Brad Schiller on Inequality

A very nice column in this morning's Wall Street Journal by Brad Schiller, presenting some evidence against the argument that inequality is increasing in the US.  One interesting bit for folks interested in the relationship between demographic change and economic well-being:

The "typical" household, however, keeps changing. Since 1970 there has been a dramatic rise in divorced, never-married and single-person households. Back in 1970, the married Ozzie and Harriet family was the norm: 71% of all U.S. households were two-parent families. Now the ratio is only 51%. In the process of this social revolution, the average household size has shrunk to 2.57 persons from 3.14 -- a drop of 18%. The meaning? Even a "stagnant" average household income implies a higher standard of living for the average household member.

Last year, the Census Bureau published a new set of income statistics that adjusted for changing household size and composition. In a single year (2006), this "equivalence-adjusted" computation increased the income share of the poor by 8% and reduced the standard measure of inequality (Gini coefficient) by 4%. Such "equivalency" adjustments would mute unadjusted inequality trends even more.

On another subject, I have a new post up at Liberty and Power discussing "Global Warming and the Local Weather." It even has a George Carlin video clip, if you need a little humor this morning.

Comments

[Daniel J. D'Amico]

Steve,

When I was at Hampden Sydney recently I saw Tony Carilli presenting some of your slides concerning the wealth disparity. Great stuff. Last night I came across this presentation:

http://video.stumbleupon.com/#p=36f968o2ms

and thought the guy could use a dose of those slides.

[Steven Horwitz]

Thanks Dan. Yeah, he could use a dose of a few things!

Some of the slide data Dan refers to can be found here: http://myslu.stlawu.edu/~shorwitz/Good/myths.htm That data is old and doesn't include some recent additional material.

For the last 7 or 8 years I've done a version of that page as a lecture at IHS summer seminars. That version includes the cost of living and inequality material as well as a section on the gender wage gap which is not on that webpage.

I have submitted an edited and revised version of the webpage to the APEE journal as an "educational note." I'm hopeful it will appear in print sometime in 2008.

[dg lesvic]

Prof. Horwitz,

Now that inequality is no longer "off-topic," perhaps you could tell us whether taking from the rich to give to the reduces or increases it.

[dg lesvic]

That was meant to read taking from the rich to give to the poor.

[Steven Horwitz]

Inequality has never been "off-topic" in this blog. Rude questions, however, have been a problem. As has asking questions that have been answered before and sticking with one's pet topic even if no one else really wants to talk about it. Nonetheless, I'll indulge you anyway:

Attempts at redistributing wealth through taxation ultimately hurt the poor by destroying the wealthy's ability to both create the capital that raises the wages of the poor, and reduce, through productive efficiency, the real costs of the goods they purchase.

I don't think there's an a priori "praxeological" truth in there that attempts at redistribution increase inequality. I think it's an empirical question. But then again, I don't care about inequality per se as much as I care about the well-being of the poor, and taxation-driven attempts at redistribution surely make them worse off over time.

[matthew mueller]

I have a couple of thoughts on this. By the way, one of the best books I have read on income inequality is the short pamphlet "One the Gap between the Rich and the Poor" by Young Back Choi. It is bad form to rely exclusively on pies and charts to demonstrate that income inequality is being reduced. Choi manages to avoid this trap remarkably well in his little pamphlet by applying verbal rigor to his argument.

However, although I have always been sympathetic to the classical liberal view of equality under the law and libertarian ideology, I must say that this passage by Theodore Burczak had a profound impact on my thinking:

"Negative freedom and the presence of equality under the law can be compatible, for example, with the starvation of peasants, who lack food not because a coercive power has denied them their nutrition but because they possess no property acceptable in a market exchange for food."

And if the case can be made that markets are not perfect, even if left free, then it would be very difficult to defend the libertarian view by arguing that everyone's interests are served in a competitive regime where property is sufficiently protected and exchange occurs unimpeded by government intervention.

Also, what has come to be called Old Institutional Economics (OIE) concentrated very much on the individual's place in society and how he evaluates his position not in isolation to external conditions but in relation to them. Consequently, a man will value his success and status on the basis of his position in society.
Absolute measures of wealth will say nothing when individuals reason in terms of their "relative" standings in society. And to the extent that norms and conventions play a large part in influencing human behavior, we can say that the propensity to emulate the actions of others will often lead to disappointment even in conditions of improvement and economic growth.

None of this should be taken as a positive endorsement of government programs of wealth redistribution. It is meant only to suggest that economic growth and increasing living standards are not as simple as some make it out to be.

[dg lesvic]

Prof. Horwitz,

I'm sure that Hayek and Mises too would thank you for your kind indulgence.

You wrote:

"I don't think there's an a priori "praxeological" truth in there that attempts at redistribution increase inequality."

My theory was an attempt at just that.

If you want to check it out, click on this hyperlink.

http://econotrashtalk.typepad.com/

[dg lesvic]

Sorry, I'm having a little trouble with this hyperlink. In the meantime, go to econotrashtalk.org and click on Comments.

[dg lesvic]

Sorry, again, the hyperlink is actually working.

[Grant]

Matthew, the quote you present by Burczak is pretty much the standard line I've heard from most liberals, especially concerning health care. Its analysis is of course correct, but I think it ignores the question: "What is the best way for the poor to obtain food and other goods they desire?". I think most people here would say the answer is: "negative freedom and the presence of equality under the law".

Its not that libertarians think free markets always lead to good outcomes, but just that they tend to. The incentives and knowledge of people who conquer and claim power over others tend to create much worse outcomes.

[matthew mueller]

Grant,

Your reply is right on point. Mises used to refer to this as "suitability analysis." Basically, the ends of everyone concerned with social justice are the same. The disagreement occurs over what means should be employed in reaching these ends. And it is a very important question. But you are absolutely correct. In my view, there can be no better response to the Burczak quote then raising the question of what institutional arrangements will enable us to avoid starvation and suffering. Insisting that these things can conceivably exist under conditions of negative freedom only begs the question.

But I have trouble accepting the argument that free markets "tend" to lead to good outcomes. ------And this does not mean that government intervention leads to good outcomes.-----Being critical of the laissez faire dogma does not commit you to socialism or interventionism. But the theory of laissez faire has several weaknesses. Its origins and foundations are based on a physics program that is now obsolete (see Philip Mirowski); it depends on the coordinative abilities of certain mechanisms, such as the price system and entrepreneurship (concepts which can easily be challenged --see R. H. Coase and Karen Vaughn); and it requires the existence of certain institutions that result from the interactions of individuals in society, making the "theory" of laissez faire completely dependent upon the process of bargaining, exchange, and negotiation (all of which can only take place under conditions of social conflict, owing to the uniquess of individual choice and preferences -- see Jack Knight).

I can go on, but I just wanted to make a quick point. I do not believe that markets "tend" to do what most libertarians believe they "ought" to do.

Now you can either make an empirical or theoretical defense of laissez-faire. But the fact that pure laissez faire has never existed makes it difficult to embrace it on empirical grounds. There would be no justification for attributing all of the beneficial outcomes of market exchange to the theory of laissez faire; other theories and considerations involving social relationships that manifest themselves in the form of formal rules must also be taken into account, and may likely be responsible for the benefits we have experienced historically. Also, there are too many philosophical arguments that could be made against an empirical defense of laissez faire. For example, no respectable philosopher believes anymore in naive inductivism and logical positivism, theories which are required for any empirical defense of a particular economic system.

And for theoretical defenses of laissez faire, see the above.

[Grant]

matthew, I won't deny that defending free markets is hard. However, I think its even harder to defend the status quo, partially because the status quo is not a coherent position to take. What are we to defend free markets from? If we are trying to create an economic and political system with logic, reason and science, where else can we turn? What are we defending free markets from, exactly? It seems to me that it is only reactionism, mindless progressivism, and senseless violence. There are certainly economists that have showed how intervention of an idealized state can improve market efficiencies, but none that I have read attempted to do this with the observations that the Austrian and public choice schools have made about governments.

My primary defense of markets is this: "If you know how to do it better, why ain'cha rich?". Market failures exist, but capitalists have profited from addressing them for decades or centuries. Every week some new Internet site pops up which tries to lessen information asymmetries and transaction costs in existing markets. In my mind, economics should have focused more on teaching entrepreneurs to profit from fixing failures in traditional markets, and less on preaching to politicians who have few incentives to care about economic theory. So while I can understand criticisms of traditional markets, I think its irresponsible to base support for other economic systems mostly on a the problems of a highly-scrutinized system.

My primary theoretical defense of markets is Hayek. I believe he showed, in clear terms, why the only economic system which can act rationally based upon its available knowledge is one which uses knowledge that no subset of minds has. In other words, people must do the 'correct' things without being told what to do; incentives (prices) must be aligned with desires. This is the only way for a society to take advantage of knowledge which cannot be understood or communicated widely, a condition which seems to be increasing every day. From this, it seems to me that private property and coordination based on incentives (not commands) is the only way to take advantage of gains from trade; the source of all human wealth.

I'm really not sure how the price mechanism and entrepreneurship can be "easily challenged" in any meaningful way, especially given the knowledge problem?

[dg lesvic]

Though this is addressed to Grant and Matthew, I wouldn't want Prof. Horwitz to think I'm forgetting about him. I'm still waiting for him to face the challenge of an amateur's new idea, and redeem the honor of the profession.

Grant and Matthew:

I have no quarrel with your desire to live under something other than laissez faire capitalism.

My only quarrel with you is if you want to force that something else on me.

If you want socialism or interventionism, have it, with my blessing, but count me out.

Agreed?

[Grant]

Uh, I don't want to live in (I think 'under' is a poor term here) anything but free markets. I'd just like to see the flaws the market corrected by the market, thats all.

Your point is well taken of course. Markets naturally support less-free arrangements, but the opposite is not true.

[Steven Horwitz]

Mr. Lesvic,

Perhaps we should have some medics standing by in case you lose consciousness while holding your breath waiting for me? You're gonna need them.

I'm not interested in re-trodding well-trodden roads. I'm sure you'd like me to spend my time demonstrating the truth or falsity of your own theory, mainly because it would distract me from contributing to the economics profession and thereby increasing the amount of evil in the world, but it ain't gonna happen. The economics profession will have to somehow soldier on minus its redemption by Horwitz or its destruction by Lesvic.

[dg lesvic]

Prof. Horwitz,

I appreciate your admission, however grudging, that the theory is correct. Now, all that remains is putting it to use.

Any reason not to do so?

Grant:

It appears that you and I are in perfect agreement here.

[dg lesvic]

Prof. Horwitz, and all the other great economists here:

This theory has been before you all for how long now, six months?, and still no refutation of it. Not even an attempt.

And even two great critics of it from the long ago, who have resurfaced here, David Friedman and Larry White, will not venture another challenge to it, out in the open.

So, isn't it time now for the principles of Mises and Hayek in such a matter?

To Mises, a scientist was "bound to reply to every censure" and "either unmask logical errors in the chain of deductions...or...acknowledge their validity."

And, to Hayek, this was "the crucial issue on which the whole character of future society will depend" and "it would be disingenuous to avoid discussing" it.

So the question is, first of all, whether there are any real Misesians and Hayekians here, any real scientists, and libertarians.

And, furthermore, whether the "schools" are for the advancement of the science or the profession, and economics is a professional or amateur science.

Your silence permits but one answer: it is a science of amateurs and a boondogle of professionals.

[dg lesvic]

I think it's also time to thank you for this free forum, and acknowledge that you're real scientists indeed.

[Steve Miller]

"I have a couple of thoughts on this. By the way, one of the best books I have read on income inequality is the short pamphlet "One the Gap between the Rich and the Poor" by Young Back Choi. It is bad form to rely exclusively on pies and charts to demonstrate that income inequality is being reduced. Choi manages to avoid this trap remarkably well in his little pamphlet by applying verbal rigor to his argument."

If any students are interested, I can have Mike Rizzo at AIER send you a copy of this book.

[dg lesvic]

Steve Miller:

I referred to larger proportions of smaller pies and smaller proportions of larger pies.

What was wrong with that?

Didn't you understand that "pie" was a metaphor for society's total net income?

What was Choi's conclusion about income inequality? How did he think redistribution, specifically taking from the rich to give to the poor, affected it, reducing or increasing it?

[Brian Pitt]

Matthew,

Dr. Boettke's "Rethinking Ourselves" addresses, head on, the Burczak argument regarding the inequality of the marketplace. Moreover, it falls in line with Dr. Horowitz' post(s) about engaging in diaglogue with those who agree regarding ENDS, yet disagree about MEANS.

Btw, you attend GMU correct? Therefore, you have the wonderful opportunity to actually discuss the "non-triumphantalist" classical liberal/libertarian position(s) regarding inequality. TAKE ADVANTAGE.

[eyeson america]

Brad Schiller states that the absolute size of the slice of the economic pie shared by the bottom 20% has increased to 476 billion from 181 billion.

He doesn't say if this takes inflation into account in the WSJournal story. Inflation would turn 181 billion into 1 trillion. If the bottom 20% are sharing 476 billion now, then they are way behind the folks in 1970.

He makes other mistakes ....

[Jamie]

Mr. Schiller made several fetal mistakes in his arguments. First, when dismissing "the poor are getting poor," he did not use the same "dollar" to measure the pie. In "2007 dollar" terms, the poor's pie should have been $471 billion in 2007 versus $218 billion in 1970. Taken 93% increase in number of households into consideration, each household's pie has only increased by 11.7% in 38 years – while the economy expanded by 307%. More importantly, being poor or rich is relative. Therefore, even if the author did not make the first mistake, the poor indeed has been getting poor with only 36% (or 12%) increase in pie size in comparison to 300+% gain for other classes.

Moreover, the author wrongly accused new immigrants of being a drag to the poor's advancement. Not only did he raise no evidence to support his assessment, but he also used an largely incorrect model, a ticket line, to explain new immigrants' entrance into the system. By various measures, new immigrants are a very positive factor to this economy, especially in promoting growth and equality. For example, since the creation of E-class investment visa in 1990, almost 200,000 new immigrants have joined the US economy through each investing more than $1 million and creating more than 10 jobs. Not only have these people not dragged the poor, they have instead increased the pie while distributing a lot of the gain to lower class through paychecks, stock options and other various forms of employee compensations. Besides, over 40% of PhDs that are currently working in US are not native. These PhDs certainly would earn anything but below median income or bring more inequality. It’s very easy to see how the ticket line model is off as new immigrants certainly do not all enter this economy from the back of the line and how dead wrong the author was in blaming new immigrants for bringing inequality.

Jamie Lin

New York, NY

An NYU Stern MBA and a proud new immigrant entrepreneur who has created many jobs