Inequality

This, I think, is just a first pass on some of the crazy things I hear about inequality. I hear lots of complaints about its rise, about how it's so wrong that some people are making a gazillion times more than the lowest-paid employee.

I was thinking about it a little differently, recently:

First, I have to acknowledge that it exists. And yes, it does.

Next I've made the assumption that inequality really is something we want to reduce.

From there it seems that there are two ways of tackling it: 1. Reduce the wealth of the top, 2. Increase the wealth of those at the bottom. How we choose between them depends on how we answer the question "why do we want to reduce inequality?"

I'm reasonably sure that no one is (at least consciously) interested in reducing inequality because they just want to hurt the wealthy. I believe that even the most ardent redistributionists believe that it is to help the poorest thrive.

So now, we look at our possible solutions:

Regarding #1 - Isn't that just sour grapes? I mean really, there was no inequality when we were all living in caves, drawing on pictures of bison with finger paints, but I seriously doubt that anyone would want to live there/then (were Neanderthals impoverished?). So clearly reducing the top's wealth doesn't do anything to helping the bottom.

Regarding #2 - This is really what we want to do, isn't it? We want to ensure that everyone is getting ahead. Everyone can buy more and better food, more and better medicine, entertainment, shelter, and all the other great things the world offers.

Now, I know that you're all thinking that the top doesn't need all that money, why don't we take some and give it to the bottom? It seems reasonable, doesn't it? I mean, does one really need more than three or four Ferraris?

The problem with this argument is that it is a zero-sum argument, by which I mean that there is a fixed amount of wealth in this world and we must ensure it is evenly and fairly distributed. This is patently, obviously, and demonstrably false. Remember our insolvent Neanderthals? How much wealth was in the world then? How about a thousand years later? Or at the Birth of Christ?

What about the difference in wealth between the years just before the start of the industrial revolution and the few years after it?

Our wealth is not a fixed pie, it is an ever growing pie. We need to do all the things we can to help ensure that it continues to grow.  We can do this best by enabling people to belly up to the table, pick up a fork and start eating. Keeping our diners away from the table and promising to throw them scraps (no matter how big or choice) will never increase anyone's ability to participate.

Then what can we do to increase wealth at the bottom? Well, I have a few ideas:

1) Scrap the minimum wage - A minimum wage prevents people from getting to the table, it limits my ability--if I'm an unskilled worker--to get my first skills. And it encourages jobs to move overseas!
2) Minimize the number of professional licenses necessary. I mean really does the state really need to license hair-braiding? Casket selling? Interpreting sign language for the hearing impaired? There are dozens upon dozens of others, these are just some of the most egregious.

Ultimately, these are all just about getting a centralized government out of business, and allowing business to grow and prosper, and the people with it.

Disqualifying the Quantification of the American Dream

Well, the New York Times has done it again. In a recent article, "The American Dream, Quantified at Last", author David Leonhardt makes some truly horrendous generalizations about the American Dream, then uses some highly cherry-picked data and very little context to back them up.

The article describes the statistical work done by Stanford professor of economics, Raj Chetty, and his team. Not satisfied with the original definition of "the American Dream" ("that dream of a land in which life should be better and richer and fuller for everyone."  Adams, JT; The Epic of America; 1931) Leonhardt goes on to tell us that the American Dream is, in reality, the likelihood of earning more than your parents at any given stage in life. Leonhardt calls it an index--and what is an index but a way of defining a thing?

But let's grant this definition, even though it could easily be debunked (e.g. why measure income? what about ability to consume? Or measurements of life expectancy? Ability to travel, get medical care, avoid back-breaking labor, etc.). Starting with people born in 1940, Leonhardt says that the chance of earning more than your parents has decreased with each subsequent generation. (See the NYT chart on the above link, about half-way down. See also Chetty's graph.) It shows that so long as your family was not in the richest 15% of the 1940 cohort, you had a better than 90% chance of earning more than your dad. (Note that I specify "dad".) And the probabilities decrease from there:

• 1950 babies had an 80-something percent chance
• 1960 babies had a mid-60's percent chance
• 1970 babies had a low-60's percent chance
• 1980 babies had a 50% chance

Pretty damning of our (pick one: government, politicians, elites, industry, corporate bosses, etc.), isn't it?

Or is it? I wonder what it would look like if we ran the model in the other way? Would a 1930 baby have the same chance as a 1940 baby? What about 1920? 1910? 1840? 1820?

1776?

I'll stop with 1776 because there was no America before then, hence no "American Dream".

I suspect, however, that  we might see that the 1940's was the high water mark of the American Dream. Why? Let's look at what else was going on: Oh, yes there's a lot of things going on, including the baby boom, the massive industrialization of the US, the fact that we were the preeminent industrial country in the world (the USSR was militarily powerful, yes, but not industrially), and the then-equivalent of China today: the world's factory. In 1960, was there a single country even partially able to compete with the US? Not even close. It wasn't until the 1970's that Japan began to catch up.

Remember I specified "dad" above? Well it's the 1960's when the women's rights movement started getting into high gear, increasing our stock of labor. There's some basic supply and demand stuff there: the supply of labor has been increasing and just as predicted, the price of labor has been decreasing.

But wait, as the infomercials say, there's more! This data looks only at income, not at compensation. A recent paper by Mark Warshawsky shows that total compensation continues to rise much faster than we commonly expect.  Does it make up for the difference in compensation we see in the data? I don't know if it does completely, but I'm sure it plays a significant part.

We must also look at other countries. What do their likelihoods of surpassing their parents' earnings? Take China, for example. Today's Chinese children make far, far more than their parents. I imagine that this is a trend that has been going on since the 1970's, following the death of Mao Tse Tung.  Of course, the decades prior were a massive crater, thanks to Chairman Mao and his abhorrent policies, but the effect is still there. Can we get some research on this?

It is also sensible to ask is it possible for "the American Dream" to continue forever? Much as one might sensibly ask, "are all the children of Lake Wobegon truly above average?" At some point, all things fall back to the mean. There are periods of extended growth, then there are periods of slower growth. Can we be grateful for the period of extraordinary growth that existed in the 40's and 50's?

And while we're at it, perhaps we need to re-examine the definition of "the American Dream". Somehow, I think people were coming to the United States far before there was the common understanding that Generation n will earn more than Generation (n-1).  The American Dream was that you could arrive on our shores, without a penny in your pocket and create a life. That is an index I'd like to see: how easy is it to get a job, start a family, do the things that give a soul meaning.

Sadly, I suspect that those numbers would slope in the same direction as Leonhardt's.