPI) is the basis for breathless claims by the Left that a substantial increase in the minimum wage would have “sweeping benefits for low-income families.” The EPI study purports to show that spending on public assistance will decline significantly with the increase in the minimum wage. Author David Cooper’s analysis is purely static, dressed up with a few linear regression equations relating participation in federal welfare programs to the wage distribution. However, his conclusion is preordained by the very design of the analysis, which relies on pooled data from public assistance programs across 2012 – 2014. This was a period over which wages were generally rising, but the federal minimum wage was constant (and only a few state minimum wages were increased).

It’s no surprise that higher wages are associated with a reduced likelihood of receiving needs-based public assistance in a cross section. That’s not quite the same as measuring the dynamic impact of an increase in the minimum wage. The adjustment to a higher wage floor involves more complex shifts in the structure of the economy, including higher prices, a higher incidence of small business failure and the substitution of automated systems for labor. And celebration would not be in order if the policy change prompted a deterioration in the employment prospects of the least-skilled workers, and it would.

There are a few gaping holes in the EPI analysis. One involves a data limitation whereby the distribution of public assistance by wage decile is related to individual workers or their families. It is one thing to say that most recipients of public assistance work for a living. It is quite another to say “Most recipients of public assistance work or have a family member who works.” Obviously, the latter does not imply the former, yet the analysis asks you to accept that the wage rates of family members who perform work during a year are the determining factor in welfare program participation, rather than the employment status and hours of all members of the household.

The analysis includes cross-sectional regressions relating the receipt of public assistance (yes or no) to wages imputed at the individual level, controlling for a complex function of age (polynomial terms), other demographic factors and part-time work status during the previous year. As stated above, the data are plagued by measurement issues. Furthermore (and this is a technical critique), linear regression is not an appropriate statistical methodology with a binary dependent variable. The author should have known better, but we’ll leave that aside.

Controlling for part-time status is intended to create a more reliable estimate of the effect of wages on program participation, as part-timers are more likely to earn low wage rates. But if hours matter in that way, then the regression is all the more suspect because hours of work are otherwise ignored (except in the imputation of wage rates).

The truth is that poverty is not a wage problem as much as a jobs and hours problem. A recent post by Angela Rachidi  of the American Enterprise Institute notes that “Only 11.7% of poor working-age adults worked full-time for the entire year in 2014.” Impoverished individuals who work full or part-time are concentrated in low-skilled occupations. Those are likely to be the same kinds of jobs for which impoverished non-workers might otherwise compete. Many of those jobs are at or near the minimum wage, but increasing the wage floor will only exacerbate the problem of unemployment or underemployment.

An increase in the minimum wage might help those workers who are able to keep their jobs. Unfortunately, if they remain employed, they are likely to suffer non-wage repercussions at their jobs. Therefore, the size of the net economic gain for those lucky enough to keep their jobs is open to question, though their measured income will rise. Still, keeping your job may be a big challenge.

The EPI analysis pays no heed to the negative employment effects of changes in the minimum wage. These stem from  employers’ efforts to control costs, hiring only when the skills and expected productivity of a worker exceed the cost. Growth and job opportunities are thus quashed by the intervention, including the gain in skills that comes with experience. If a business hikes price to defray higher labor costs, the negative impact on customers will induce them to buy less, reducing the need for labor. Another possible impact may be caused by the so-called “welfare cliff“, or the tendency of many program benefits to decline as income rises, which imposes a marginal tax rate on beneficiaries’ labor income. A higher wage floor might induce a worker to reduce hours to avoid the cliff, if their employer allows it, or it might induce another employed member of the same household to reduce hours.

Here is the extent of EPI’s treatment of the negative employment effects of a higher minimum wage, quoting the Congressional Budget Office (CBO):

“CBO predicts that federal expenses would initially go down, but could later increase if the higher minimum wage has a significant negative effect on employment. On net, they conclude that ‘it is unclear whether the effect for the coming decade as a whole would be a small increase or a small decrease in budget deficits.’ It is important to note that the CBO’s ambiguity on this point is driven by their atypically high estimates of the probability of significant employment loss stemming from such an increase. If employment loss is insignificant (as most research on a minimum-wage increase of this magnitude indicates), the budget savings would surely dominate.” [Emphasis added]

The parenthetical, bolded statement is offered by Cooper without any support whatsoever, and it is incorrect. First, the evidence that the wage floor has negative employment effects “has been piling up” of late. “Living wage” advocates should not be encouraged by the recent experience of six large cities that have increased their minimum wages. Here is further information on the District of Columbia and WalMart’s reaction to a recent wage hike. The long-run effects of minimum wages are the most destructive, according to a recent paper authored by David Neumark and Olena Nizalova:

“The evidence indicates that even as individuals reach their late 20’s, they earn less and perhaps work less the longer they were exposed to a higher minimum wage at younger ages. The adverse longer-run effects of facing high minimum wages at young ages are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.“

Other recent work shows that minimum wage increases during the Great Recession increased unemployment among workers age 16 – 30 with less than a high-school education. Another paper finds that minimum wage hikes are bad anti-poverty measures, poorly targeted and regressive in their effects on the poor due to higher prices. A couple of previous posts on Sacred Cow Chips include many links to other work on minimum wages: “Major Mistake: The Minimum Opportunity Wage“, and “Unintended Consequences: Living (Without a) Wage“. Today, many jobs are at risk of automation, so the responsiveness of employers might be greater than ever.

In a strong sense, EPI’s findings and conclusion are beside the point for the many low-skilled workers whose jobs would be at risk, as well as those who might never be given legitimate employment opportunities under a higher wage floor. Those erstwhile workers and job seekers are generally the least skilled and most in need of experience. But EPI, and unthinking living wage advocates, are all too eager to signal the humanity and virtue of their favored policies, foolishly ignoring the negative and inhumane employment consequences.

Those Halcyon Days of Desperation

18 Monday Jan 2016

Posted by in Capitalism, Markets, Poverty

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chickennostalgic

Nostalgia is hard to resist. Youth is fleeting, and for most of us, it seems more magical in hindsight than it might have been at the time. It’s also easy to imagine that certain historical eras were more interesting or romantic than the present. For example, my spouse tells me she’d love to have lived in the frontier days, yet she can’t tolerate the reality of a camping trip. We also tend to lionize certain leaders of the distant past, ascribing greatness based on history written by victors. Our objectivity may be obscured by narratives shaped over many years.

Today, some imagine and aggrandize the past in a different way: as a time when motives were “selfless”; when the world was inhabited by less acquisitive and more “minimalist” folk; when practices were more “sustainable”, or even “legitimate”. Despite the primitive conditions of that world, it was a better place for “free” human beings. So it is said, seriously!

Sarah Sqwire takes a look at these flights of fancy in “The Good Old Days of Poverty and Filth“. She dissects the views of one Luc Sante, a cultural historian, as an archetypical patron of primitivism. She invokes the French phrase “nostalgie de la boue, ‘longing for the mud,’ which means a romantic yearning for a primitive or degraded behavior or condition.” Here are some of Skwire’s colorful comments about the past:

“We don’t need every medieval romance novel to remind us that the heroine’s breath didn’t smell like cool mint Listerine. It’s probably for the best that the historical re-enactors at Colonial Williamsburg don’t actually use authentic colonial medical remedies for their health problems…. Any lover of history will occasionally find him or herself dreaming about attending a performance in the pit at Shakespeare’s Globe, or roughing it in the saloons and shacks of a gold rush town. … But a good student of history will acknowledge that the Globe was undoubtedly loud, smelly, crowded, and occasionally even dangerous for playgoers. And the rugged romance of the gold rush town is offset by the knowledge that you were probably far more likely to die of gangrene or cholera than you were to strike it even moderately rich. And those glorious 18th-century wigs? Heavy, hot, smelly, and prone to harboring bugs.“

She then quotes Sante:

“In the Paris I write about, people ran businesses to make a living, not to make a profit. Cafes, bars: they’re no longer public institutions or part of a community. There’s no possibility for eccentric self-determination amongst the shopkeepers.”

Skwire notes the odd distinction that Sante makes in the first sentence above, as if profit is not how proprietors ever made “a living”, or that they observed certain limits on their finances not imposed by market forces (i.e., their customers). She adds that businesses often seek to “create communities” as part of their business models, now in the era of social media more than ever, contrary to Sante’s presumption. Here’s Skwire’s verdict:

“Sante, though, has so much mud in his eyes that he is blind to the tangible and important progress that has been made in human wealth and welfare. His mucky nostalgia leads him to claim that our increasing wealth — which has given us more health, more discretionary income, more food, and more free time — is a danger more pernicious than terrorism.“

I am surprised that Skwire fails to mentions the environmental left in this context. It is, after all, the source of hysteria related to population and scarcity, and the source of so much criticism of modernity. As an antidote to such nonsense, I recommend the Human Progress web site. This recent entry on Julian Simon is instructive. I also recommend Matt Ridley’s Rational Optimist blog. Try this entry on “The Long Shadow of Malthus” for a start.

Skwire views Luc Sante’s infatuation with pre-modern life and lifestyles as an elitist’s prescription for “other” people. That may well be. It also fits the profile of many environmental elites. Whether or not Skwire’s characterization of Sante is accurate, he is at least ignorant of the great diffusion of prosperity taking place around the globe, fueled by markets and economic development. It seems awkward that anyone would bemoan economic progress when, in fact, world poverty is declining, yet that very misgiving is implied by many critiques of markets and modernity.

Degrees of Poverty and The Social Safety Trap

01 Thursday Oct 2015

Posted by in Poverty

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Income Dist Chart

The poor in the United States are extremely well-off by international standards. That is clear in the chart above, which David Henderson discusses in “The Role of Luck In The Income Distribution“. By luck, Henderson means that one’s country of birth has a huge impact on their ultimate place in the global income distribution. The chart compares positions in a single country’s income distribution with corresponding points in the global distribution (2008 data). For example, an individual in the 20th percentile of the U.S. income distribution (20 on the horizontal axis) is in roughly the 86th percentile of the global distribution (from the vertical axis). Those at the very bottom of the U.S. income distribution have a greater income than half of the individuals in the world. The average U.S. earner in the lowest 20% earns more than nearly 75% of all earners globally. Individuals across the entire income distribution in the U.S. have higher incomes than their counterparts elsewhere.

Within the U.S., we often use the term “impoverished” in a fairly parochial sense: compared to our compatriots, not to the rest of the world. Robert Rector discusses the living standards of the poor in America in “How Do America’s Poor Really Live? Examining the Census Poverty Report“. The actual census report released this month is discussed in The Atlantic here. Rector states the following:

“According to the government’s own reports, the typical American defined as poor by the Census Bureau has a car, air conditioning, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. … Far from being overcrowded, poor Americans have more living space in their home than the average non-poor person in Western Europe.“

Rector notes that the Census Bureau’s measure of poverty is based on a flawed definition of income, one that is inconsistent with how income is defined in calculating official measures of poverty in other countries. The Census definition excludes most welfare benefits, and taxes aren’t always subtracted from income by other countries. The Rector post linked above contains an incorrect link to this recent article on international comparisons of poverty rates. When the measurement inconsistencies are corrected, the official U.S. poverty rate is similar to the advanced economies of Europe, and it is lower than Eurooean poverty rates based on a more inclusive definition preferred by many on the left. And again, the actual standard of living of those below the official poverty level in the U.S. is impressive compared to the rest of the world. It is also impressive from a historical perspective.

Rector discusses the failure of the welfare state and the War on Poverty to lift the impoverished out of dependency. This has been covered here on Sacred Cow Chips several times (see here and here). The terrible structure of incentives built into many anti-poverty programs is one of the primary causes, as well as the failure of public education. Also at fault are minimum wage legislation, the War on Drugs, tax policy and a regulatory regime that discourages job creation by punishing new capital investment and business creation.

The left often claims that the distribution of income in the U.S. is becoming increasingly skewed toward high-income households. In “Myths and Causes of Income Inequality“, James D. Agresti demonstrates that the real causes of this phenomenon are demographic. The splintering of families at low income levels has increased the number of low-income households and reduced average incomes among those households. At the level of individual earners, there is no discernible trend in income inequality. According to Agresti:

“… the rise of household income inequality stems from family disintegration driven by changing attitudes toward sex, marital fidelity, and familial responsibility.“

Agresti stops short of drawing a link between anti-poverty policies and the disintegration of the family, though there are reasons to suspect pernicious connections along those lines.

It is easy to exaggerate the extent and severity of poverty in the U.S.; doing so is of obvious value in promoting the leftist agenda. In reality, the poor in this country are provided with a standard of living through public assistance that is high relative to their counterparts across the globe, and it is similar to other advanced economies. In addition, when changes in the structure of households are neutralized, there has been no upward trend in income inequality, contrary to assertions from the left. Our long-term objective should be to lift able recipients out of dependency, consistent with President Johnson’s original goals for the War on Poverty. That will require major reforms to our anti-poverty efforts, public education and many other aspects of public policy. Most poor families in the U.S. receive support that is enviable to the poor elsewhere. Nevertheless, their plight of dependency has dispiriting and self-reinforcing effects.

Francis Pontiff-icates In His Fallible Zone

24 Thursday Sep 2015

Posted by in Capitalism, Global Warming, Poverty, Socialism

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Francis Politics

Pope Francis dispenses guidance in matters of faith from his heart. In matters of economics and science, his guidance doesn’t come from a well-informed mind. I’ve devoted two posts to Francis’ political follies this year: “Green Hubris: The Flub of Rome“, and “Francis’ Statist Vision Not Shared By Venezuelan Clergy“. While foreswearing ideology in the pulpit, he nevertheless promotes leftist economic ideology and denigrates capitalism, the single-best form of social organization for lifting mankind from privation. He ignores mountains of evidence demonstrating that his hopes for humanity are best served by free markets and liberty. Francis further confuses the issue of church teachings versus personal ideology by claiming that his views are longstanding views of the Church.

A dark theory of the Pope’s anti-capitalist rhetoric occurred to me. It has to do with an ecclesiastical variant on statism: just as statist elites like President Obama seem to prefer widespread dependence on the state, so too does the Pope wish for widespread dependence on the Church for spiritual nourishment. Karl Marx is often quoted as having said “Religion is the opiate of the masses.” However, the full quote is the following:

“Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.“

Perhaps the Pope understands this all too well. An impoverished world may well be a more pious world, and his condemnation of capitalism might help to lead us there. Is such an ulterior motive too Machiavellian to describe the kind-hearted pontiff? Probably. Perhaps the Devil made me think of it!

Like most on the Left, the Pope does the world’s poor no favor by way of blindly accepting the global warmist agenda, which is based on a hypothesis “proven” only in the sense that a certain class of climate models predict a directional outcome. Those models have accumulated a long track record of bad forecasts. Not only that: the surface temperature records reported by U.S. Government agencies and the media as “evidence” of global warming are not supported by satellite records, and trends have been heavily manipulated via downward adjustments to past temperatures. But even if we stipulate that the carbon-forcing models and the surface temperature records are correct, there are major questions regarding the severity of the outcome and whether it poses a two-sided risk to human welfare. Mediation of this hypothetical risk is extremely costly, requiring diversion of vast quantities of resources, and that takes a real human toll. This is why the policy prescriptions of the warmist community lack internal consistency. For example, they wish to restrict power production from fossil fuels in the developing world, forcing populations to deforest and rely on unhealthy wood burning — indoors! — to meet basic needs like heating and cooking.

Here is the full text of a letter from Don Boudreaux to the Washington Post:

“On the opening page of your website today you ask readers to register their agreement or disagreement with this statement of Pope Francis: ‘This is our sin: Exploiting the Earth and not allowing her to give us what she has within her.’

This claim is laughable. History testifies unmistakably that the earth is extremely stingy in volunteering to humans ‘what she has within her.’ Indeed, what the earth has within her are mere raw materials, by themselves useless unless and until human creativity discovers not only how to transform them into actual resources and outputs that improve human well-being (Ever try fueling your jet with crude oil?) but also how to ‘exploit’ the earth so that she releases her materials to us at a reasonable cost.

The Pope is vocal about helping the world’s poor. I believe that he’s sincere. So I sincerely hope that he comes to realize that the greatest sin of all against humanity would be the suppression of those capitalist institutions that have proven to be the only practical means of transforming what the earth has within her into a bounty of goods and services that allows the masses, for the first time in history, to live lives of material abundance and dignity upon her.“

A few of the comments that follow Boudreaux’s post on Cafe Hayek are good, too.

Stephanie Slade has an excellent piece in Reason entitled “If Pope Francis Wants to Help the Poor, He Should Embrace Capitalism“. Here are some samples addressing the power of markets and capitalism to improve human welfare and eradicate poverty:

“Pope Francis thinks free marketeers have been deluded by a ‘myth of unlimited material progress.’ If we have, it’s because we’ve seen for ourselves the wonders that economic development and technological advancement can bring—from modern medicine stopping diseases that were the scourge of civilizations for centuries, to buildings more able to withstand natural disasters than at any time before, to ever-widening access to the air conditioning he wishes us to use less of.“

“‘Entrepreneurial capitalism takes more people out of poverty than aid.’ With those 10 words, spoken to an audience at Georgetown University in 2013, philanthropist rock star Bono demonstrated a keener understanding of economic reality than the leader of global Catholicism.

The U2 frontman clearly has it right—and Pope Francis is wrong to suggest that poverty is growing, or that capitalism, free markets, and globalization are fueling the (non-existent) problem. In just two decades, extreme poverty has been reduced by more than 50 percent. ‘In 1990, almost half of the population in developing regions lived on less than $1.25 a day,’ reads a 2014 report from the United Nations. ‘This rate dropped to 22 per cent by 2010, reducing the number of people living in extreme poverty by 700 million.’

How was this secular miracle achieved? The bulk of the answer is through economic development, as nascent markets began to take hold in large swaths of the world that were until recently desperately poor. A 2013 editorial from The Economist noted that… ‘Most of the credit… must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.’“

As Slade explains, far from a scourge on the environment, capitalism is and has been a great blessing:

“Both the economics and the history are clear: The more prosperous the developing world becomes, the more it too will be able to demand and achieve livable conditions. If your goal is to move the world to concern for the preservation of biodiversity, the answer is economic growth. If you want to increase access to clean water, the solution is to increase global wealth, and the consumer power that comes with it. Studies have shown that deforestation reverses when a country’s annual GDP reaches about $3,000 per capita. While some environmental indicators do get worse during the early stages of industrialization, the widely accepted Environmental Kuznets Curve hypothesis convincingly argues that they quickly reverse themselves when national income grows beyond a certain threshold. If the pope wants a cleaner world, the best way to get there is by creating a richer world—something Pope Francis’ own policy recommendations will make more difficult.“

A theme in Slade’s essay is that Francis is simply confused. On one level, he seems to know that technological advance is of great benefit to mankind, yet he is extremely wary of economic growth and believes that less production and consumption is better. That would make the job of alleviating conditions for the world’s poor much more challenging, if not impossible! He acknowledges that the environment has improved drastically in some parts of the world, but he seems unaware that the same areas are the most economically developed, and have the most well-developed markets. Like most on the Left, he also seems confused about the real meaning of capitalism. And the Pope “often blurs the line between public and private action.”

Slade concludes with some messages for Catholics. First, the Pope’s opinions on matters of faith are said to be infallible, according to Catholic doctrine. But opinions on topics like capitalism and the environment are outside his sphere of infallibility. Second, Slade is rightly offended by the Pope’s attitude that libertarianism and a belief in the efficacy of free markets is not compatible with Christianity.

Thus far during the Pope’s visit to Cuba and the U.S., he has thrilled the murderous Castro brothers and spoken out in favor of Obama’s climate agenda. Raul Castro is so happy about the Pope’s opinions on capitalism “that he might ‘start praying again’ and rejoin the church“. I truly hope that members of the Catholic flock, or any others,  don’t take the Pope’s political exhortations too seriously.

Bernie Sanders: Just a Regular Looter

17 Thursday Sep 2015

Posted by in Free markets, Poverty, Socialism

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Bernie

Economic illiteracy is getting to be a central theme in the early stages of the 2016 presidential race. The two candidates with whom the public and media are most fascinated at the moment are Bernie Sanders and Donald Trump. Both are veritable case studies in delusional economic reasoning. I have already devoted two posts to Trump, the current frontrunner for the Republican nomination (both posts appear at the link in reverse order). At the time of the second of those posts, I recall hoping desperately that someone or something would rescue my blog from him. I have managed, since then, to resist devoting more attention to his campaign. In this post, I’ll focus on Senator Bernie Sanders of Vermont, currently the top rival to Hillary Clinton for the Democrat nomination.

It’s ironic that Sanders, a self-proclaimed socialist, shares several areas of acute economic illiteracy with Donald Trump. There is a strong similarity between Sanders and Trump on foreign trade (and both candidates are pro-Second Amendment). Like Trump, Sanders demonstrates no understanding of the reasons for trade, as Kevin Williamson notes:

“The incessant reliance on xenophobic (and largely untrue) tropes holding that the current economic woes of the United States are the result of scheming foreigners, especially the wicked Chinese, “stealing our jobs” and victimizing his class allies…. He describes the normalization of trade relations with China as “catastrophic” — Sanders and Jesse Helms both voted against the Clinton-backed China-trade legislation — and heaps scorn on every other trade-liberalization pact. That economic interactions with foreigners are inherently hurtful and exploitative is central to his view of how the world works.“

Sanders lacks an understanding of trade’s real function: allowing consumers and businesses to freely engage in mutually beneficial exchanges with partners abroad, and vice versa. Trade thereby allows our total consumption and standard of living to expand. It is not based on “beating” your partners, as Sanders imagines. It is cooperative behavior.

Opposition to free trade nearly always boils down to one thing: avoiding competition. That goes for businesses seeking to protect or gain some degree of monopoly power and for unions wishing to keep wages, benefits and work rules elevated above levels that can otherwise be justified by productivity. The result is that consumers pay higher prices, have access to fewer goods and less variety, and have a lower standard of living. It is no accident that trade wars deepened the severity of the Great Depression domestically and globally. But Sanders, like Trump, has failed to learn from the historical record.

Another area of Sanders’ deep economic ignorance is his position on wage controls. He advocates a mandatory $15 federal minimum wage with no recognition of the potential damage of such a change. Kevin Williamson has this to say:

“Prices [and wages] in markets are not arbitrary — they are reflections of how real people actually value certain goods and services in the real world. Arbitrarily changing the dollar numbers attached to those preferences does not change the underlying reality any more than trimming Cleveland off a map of the United States actually makes Cleveland disappear.“

The minimum wage was the subject of a recent post on Sacred Cow Chips. A higher minimum is a favorite policy of well-meaning leftists and social justice warriors, but they fail to address the realities that the least-skilled suffer adverse employment effects, that a higher minimum wage hastens the substitution of capital for unskilled labor, and that the policy often benefits non-primary workers from middle and upper-income households. It’s a lousy way to help the impoverished. Moreover, minimum wages were originally conceived as a tool of racial exclusion and in all likelihood still act that way. Most of the research supporting minimum wage increases focuses on short-run effects or on sectors that are less capital-intensive. Findings about long-run effects are much more negative (see here, too). It’s a given that Sanders understands none of this.

Other elements of Sanders’ platform are essentially freebies for all: universal health care (see the first link from this Bing search), free college tuition for all, and expanded social security benefits. And of course there is a promise to rebuild our crumbling infrastructure, taking full advantage of the myth that our infrastructure is so decrepit that it must be replaced now. All of these ideas are costly, to say the least, and there is nothing adequate in Sanders’ platform to pay for them. He’ll raise taxes on the 1%, he says. Just watch the capital fly away. Ed Krayewski of Reason discusses Sander’s rich promises and the lack of resources to pay for them in “Bernie Sanders, the 18 Trillion Dollar Man“:

“The Wall Street Journal spoke with an economist at the liberal Center on Budget and Policy Priorities, who acknowledged taxes would have to go up for the middle class too to pay for Sanders programs.“

Middle class tax hikes would undoubtedly be accompanied by a lot more public debt, and ultimately inflation. Freebies for whom? As Krayewski says, Sanders “wants taxpayers to ‘feel the Bern’“.

In fairness, Sanders suggests that some of the needed revenue can be diverted from military spending. Possibly, but the military budget has already been reduced significantly, and it is not clear that much fat remains for Sanders to cut. There will certainly be demands for greater military spending given the significant threats we are likely to face from rogue states.

Sanders’ promise to transform our energy system is another one that will come with high costs. What Sanders imagines is a widespread fallacy that green energy can be produced at little cost. However, we know that renewables carry relatively high distributed costs and their contributions to load are intermittent, requiring base load backup from more traditional sources like fossil fuels or nuclear energy. Like President Obama, Sanders would impose new costs on fossil fuels, but the poor will suffer the most without offsetting assistance. And subsidies are also required to incent greater adoption of expensive alternatives like home solar and electric vehicles. Sanders would authorize this massive diversion of resources for the purpose of mitigating a risk based on carbon-forcing climate models with consistent track records of poor accuracy.

If free speech is your hot button, then Sanders’ promise to “overturn” Citizen’s United won’t make you happy. Why should an association of individuals, like a union or a corporation, be denied the right to use pooled resources for the purpose of expressing views that are important to their mission? Sanders is proposing an outright abridgment of liberty. From the first Kevin Williamson link above:

“… criminalizing things is very much on Bernie’s agenda, beginning with the criminalization of political dissent. At every event he swears to introduce a constitutional amendment reversing Supreme Court decisions that affirmed the free-speech protections of people and organizations filming documentaries, organizing Web campaigns, and airing television commercials in the hopes of influencing elections or public attitudes toward public issues.“

It is hard to take issue with Sanders’ call for an end to police brutality without a clear sense of his attitude toward law enforcement. I believe all fair-minded people wish for zero police brutality, but critics often minimize the difficulty of police work. No doubt there are gray areas in the practice of law enforcement; some police officers take their powers too far, which cannot be condoned. If institutional reforms can help, so much the better. But the police must be given the latitude to do a difficult job without fear of unreasonable legal reprisal.

On a related note, Sanders advocates an end to the war on drugs, a reform that I wholeheartedly support. Go you Bernie!

Finally, here is a more general illustration of Bernie Sanders’ backward views on economics. It is a Sanders quote I repeat from the second Kevin Willamson link above:

“You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country. I don’t think the media appreciates the kind of stress that ordinary Americans are working on.“

Sanders’ complaint about the plethora of choices in consumer goods fails to recognize that they reflect real differences in consumer preferences, as well as an economy dynamic enough to provide for those preferences. Far from causing hunger and poverty, that dynamism has lifted standards of living over the years across the entire income distribution, even among the lowest income groups, to levels that would astonish our forebears. And it created the wealth that enables our society to make substantial transfers of resources to low income groups. Unfortunately, those very transfer programs are rife with incentives that encourage continued dependency. Other government interventions such as the minimum wage have diminished opportunities for work for individuals with little experience and skills. Meanwhile, regulation and high business and personal taxes undermine the continued growth and dynamism of the economy that could otherwise lift more families out of dependency. Sanders would do better to study the history of socialism in practice, and to look in his own socialist mirror to identify the reasons for persistently high levels of poverty.

Poverty Maintenance Is Not A Win

01 Wednesday Apr 2015

Posted by in Poverty, Uncategorized

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obama-new-normal

Merely keeping a patient alive is inferior to curing the disease. Likewise, merely allowing the impoverished to live under tolerable conditions is inferior to eliminating the underlying causes of poverty. Evidence for the former is used by Harvard Professor Christopher Jencks to proclaim the war on poverty a success. That is the upshot of his recent article in The New York Review of Books. But does the maintenance of a permanent dependent class constitute success? I believe that our goals should be loftier, and President Johnson’s original goals for the War on Poverty went much farther than Jencks suggests.

Ostensibly a review of other work by Martha Bailey and Sheldon Danziger, Professor Jencks devotes most of his essay to arguing that the official poverty rate published by the Census Bureau is distorted, and that a “corrected” measure has declined since the “war” was initiated by Johnson in the 1960s. The official rate has fluctuated in a range of 11-15% since the mid-1960s. Jencks corrects the 2013 rate of 14.5% for 1) the value of non-cash benefits received by certain program recipients (-3%); 2) the omission of refundable tax credits from the official incomes of employed individuals below the poverty line (-3%); and 3) a change in the price index used to adjust the official poverty thresholds over time to one that does not overstate changes in the cost of living (-3.7%). These three adjustments would reduce the poverty rate in 2013 to just 4.8%.

Taken at face value, that reduction is impressive, but the third adjustment is not directly attributable to antipoverty programs. It could also be due to economic growth or other factors. Jencks notes the following:

“Both liberals and conservatives tend to resist the idea that poverty has fallen dramatically since 1964, although for different reasons. Conservatives’ resistance is easy to understand. They have argued since the 1960s that the federal government’s antipoverty programs were ineffective, counterproductive, or both. 

Liberals hear the claim that poverty has fallen quite differently, although they do not like it any better than conservatives do. Anyone, liberal or conservative, who wants the government to solve a problem soon discovers that it is easier to rally support for such an agenda by saying that the problem in question is getting worse than by saying that although the problem is diminishing, more still needs to be done.”

For my own part, I believe that many antipoverty programs succeed only as palliatives. They have not succeeded in breaking the cycle of poverty and dependence on the state. In other words, successful programs must foster self-sufficiency, which is a superior goal from a humanitarian and a Libertarian perspective. Jencks plans a follow-up on the “successes and failures specific anti-poverty programs”, but merely paying alms to the poor establishes a very low threshold for success.

In fairness to Jencks, anti-poverty programs serve a large number of individuals who are incapable of providing for themselves for a variety of reasons such as age, physical and mental disabilities. While it is beyond the scope of this post, some argue that private charities are more effective at providing for these individuals as well as the able poor. A greater role for charity could even be facilitated via public funding, but in any case, a larger role for private charity should always be on the menu of policy options.

A basic failing of many welfare programs is an incentive problem: able recipients perceive a penalty for work effort (additional hours or even kinds of employment) if rising earned income is associated with reduction or elimination of program benefits. This means that participants face a very high effective marginal tax rate on earned income.

This article from The CATO Institute contains a good overview of the federal welfare system, which consists of 126 separate programs. The article contains somewhat more detailed on the largest anti-poverty programs, such as Refundable Tax Credits (the Earned Income Tax Credit (EITC), and Child Tax Credit (CTC)), Supplemental Security Income (SSI – for aged, blind and disabled), SNAP (food stamps), housing subsidies, child nutrition (WIC), Temporary Assistance For Needy Families (TANF) and unemployment insurance. Social Security is also included since it pays benefits to many low income seniors.

The CATO analysis shows that by one measure, refundable tax credits are by far the most cost efficient at lifting people out of poverty at a point in time, at least among the large programs, followed by SSI and using subsidies. In-kind programs such as SNAP and WIC tend to be less targeted and less effective by this measure. There is fairly widespread agreement that the tax credits have better incentives for work effort, but there are still high marginal tax rates in the phase-out range, a marriage penalty, and the credits are paid only once a year as tax refunds. Some contend that the phase-out of the EITC discourages labor supply even more than the credit increases labor supply at lower incomes. Still others believe that adding certain work requirements would make the EITC a more effective measure:

“The [EITC] clearly does reduce poverty, but it raises work levels far less than some of the statistical studies of the past decade claim, and it appears to do so by encouraging working people to keep working, rather than driving the non-working poor toward jobs. If we wish the credit to promote work as well as raise incomes, we … must add other suasions to promote and enforce work, such as those found in the more successful work-incentive experiments…. These include mandating participation in work programs and setting some threshold of working hours that claimants have to achieve to get benefits.”

The incentive effects of other programs are more negative than the tax credits. This paper found that the food stamp program reduces employment and hours worked. The TANF program, which was the successor to Aid To Families With Dependent Children (AFDC), also exposes recipients to high marginal tax rates. While CATO has been criticized for analyzing the combined impact on marginal tax rates of up to eight different programs, there is little question that the incentive problem is compounded for participants in multiple programs.

There are many different approaches that can be explored for eliminating poverty, supporting those who can’t work and ending dependency for those who can. Certainly, the work incentives of existing anti-poverty programs can be improved in a number of ways. More inventive approaches can be tested at the state level. However, programs such as guaranteed incomes should be eschewed, as they tend to aggravate the incentive problem and encourage dependency.

There are many other approaches to attacking poverty and its causes that do not strictly qualify as “welfare reform.” These include measures that would improve education and employment prospects, including apprenticeship and other training programs. School choice is a fundamental reform with enormous potential to improve the quality of education among poor children. Transitioning to market-based health care reform, including competition among health insurers, would reduce medical costs across the board. Eliminating costly regulation of business can encourage economic growth, which is basic to lifting the incomes of the working poor. Minimum wage legislation should be avoided as it simply eliminates opportunities for the least productive members of society and it is not well-targeted at the poor. Tax reform that encourages saving and investment, including corporate tax reform, will increase the economy’s long-term growth potential, as would a general reduction in the size of the public sector. An end to wasteful subsidies to “privileged” industries can minimize malinvestment and release resources to uses that pass a true market test, leading to a more general prosperity.