Degrees of Poverty and The Social Safety Trap

01 Thursday Oct 2015

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Anti-Poverty Programs, Census Bureau Report on Poverty, David Henderson, Family Disintegration, income inequality, James D. Agresti, Living Standards, Measuring Poverty, Minimum Wage, Poverty, Public education, Robert Rector, War on Drugs, War on Poverty

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.

Racism And Minimum Wage Fairy Tales

02 Saturday May 2015

Posted by Nuetzel in Markets, Price Mechanism, Regulation

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Carrie Sheffield, David Henderson, Davis Bacon Act, Eugenics, John F. Kennedy, Minimum Wage, Progressive Rhetoric, Racial Discrimination, racism, Thomas Leonard, Thomas Sowell, Walter Williams

The real history of the minimum wage is an unsavory tale unknown to most current observers. The myth that it had honorable origins is widespread, with special currency among the progressive Left. Their uncritical support for a higher wage floor reflects a failure to grasp its pernicious economic effects on low-skilled labor and an ignorance of its historical context as a mechanism enabling racial discrimination. In fact, minimum wage legislation was often motivated by racist economic concerns, as Carrie Sheffield explained a year ago in this commentary in Forbes. She quotes, among others, the great Thomas Sowell, an African-American economist, from this opinion piece:

“In an earlier era, when racial discrimination was both legally and socially accepted, minimum-wage laws were often used openly to price minorities out of the job market.“

Sowell cites historical examples of minimum wage legislation intended to harm the employment prospects of Japanese, Chinese and blacks, including the following:

“Some supporters of the first federal minimum-wage law in the United States — the Davis-Bacon Act of 1931 — used exactly the same rationale, citing the fact that Southern construction companies, using non-union black workers, were able to come north and underbid construction companies using unionized white labor.

These supporters of minimum-wage laws understood long ago something that today’s supporters of such laws seem not to have bothered to think through. People whose wages are raised by law do not necessarily benefit, because they are often less likely to be hired at the imposed minimum-wage rate.“

Walter Williams, another well-known African-American economist, provides more evidence of these origins of the wage floor in “Mandated Wages and Discrimination“:

“During the legislative debate over the Davis-Bacon Act, which sets minimum wages on federally financed or assisted construction projects, racist intents were obvious. Rep. John Cochran, D-Mo., supported the bill, saying he had ‘received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.’ Rep. Miles Allgood, D-Ala., complained: ‘That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.’ Rep. William Upshaw, D-Ga., spoke of the ‘superabundance or large aggregation of Negro labor.’ American Federation of Labor President William Green said, ‘Colored labor is being sought to demoralize wage rates.’ The Davis-Bacon Act, still on the books today, virtually eliminated blacks from federally financed construction projects when it was passed.“

An article by Thomas C. Leonard in the Journal of Economic Perspectives, “Eugenics and Economics in the Progressive Era“, reinforces the point:

“The progressive economists believed that the job loss induced by minimum wages was a social benefit as it performed the eugenic service ridding the labour force of the unemployable.”

And if that isn’t enough for you, David Henderson has this to say:

“Unions don’t support minimum wage increases because their own members are working at the minimum wage. Virtually all union employees–I’ve never heard of an exception–work at wages above the minimum. Northern unions and unionized firms, for example, have traditionally supported higher minimum wages to hobble their low-wage competition in the South…

… In a 1957 Senate hearing, minimum-wage advocate Senator John F. Kennedy of Massachusetts, who just four years later would be President of the United States, stated,

‘Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too – the wages of the white worker who has to compete. And when an employer can substitute a colored worker at a lower wage – and there are, as you pointed out, these hundreds of thousands looking for decent work – it affects the whole wage structure of an area, doesn’t it?’“

One can claim that JFK was advocating for a higher wage floor to benefit all workers, but it’s hard to avoid the conclusion that “protecting” white workers was his priority. And it strains credulity to deny that JFK was aware of the other side of the coin: there would be negative repercussions for low-skilled black workers. What is painfully obvious about minimum wage legislation is that the real beneficiaries are generally not those competing for minimum wage jobs, but more entrenched labor interests.

It is an unfortunate reality that blacks make up a disproportionately large share of the unskilled labor force. According to another commentary by Walter Williams, unemployment among blacks was not a chronic problem in the first half of the 20th century, even among teens, and male labor force participation among blacks was higher than for whites. Over the past 50 years, however, black unemployment has averaged twice the rate for whites. Minimum wage legislation has encouraged this disparity.

Today’s advocates of a higher minimum wage are inadvertently rooting for a policy that compounds the disadvantages faced by the least skilled workers. The minimum wage contributes to a negative disparate impact on black labor market outcomes and prevents blacks from gaining valuable job experience. It is impossible to regulate wages without impinging on hiring decisions, and it is impossible to regulate both wages and hiring without impinging on the survival of employers. To help the unskilled, the best thing policymakers can do is allow them to trade their labor freely.

Peak-Resource Myopia Serves the State

08 Sunday Feb 2015

Posted by Nuetzel in Peak Oil

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David Henderson, Don Boudreaux, Government Failure, Michael Lynch, Peak Oil, Scarcity, Thomas Malthus, William Jevons

We often hear we’re at the “peak” availability of some resource, but what’s really meant is that we’re at a cliff’s edge, about to run dry. These claims are usually uninformed and have been wrong historically. Of course, scarcity is real; it’s why I do economics and love markets, which solve the problem of scarcity through voluntary, arms length cooperation in balancing needs and wants with the availability of resources. But scarcity at any point in time rarely implies anything about the availability of resources going forward. Current knowledge and conditions, and existing technology for extracting and utilizing resources, provide signals about opportunities; they should not dominate our outlook for the future in a dynamic economy.

The view that the availability of resources is subject to hard limits, or that they will “run out”, is discussed by David Henderson in his post “The Jevons Fallacy,” regarding the “peak” views often credited to economist William Jevons. Henderson quotes his own bio of Jevons:

“Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”

Don Boudreaux has a few thoughts on Henderson’s post and the topic of scarcity, emphasizing the contribution of human ingenuity to the supply of resources:

“Atoms are created and made into matter by the impersonal forces of nature (or, if you are a theist, by God). In contrast, matter is made into resources only by human creativity, especially when this creativity is unleashed and directed by markets. So more humans – and more markets – quite realistically (and, so far, historically) mean an increasing, not a decreasing, supply of resources.”

A 2005 post at the humansunderrated blog made the same point: “Only one resource truly matters and that is the human mind.” And the human mind, guided by market signals, is what ultimately solves the problem of scarcity. It does not get solved when human initiative is shackled by regulation, insecure property rights, or protected monopoly interests, which are all varieties of government failure.

In “Peak Nonsense,” Michael Lynch concurs:

“And so here we go again on the trial of exhaustion theory, one step removed from the scientism of central planning where decline rates are projected and a social cost of depletion is calculated for an extraction tax. But it is all bad science. ”

There is no end to scarcity. It will always be with us, but we have not reached peak oil, peak fossil fuels, peak food, or peak anything. The dreary viewpoint credited to Jevons and Thomas Malthus is misguided as long as people remain free to engage in voluntary production and trade. The “peak” perspective serves the interest of statists who’d prefer to impose arbitrary limits on our productive potential.