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Inequality and Inequality Propaganda

21 Saturday Dec 2019

Posted by Nuetzel in Income Distribution, Inequality, Uncategorized

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Alexandria Ocasio-Cortez, Bernie Sanders, Capitalism, Consumer Surplus, David Splinter, Declaration of Independence, Declination blog, Diffusion of Technology, Economic Mobility, Edward F. Leamer, Elizabeth Warren, Gerald Auten, Income Distribution, Inequality, J. Rodrigo Fuentes, Jeff Jacoby, Luddite, Marginal cost, Mark Perry, Marriage Rates, Pass-Through Income, Redistribution, Robert Samuelson, Scalability, Thales, Uber, Workaholics

I’m an “inequality skeptic”, first, with respect to its measurement and trends; and second, with respect to its consequences. Economic inequality in the U.S. has not increased over the past 60 years as often claimed. And some degree of ex post inequality, in and of itself, has no implication for real economic well-being at any point on the socioeconomic spectrum, the growls of class-warmongers aside. So I’m not just a skeptic. I’m telling you the inequality narrative is BS! The media has been far too eager to promote distorted metrics that suggest widening disparities and presumed injustice. Left-wing politicians such as Bernie Sanders, Elizabeth Warren, and Alexandra Ocasio-Cortez pounce on these reports with opportunistic zeal, fueling the flames of class warfare among their sycophants.

Measurement

Comparisons of income groups and their gains over time have been plagued by a number of shortcomings. Jeff Jacoby reviews issues underlying the myth of a widening income gap. Today, the top 1% earns about the same share of income as in the early 1960s, according to a recent study by two government economists, Gerald Auten and David Splinter.

Jacoby recounts distortions in the standard measures of income inequality:

  • The comparisons do not account for tax burdens and redistributive government transfer payments, which level incomes considerably. As for tax burdens, the top 1% paid more taxes in 2018 than the bottom 90% combined.
  • The focus of inequality metrics is typically on households, the number of which has expanded drastically with declines in marriage rates, especially at lower income levels. Incomes, however, are more equal on a per capital basis.
  • The use of pension and retirement funds like IRAs and 401(k) plans has increased substantially over the years. The share of stock market value owned by retirement funds increased from just 4% in 1960 to more than 50% now. As Jacoby says, this has “democratized” gains in asset prices.
  • A change in the tax law in 1986 led to reporting of more small business income on individual returns, which exaggerated the growth of incomes at the high-end. That income had already been there.
  • People earn less when they are young and more as they reach later stages of their careers. That means they move up through the income distribution over time, yet the usual statistics seem to suggest that the income groups are static. Jacoby says:

“Contrary to progressive belief, America is not divided into rigid economic strata. The incomes of the wealthy often decline, while many taxpayers go from being poor at one point to not-poor at another. Research shows that more than one-tenth of Americans will make it all the way to the top 1 percent for at least one year during their working lives.”

Mark Perry recently discussed America’s record middle-class earnings, emphasizing some of the same subtletles listed above. A middle income class ($35k-$100k in constant dollars) has indeed shrunk over the past 50 years, but most of that decrease was replaced by growth in the high income strata (>$100k), and the lower income class (<$35k) shrank almost as much as the middle group in percentage terms.

Causes

What drives the inequality we actually observe, after eliminating the distortions mentioned above? The reflexive answer from the Left is capitalism, but capitalism fosters great social and economic mobility relative to authoritarian or socialist regimes. That a few get fabulously rich under capitalism is often a positive attribute. A friend of mine contends that most of the great fortunes made in recent history involve jobs for which the product or service produced is highly scalable. So, for example, on-line software and networks “scale” and have produced tremendous fortunes. Another way of saying this is that the marginal cost of serving additional customers is near zero. However, those fortunes are earned because consumers extract great value from these products or services: they benefit to an extent exceeding price. So while the modern software tycoon is enriched in a way that produces inequality in measured income, his customers are enriched in ways that aren’t reflected in inequality statistics.

Mutually beneficial trade creates income for parties on only one side of a given transaction, but a surplus is harvested on both sides. For example, an estimate of the consumer surplus earned in transactions with the Uber ride-sharing service in 2015 was $1.60 for every dollar of revenue earned by Uber! That came to a total of $18 billion of consumer surplus in 2015 from Uber alone. These benefits of free exchange are difficult to measure, and are understandably ignored by official statistics. They are real nevertheless, another reason to take those statistics, and inequality metrics, with a grain of salt.

Certain less lucrative jobs can also scale. For example, the work of a systems security manager at a bank produces benefits for all customers of the bank, and at very low marginal cost for new customers. Conversely, jobs that don’t scale can produce great wealth, such as the work of a highly-skilled surgeon. While technology might make him even more productive over time, the scalability of his efforts are clearly subject to limits. Yet the demand for his services and the limited supply of surgical skills leads to high income. Here again, both parties at the operating table make gains (if all goes well), but only one party earns income from the transaction. These examples demonstrate that standard metrics of economic inequality have severe shortcomings if the real objective is to measure differences in well-being. 

Economist Robert Samuelson asserts that “workaholics drive inequality“, citing a recent study by Edward E. Leamer and J. Rodrigo Fuentes that appeals to statistics on incomes and hours worked. They find the largest income gains have accrued to earners with high educational attainment. It stands to reason that higher degrees, and the longer hours worked by those who possess them, have generated relatively large income gains. Samuelson also cites the ability of these workers to harness technology. So far, so good: smart, hard-working students turn into smart, hard workers, and they produce a disproportionate share of value in the marketplace. That seems right and just. And consumers are enriched by those efforts. But Samuelson dwells on the negative. He subscribes to the Ludditical view that the gains from technology will accrue to the few:

“The Leamer-Fuentes study adds to our understanding by illuminating how these trends are already changing the way labor markets function. … The present trends, if continued, do not bode well for the future. If the labor force splits between well-paid workaholics and everyone else, there is bound to be a backlash — there already is — among people who feel they’re working hard but can’t find the results in their paychecks.“

That conclusion is insane in view of the income trends reviewed above, and as a matter of economic logic: large income gains might accrue to the technological avant guarde, but those individuals buy things, generating additional demand and income gains for other workers. And new technology diffuses over time, allowing broader swaths of the populace to capture value both in consumption and production. Does technology displace some workers? Of course, but it also creates new, previously unimagined opportunities. The history of technological progress gives lie to Samuelson’s perspective, but there will always be pundits to say “this time it’s different”, and it probably sounds heroic to their ears.

Consequences

The usual discussions of economic inequality in media and politics revolve around an egalitarian ideal, that somehow we should all be equal in an absolute and ex post sense. That view is ignorant and dangerous. People are not equal in terms of talent and their willingness to expend effort. In a free society, the most talented and motivated individuals will produce and capture more value. Attempts to make it otherwise can only interfere with freedoms and undermine social welfare across the spectrum. This post on the Declination blog, “The Myth of Equality“, is broader in its scope but makes the point definitively. It quotes the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness.”

The poster, “Thales”, goes on to say:

“The context of this was within an implied legal framework of basic rights. All men have equal rights granted by God, and a government is unjust if it seeks to deprive a man of these God-given rights. … This level of equality is both the basis for a legal framework limiting the power of government, and a reference to the fact that we all have souls; that God may judge them. God, being omniscient, can be an absolute neutral arbiter of justice, having all the facts, and thus may treat us with absolute equality. No man could ever do this, though justice is often better served by man at least making a passing attempt at neutrality….”

Attempts to go beyond this concept of ex ante equality are doomed to failure. To accept that inequalities must always exist is to acknowledge reality, and it serves to protect rights and opportunities broadly. To do otherwise requires coercion, which is violent by definition. In any case, inequality is not as extreme as standard metrics would have us believe, and it has not grown more extreme.

National Endowment for Rich Farts

08 Wednesday Mar 2017

Posted by Nuetzel in Big Government, Charity, Subsidies

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Cliches of Progressivism, Constitutional convention, Grant Multiplier, Heritage Foundation, Identity Politics, Jeff Jacoby, Lawrence Reed, National Bureau of Economic Research, National Endowment for the Arts, National Public Radio, Politicized Art, Public Arts Funding, Stuart Butler

Wailing has begun over the possible defunding and demise of the National Endowment for the Arts (NEA). How could those cretins propose to eliminate an institution so very critical to promoting artistic expression? If that’s your reaction, you haven’t thought much about the main beneficiaries of federal sinkholes like the NEA. Granted, at $146 million annually, it is not a major federal budget item, but I’d rather not stoop to defend a lousy program because it’s small. So what’s my beef with the NEA, you ask? Read on.

First, any implication that the NEA is the lifeblood of the arts is laughable. No, the arts won’t die if federal funding is denied. Jeff Jacoby quotes figures suggesting that grants from the NEA represented less than 1% of all support for the arts and culture in the U.S. in 2015. Great art was created prior to the establishment of the NEA in 1965. Without the NEA, such bungles as “Piss Christ” would have met with less acclaim. As such a minor funding vehicle, eliminating the NEA won’t make much difference to artists, but it will end a subsidy for wealthy patrons, who can and do provide support for worthy projects, but also derive essentially private benefits from the federal arts spigot.

A large share of NEA grant money goes to non-profit organizations that are already subsidized to the extent that they are not taxed. (Let’s face it: the term “non-profit” itself is often a term of art.) Large arts organizations, which receive a significant share of NEA grants, often have highly-paid administrators and sumptuous facilities. Contributions to those organizations are tax-deductible for the donors. And few of those organizations provide art to the public for free or at a discount. Indeed, as noted at the last link, they often charge significant prices for attendance, and their audiences include a disproportionate percentage of high-income patrons.

Lawrence Reed argues persuasively that government need not subsidize the arts in an article in his series on the Cliches of Progressivism. Here are the highlights:

  • “Government funding of the arts… carries with it all the downsides of dependence on politics.
  • Claims that arts spending is magically “multiplied” are specious and usually self-serving, and never look at alternative uses of the same money.
  • Culture arises naturally and spontaneously among people who chose to interact with each other. Art is part of that, but it also competes with all sorts of other things people choose to do with their time and money.
  • If art is truly important, then the last thing we should want to do is politicize it or divert it toward those things that people with power think we should see or hear.”

Reed’s comment regarding “multipliers” might need some explanation in this context. The NEA’s defenders often claim that each dollar of NEA grant money results in multiple additional grants from other sources, but there is absolutely no evidence to support this claim except for a requirement that NEA grants be matched at the state level (not to mention a requirement for a state-level arts agency). Obviously, that represents another cost to taxpayers. It is quite possible, in fact, that the NEA and matching state grants act as substitutes for, and depress, private arts giving. See this piece in Forbes for more background. This NBER research utilized a large panel data set on individual charities and found only mixed support for the proposition that government grants encourage private contributions. In fact, the estimated effect was ambiguous for individual categories of charitable giving (which did not explicitly address the arts as a category). In any case, a positive cross-sectional effect of government grants on private giving for individual charities is consistent with a negative effect on other charities that do not receive public grants.

In a 20-year-old report from the Heritage Foundation, Stuart Butler offered a list of reasons to defund the NEA, which have held up well. Here, I provide eight that seem relevant:

  1. The arts will have more than enough support without the NEA: See above.
  2. Welfare for cultural elitists: See above. NEA grants fund a number of big and very elite organizations, but they would have you believe that it’s a veritable welfare program for the arts. That is a huge distortion. There is no question that the distribution of patrons of these organizations skews to the wealthy.
  3. Discourages charitable gifts to the arts: See above. Is the award of an NEA grant the equivalent of establishing a credit record to an arts organization? This might hold up for a few small organizations with projects the NEA has funded, but again, the support for this proposition is anecdotal and self-serving, and the numbers are small. And is there an implied stain on the legitimacy of any organization unable to win such a grant?
  4. Lowers the quality of American art: Committee decisions and central planning are not conducive to the spirit of creativity. Public institutions are often guided by political agendas, and government-sanctioned art stands in sharp contradiction to the ideal of free expression. Butler quotes Ralph Waldo Emerson: “Beauty will not come at the call of the legislature…. It will come, as always, unannounced, and spring up between the feet of brave and earnest men.”
  5. Funds pornography: this is not my hot button… it’s an issue only to the extent that public funds should not be used for purposes only flimsily in the public interest that many taxpayers find morally repugnant.
  6. Promotes politically correct art: See #4 above. The merits are then judged on the basis of criteria like race, ethnicity, and gender identity, not the quality of the art itself.
  7. Wastes resources: Butler offers a few examples of the waste at the NEA, a shortcoming common to all bureaucracies. The NEA funds organizations that behave as non-profit cronyists, engaging in lobbying efforts for more support. Butler also cites evidence that recipients of government grants in the UK hire more administrative staff than non-recipients, and tend not to reduce ticket prices.
  8. Funding the NEA disturbs the U.S. tradition of limited government: I suppose this goes without saying….

The federal government in the U.S. was granted a set of enumerated powers in the Constitution, and promoting the arts was not one of them. It wasn’t as if the subject didn’t come up at the Constitutional Convention. It did, and it was voted down. Today, entrenched interests at organizations like the NEA and National Public Radio distort the character of the constituencies they serve. In reality, those constituencies  are heavily concentrated among the cultural and economic elite. The NEA and NPR also promote the fiction that they are all that stand between access to the arts and culture and a bleak, artless dystopia. Give them credit for creating a fantasy about which the political left readily suspends disbelief.

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