Monthly Archive for December, 2010

Quote Of The Day

“The New York Post is reporting that the New York City sanitation workers deliberately slowed down the snow cleanup as a way to pay back the administration for cutbacks.  On the face of it, it’s not implausible–it wouldn’t be the first time that New York City unions chose the worst possible time to show their displeasure with working conditions.  (Two of the last three transit strikes, for example, have taken place during the holiday season.)” — Megan McArdle

Update: McArdle has more here.

Quote Of The Day

“The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.” — Tyler Cowen, in an article on Income Inequality

Oil Economics

Economist David Henderson, in a book review, states oil economics that many environmentalists lack:

Another problem, state Hubbard and Navarro, is that America’s heavy oil dependence makes our economy far more vulnerable to slower growth and recessions triggered by sudden price increases. But because oil is traded in a world market, we are vulnerable to price increases whether we import all or none of our oil. So whether we produce all or none of the oil we use, an oil price increase hurts our consumers the same amount. To be sure, if we imported less oil and produced more domestically, a price increase would help our producers. But how would we put ourselves in the position of having more production? By guaranteeing a higher price to domestic producers. By insisting on higher-cost domestic production, we would avoid the possibility of more-expensive oil when prices spike for the certainty of more-expensive oil all the time.

The full review can be found here.

Quote Of The Day

“I don’t know how much money you make. But whatever it is, I wish you and everyone else would work twice as many hours and earn twice as much income. Why? With one exception (discussed below) your earning more money can’t possibly harm me. In three very important ways it will benefit me. Your higher level of spending on goods and services will almost certainly increase the market for whatever I produce. Your increased saving and investment will lead to more capital and more inventions and almost certainly allow me to produce more within an hour’s worth of work. And (not to be overlooked) with more income you are more likely to buy your own health insurance and pay for other necessities instead of expecting me to pay for them.” — John Goodman, healthcare economist

The History Of Conservatives Environmentalist Skepticism

I’m too young to know if this is true or not, but Ross Douthat gives the history:

To understand why, it’s worth going back to the 1970s, the crucible in which modern right-wing politics was forged.

The Seventies were a great decade for apocalyptic enthusiasms, and none was more potent than the fear that human population growth had outstripped the earth’s carrying capacity. According to a chorus of credentialed alarmists, the world was entering an age of sweeping famines, crippling energy shortages, and looming civilizational collapse.

It was not lost on conservatives that this analysis led inexorably to left-wing policy prescriptions — a government-run energy sector at home, and population control for the teeming masses overseas.

Social conservatives and libertarians, the two wings of the American right, found common ground resisting these prescriptions. And time was unkind to the alarmists. The catastrophes never materialized, and global living standards soared. By the turn of the millennium, the developed world was worrying about a birth dearth.

This is the lens through which most conservatives view the global warming debate. Again, a doomsday scenario has generated a crisis atmosphere, which is being invoked to justify taxes and regulations that many left-wingers would support anyway. (Some of the players have even been recycled. John Holdren, Barack Obama’s science adviser, was a friend and ally of Paul Ehrlich, whose tract “The Population Bomb” helped kick off the overpopulation panic.)

The full post can be found here.

The Inequality Debate

A good friend of mine, recently turned lefty, has been harping on the income inequality tune lately. It’s new to him, so he finds it quit convincing. We’ve been going back and forth on it now for some months (see here and here, for example) but he tried to address all of my arguments in one post. See here.

My response was too long for a single comment, so I broke it down into bits. I thought I’d post it here in full (with some minor typo and other corrections) for others to see as well. It’s a good intro to the income inequality debate and the response to it from those that disagree.

You can start with his post here and my response is below.

Finally, a response. You have been harping the income inequality argument for some time now, and simply ignoring the responses that have come (see here and here, for recent examples). Lets discuss.

First, family size. You write, I’m told that the increase in inequality is due to the changing family structure. More single family homes. It’s interesting that a lot of these responses I get come without evidence. It’s just a claim that sounds plausible.

This is the wrong way to look at it Jon. Remember, it’s not the right that is making the income inequality argument, it’s the left. The reason you don’t find a lot of responses controlling for family size is because frankly, there are few, if any solid ones. But that speaks ill of the left, not the right: after all, income inequality is their argument – their primary argument, in many ways – and the fact that they haven’t taken the time to control for such basic differences speaks badly of their academic objectivity, wouldn’t you say?

With that said, all you had to do was ask. Here is one, two, three, four, five, six, seven, eight and nine responses that deal directly with family size.  Remember, it’s not just divorce rates and working hours that matter, it’s also immigration and more importantly, the rise in single mothers and the age of the population that matters.

Second, total compensation. Were not just talking about 401k’s here, were primarily talking about healthcare costs. And when you factor those in, almost all of the income inequality disappears. Cornell University professors Richard Burkhauser and Kosali Simon write in a NBER paper:

In this paper we take estimates of the value of different types of health insurance received by households and add them to usual pre tax post transfer measures of income from the Current Population Survey’s March Annual Demographic Supplement for income years 1995-2008 to investigate their impact on levels and trends in measured inequality. We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend. (emphasis mine)

But again, doesn’t the dearth of studies that take into account health care costs and 401k’s say something about the academic integrity of those that constantly put forth the income inequality argument (the economists, that is)? It’s like they are cherry picking the data that most fits what they want to believe.

Third, consumption inequality. Then there are mitigating factors to income inequality. Income inequality just looks at the inputs to income but what about the outputs? In other words, instead of looking at wages, lets look at purchasing power. And when you do that, you see that the trend is the opposite:

Looking at trade data between 1994 and 2005, Broda and Romalis construct inflation rates for different income groups and find that rates for the richest outpaced rates for the poorest by about 4 percent over the period. Since income inequality between the top and bottom 10 percent of earners grew by about 6 percent, the different inflation rates among income groups wipes out about two-thirds of the rise in inequality.

This study is by two University of Chicago economists. This is how University of Chicago economist Steve Levitt (and author of Freakonomics) puts it:

Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.

When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.

What caused this dramatic drop in the prices of goods purchased primarily by the poor vs those by the rich? Levitt explains that as well:

Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!

China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result….

MIT economist Jerry Hausman (who taught me econometrics in my first year of graduate school) and co-author Ephraim Leibtag have analyzed the impact of the entrance of a Wal-Mart superstore on local food prices.

Not only are Wal-Mart’s prices lower, but its entry also induces competitors to lower prices. The impact is much larger on the poor than the rich, both because the poor are more likely to shop at Wal-Mart and because they spend more of their income on food.

In other words, the two greatest forces in mitigating the impact of income inequality are precisely the other two things the left dislikes most: globalization via China and Walmart.

With that said, I don’t want to leave the impression that I think there has been no increase in income inequality. I do believe that there has been in fact real inequality and it has been growing (and for precisely the same reasons economists generally believe: technology, greater division of labor etc). I just disagree with the magnitude and more so, the importance of it.

Fourth, culture. Much of the increase in income inequality is a result of cultural changes, specifically in marriage mating. Arnold Kling writes:

There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago. For example, sociologists Christine Schwartz of the University of Wisconsin and Robert Mare of UCLA found that beginning in the early 1970s there was a striking “decline in the odds that those with very low levels of education marry up.” And they found that between 1940 and the late 1970s the likelihood that someone with only a high-school diploma would marry someone with a college degree dropped by over 40 percent.

Indeed, economists Betsey Stevenson and Justin Wolfers at the Wharton School at the University of Pennsylvania believe that a revolution in modern marriage has taken place. According to their view, two generations ago, a husband and wife married in order to share production, with the man working in the market and the woman working at home. Today, the husband and wife are both likely to work in the market, and they choose one another because they have similar tastes in consumption….

Stevenson and Wolfers point out that it may well have been the case a few generations ago that “opposites attract” and the production-based marriage benefited from differences in backgrounds and skills. Today, the consumption-based marriage benefits from the couple’s similarities. Thus, marriage becomes less a driver of mobility across income segments and more a driver of income inequality.

The full article, which I highly recommend, can be found here.

Fifth, the benefits of income inequality. Let’s remember from our basic economics course that some income inequality is good. It serves as a signal mechanism to encourage more productive behavior, such as, getting an education. This is the basic argument that Gary Becker and Kevin Murphy of the University of Chicago make here.

Sixth, the irrelevance of income inequality.There are powerful arguments on why income inequality should be ignored. For example, here and here. But my favorite of em all, is the growing irrelevance of income inequality. Don Boudreaux explains:

But I here suggest that economic growth, even as it might generate ever-larger income inequality, increasingly renders these same differences in money income or wealth less and less relevant as a measure of differences in quality of life. Some examples:

– Inexpensive consumer electronics enable almost all Americans, even the poorest, to listen at their leisure to the world’s finest orchestras perform great music; contrast now with, say, 1880, when only the relatively rich could afford to hear great music – and only the superrich (by hiring their own chamber orchestras) could enjoy listening to such music whenever they wished.

– Today’s inexpensive Chevrolets and Kias are more reliable and better equipped than were top of the line Cadillacs of 40 years ago.

– Fifty years ago European vacations were a luxury enjoyed mostly by the rich and upper middle classes; today – chiefly because of inexpensive air travel – such vacations are within the means of a much greater proportion of the population.

– The clothing worn by wealthy Americans is virtually indistinguishable from the clothing of ordinary Americans; Bill Gates, Tom Hanks, and Laura Bush are not distinguished from the vast majority of Americans by their clothing. In both quality and quantity, clothing is nearly super-abundant in modern western society.

The further back you go in history, the greater were the material differences that separated rich from poor. Many of these distinctions were evident to the untrained eye (for example, the rich rode in carriages; the poor walked). Fewer of the distinctions today between rich Americans and middle-class Americans – even poor Americans – are as palpable, as salient, as stark, as were the distinctions of generations past.

Bill Gates has many more zeroes in the accounts of his finances than I have in the accounts of my finances. But I don’t see these. What is seen, what is experienced, what is palpable, as differences between Gates’s financial status and that of ordinary Americans is increasingly disappearing.

In other words, whats important here is economic growth, if you have that, income inequality matters less and less.

Update: Jon responds here.

Columbia University And Eminent Domain

Megan McArdle explains:

So the Supreme Court will not hear the eminent domain case involving Columbia University, which finagled the state into seizing local land and transferring it to the school.  That means that the landowners who don’t want to sell have no recourse.  Worse, it reinforces the precedent of Kelo–that the government can take land and transfer it to private actors even when there’s only a trivial and dubious public gain involved.

In the case of Columbia, there’s a tangible public loss–they’re going to tear down one of the few gas stations in Manhattan in order to give Columbia’s privileged students more space.  And what public benefit does the city get?  We’re talking about taking taxpaying private properties and transferring them to a non-profit which will not pay taxes, and will turn a large swathe of Manhattan into a quasi-compound for some of the wealthiest and most privileged people in the city.

Which is, of course, the most sick-making aspect.  I am not against eminent domain for public uses like hospitals or railroads.  But by no stretch of the imagination could Columbia University be called a public accommodation.  One’s gut and one’s social conscience rebel at the seizure of private property which is taken precisely because it serves, or is owned by, poorer people.  One’s gut and one’s social conscience positively riot at the thought of taking this seized land and handing it over to wealthy private institution that almost exclusively serves the affluent class.

I don’t understand why this is an issue that only fires up libertarians.  Can’t we all agree that it would be better to live in a world where Columbia cannot do this sort of thing?  I guess not, though.

The full post can be found here.

Quote Of The Day

The Walmart effect. The giant retailer sets sustainability requirements for suppliers and manufacturers. “We find that Walmart is the most powerful environmental regulator in the market,” says Arnold.” — Sharon Begley, writing in Newsweek on the forces that continue to help cut carbon

Quote Of The Day

“How do you go from being the targeted victim of an unprecedented information attack to being the victor? Simple: Be revealed to have been working hard behind the scenes to do the right thing. The United States is as imperfect as any nation and guilty of countless missteps as the past decade has shown with great clarity. But if there is one over-arching message to the Wiki-spill it is that for the most part, in most places U.S. diplomats and senior officials have been doing an admirable job. For more on this, see the estimable and wise Les Gelb’s piece yesterday for The Daily Beast.”David Rothkopf, writing in Foreign Policy

No Big Lies In WikiLeaks

Daniel Drezner writes:

There are no Big Lies. Indeed, Blake Hounshell’s original tweet holds: “the U.S. is remarkably consistent in what it says publicly and privately.” Assange — and his source for all of this, Bradley Manning — seem to think that these documents will expose American perfidy. Based on the initial round of reactions, they’re in for a world of disappointment. Oh, sure, there are small lies and lies of omission — Bob Gates probably didn’t mention to Dmitri Medvedev or Vladimir Putin that “Russian democracy has disappeared.” Still, I’m not entirely sure how either world politics or American interests would be improved if Gates had been that blunt in Moscow.

If this kind of official hypocrisy is really the good stuff, then there is no really good stuff. U.S. officials don’t always perfectly advocate for human rights? Not even the most naive human rights activist would believe otherwise. American diplomats are advancing U.S. commercial interests? American officials have been doing that since the beginning of the Republic. American diplomats help out their friends? Yeah, that’s called being human. I’m willing to be convinced otherwise, but it strikes me that these leaks show other governments engaged in far more hypocritical behavior.

The full post can be found here.

Quote Of The Day

“I have mixed feelings about a lot of different aspects of this, but there are two key points. One is that the leaker here (presumably Bradley Manning, but that’s not yet been proven in a court of law) has broken the law and needs to be punished. The other is that the ability to republish leaked secrets is integral to the operation of a free press. Creating a new standard of harassing not leakers, but the publishers of leaks, is a very dangerous precedent whose implications go far beyond whatever you may think of the particular circumstances.” — Matthew Yglesias

My Tentative View Of The Dream Act

A couple of people have asked me privately what I think about the Dream Act so I thought I would post it here as well. This has been my general reply to the question:

“There is a trade off (inverse relationship) between welfare and immigration. The more welfare, the less people are supportive of immigration. The more immigration, the less people are supportive of welfare. And the inverse relationship is especially strong when it’s immigrants themselves getting welfare. The more people perceive of immigrants coming for welfare checks, for example, the less they will be tolerant of more immigrants.

So by default, because I want more immigrants in the United States, I am generally against any welfare that seems to benefit immigrants. But the Dream Act is tricky. It’s not exactly welfare. It’s more like “level playing field” type welfare. Without it, you create this poor underclass with no real hope to get ahead. So I am torn. That makes me want to support it.

In the end, I don’t know which way I would ultimately vote on the legislation. I probably would vote for it, but very reluctantly. Instead, I wish this was more of a private charity kind of thing. Create a private charity that pays for immigrants education, for example. Forcing others to pay via taxes is only going to create backlash – and ultimately, harm other immigrants wishing to come to the United States.

Quote Of The Day

“The problem of the permanent state is a real one, but occasional mass data dumps like the one WikiLeaks just provided, however temporarily satisfying to decentralizers and libertarians, don’t promise anything remotely like reform. Quite the reverse, in fact: The specter of being WikiLeaked will likely exacerbate all of the tendencies that Wilkinson dislikes about the modern leviathan. Systems will turn inward; information-sharing will decrease; further centralization, rather than any kind of devolution or transparency, will be the order of the day. And all the while, the useful work that’s done by “America’s intelligence agencies, military, and consular offices” — the prevention of wars, the anticipation of crises, the discreet management of difficult situations — will become that much more difficult to accomplish.” — Ross Douthat, on effectiveness of WikiLeaks

Update On TARP

It looks like it’s the union auto industry bailout that was the costliest:

The much-maligned TARP program will cost taxpayers only $25 billion according to the latest estimates from the Congressional Budget Office. That’s substantially less than the $66 billion CBO estimated back in August or the $113 billion that the Office of Management and Budget estimated in October.

The good news, budget-wise, is that the government is on track to make about $22 billion on its assistance to banks.

However, CBO estimates that TARP’s other activities will cost $47 billion. This reflects aid to AIG ($14 billion), the auto industry ($19 billion), mortgage programs ($12), and a few smaller programs ($2 billion).

Donald Marron has more here.

The Problem With WikiLeaks

I still haven’t decided whether WikiLeaks is a net good or bad, but I thought this was an interesting perspective:

Anyone who has worked in international affairs would understand (and this goes for Americans and non-Americans) secrecy is an essential element of diplomatic relations. Henry Farrell makes the smart point here that effective diplomacy actually relies on a healthy level of hypocrisy. The simple reality is that effective diplomacy and effective counter-terrorism often must work in the dark. To suggest otherwise demonstrates a shocking lack of understanding about how diplomats actually operate.

First of all, we rely on our diplomats to offer candid, unvarnished and secret assessments of foreign leaders – and now Wikileaks has splashed those assessments across the Internet for all the world to see. Now, for example, Turkey’s leaders can read first-hand the analysis of our diplomats in Ankara about them (by the way if anyone believes that the Turkish government hasn’t done similar assessments of US leaders they’re crazy). How does that help anyone and how that does strike a blow “against the U.S. Government’s authority generally and secrecy powers in particular”?

Short answer: it doesn’t. All that’s happened here is that it will now be more difficult for US diplomats to do their job; it will fray relations with a key Middle East ally and ironically it will probably lead to more not less secrecy, because diplomats will be more fearful of putting their thoughts down in cables that can then be leaked to the New York Times (a point made well here by Charles Hill).

The full post, by Michael Cohen, is worth the read and can be found here.

Update: Megan McArdle adds a similar perspective here.