tag:blogger.com,1999:blog-34615033642691875992024-02-18T20:11:46.691-08:00Diversity of IdeasPolitical and economic commentary from Left and Right. Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.comBlogger43125tag:blogger.com,1999:blog-3461503364269187599.post-37811369623144825282019-03-11T18:32:00.004-07:002019-03-14T19:23:48.534-07:00Deciphering MMT (wonkish)<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCRENHACSF2t0dWarMCcW8Z108ztyu7_35Dr1ZfPRjGIF3FLPK-BoNK64pnC-JucJXtF64K78UXDuz4ZdRcOurT7jcQq58YQSE2VWV8hCyCdYGJ_O-OSP80oLbUqqlh-oAr1-tVWgIGG4/s1600/MMT.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="275" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCRENHACSF2t0dWarMCcW8Z108ztyu7_35Dr1ZfPRjGIF3FLPK-BoNK64pnC-JucJXtF64K78UXDuz4ZdRcOurT7jcQq58YQSE2VWV8hCyCdYGJ_O-OSP80oLbUqqlh-oAr1-tVWgIGG4/s1600/MMT.jpg" /></a></div>
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One of the most interesting debates blowing up the econ blogosphere is between mainstream macro and modern monetary theory (MMT) (see <a href="https://www.nytimes.com/2019/02/12/opinion/whats-wrong-with-functional-finance-wonkish.html" target="_blank">here</a>, <a href="https://www.bloomberg.com/opinion/articles/2019-02-21/modern-monetary-theory-is-not-a-recipe-for-doom" target="_blank">here</a>, <a href="https://www.project-syndicate.org/commentary/federal-reserve-modern-monetary-theory-dangers-by-kenneth-rogoff-2019-03" target="_blank">here</a>, and <a href="https://www.washingtonpost.com/opinions/the-lefts-embrace-of-modern-monetary-theory-is-a-recipe-for-disaster/2019/03/04/6ad88eec-3ea4-11e9-9361-301ffb5bd5e6_story.html?noredirect=on&utm_term=.ba3024e2f762" target="_blank">here</a>). MMT seems to flip the conventional wisdom surrounding money, banking, and monetary and fiscal policy on its head—the federal government, as the monopoly issuer of the currency, has no budget constraint; budget deficits <i>lower</i> interest rates instead of raising them; and fiscal policy should be the primary tool used to achieve full employment.<br />
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<a name='more'></a>It’s an interesting theory, and I find some elements of it useful in explaining how modern banking works. But I also find it to be an enigma; how MMTers model the short-run macroeconomy feels like a mystery. Paul Krugman <a href="https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html" target="_blank">accuses</a> MMTers of playing Calvinball, and maybe he’s right. Nevertheless, here’s my attempt to decipher MMT.<br />
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Before I begin, let me say that this is not an attempt to affirm or refute MMT, it is simply an attempt to understand it (or at least part of it).<br />
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Start with the model Krugman presents in <a href="https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html" target="_blank">this post</a>. This is the New Keynesian IS-LM model, typically taught in undergraduate macro courses:<br />
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In this model, planned investment is a function of the interest rate, and because the interest rate is the cost of borrowing to finance investment, higher interest rates reduce planned investment and vice versa. So, the investment function slopes down. But because higher interest rates reduce planned expenditure, income also falls. Put these together, and you get the IS curve. Where the IS curve crosses the “full employment” line determines the <a href="https://en.wikipedia.org/wiki/Natural_rate_of_interest" target="_blank">natural rate of interest</a>. </div>
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Not shown in the figure above, but implicit to the model, is the LM curve. The LM curve tells us the interest rate that equilibrates the money market at any level of income. A rise in income increases the demand for money, which leads to rising interest rates, and vice versa. So, the LM curve slopes upward. In practice, the central bank simply chooses the interest rate, making the LM curve horizontal. </div>
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Suppose the economy is in recession and the central bank has set the interest rate above the natural rate. The solution is simply for the central bank to lower the LM curve down until the interest rate equals the natural rate. In practice, the central bank does this by reducing the fed funds rate and/or the interest it pays on reserves. Alternatively, fiscal policy can be used to shift the IS curve to the right, raising the natural rate to match the interest rate set by the central bank.</div>
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One implication of this model is that the short-run aggregate demand curve is vertical. So, if the central bank wants to prevent inflation or deflation, it must adjust the interest rate to do so. If the interest rate is too high (above the natural rate), we’ll get deflation, and if it’s too low, we’ll get inflation. </div>
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O.K., now, what do MMTers say?</div>
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One thing they say is that the interest rate has <a href="https://www.bloomberg.com/opinion/articles/2019-03-01/paul-krugman-s-four-questions-about-mmt" target="_blank">very little</a>, if any, effect on savings and investment. In other words, savings and investment are interest-inelastic. If that’s the case, then the IS curve would be vertical. </div>
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What then, is the natural rate of interest? Well, if the IS curve is vertical, there isn’t one. That is, there is no unique interest rate that equilibrates the supply and demand for savings at full employment. Actually, MMTers <a href="https://rwer.wordpress.com/2017/08/12/the-loanable-funds-hoax/" target="_blank">argue</a> that there isn’t a market for loanable funds at all. So, if we happen to be at full employment, any interest rate will do.</div>
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MMTers agree, I think, that the short-run aggregate demand curve is vertical. But because they also (seem to) believe the IS curve is vertical, adjusting interest rates has no effect on aggregate demand. So, monetary policy can’t affect demand—it’s “<a href="https://www.bloomberg.com/opinion/articles/2019-03-01/paul-krugman-s-four-questions-about-mmt" target="_blank">weak tea</a>”—which means fiscal policy must be used to achieve full employment output.</div>
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O.K. Suppose we start relying on fiscal policy to reach full employment output. Won’t we run up too much debt?</div>
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Not to worry, <a href="https://www.bloomberg.com/opinion/articles/2019-02-21/modern-monetary-theory-is-not-a-recipe-for-doom" target="_blank">say the MMTers</a>. As long as the interest rate remains below the GDP growth rate, snowballing debt can’t happen. And if the central bank can set whatever interest rate it wants, it can simply choose a rate below the GDP growth rate. In fact, it may as well <a href="http://bilbo.economicoutlook.net/blog/?p=4656" target="_blank">choose zero</a>. So, the government <a href="https://www.bloomberg.com/news/articles/2018-10-19/this-theory-has-some-u-s-politicians-thinking-big-quicktake" target="_blank">faces no budget constraint</a>, at least in the long-term. The only constraint is accelerating inflation—that is, a vertical IS curve to the right of full employment output.</div>
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O.K., I think this is (mostly) right. I realize this doesn’t showcase the interaction between the Treasury, central bank, and financial system that MMTers insist is so important, and yes, I know MMTers aren’t fond of IS-LM, but I think this helps clarify a lot of their thinking.</div>
Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-6426670350180818822017-06-29T15:47:00.001-07:002017-06-29T15:47:47.219-07:00Nope, We Still Don't Have An Income Inequality Problem<div class="separator" style="clear: both; text-align: center;">
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<span style="font-family: inherit;">A f<a href="http://thefederalist.com/2017/06/27/nope-evidence-still-says-income-inequality-not-problem/#disqus_thread">ollow up piece</a> to my <a href="https://thefederalist.com/2017/05/25/dont-income-inequality-problem-egomania-problem/">original post</a> on inequality is up at The Federalist. </span><br />
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<span style="font-family: inherit;">A slice regarding the myth of wage stagnation:</span><br />
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<span style="font-family: inherit;"><i><span style="background-color: white;">The myth of wage stagnation is commonly perpetrated by looking at </span><span style="background-color: white; border: 0px; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">average</span><span style="background-color: white;"> real wage statistics. But there are several problems with using average wages as a measure, which I’ve explained before, </span><a href="http://dailysignal.com/2011/03/11/why-does-income-inequality-matter/" style="background-color: white; border: 0px; color: #ea370b; margin: 0px; outline: 0px; padding: 0px; text-decoration-line: none; vertical-align: baseline;">here</a><span style="background-color: white;">, </span><a href="http://dailysignal.com/2011/04/02/income-inequality-round-two/" style="background-color: white; border: 0px; color: #ea370b; margin: 0px; outline: 0px; padding: 0px; text-decoration-line: none; vertical-align: baseline;">here</a><span style="background-color: white;"> and </span><a href="http://dailysignal.com/2011/04/16/income-inequality-one-more-time/" style="background-color: white; border: 0px; color: #ea370b; margin: 0px; outline: 0px; padding: 0px; text-decoration-line: none; vertical-align: baseline;">here</a><span style="background-color: white;">. Briefly, one big problem is that average wage statistics are skewed downward due to the large wave of immigration we experienced in the 1980s and 1990s. Even though many immigrants were finding work and improving their lives, the influx of low-skilled work pulled wage averages downward, which makes it appear like there was stagnation when there really wasn’t.</span></i></span><br />
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<span style="font-family: inherit;"><span style="background-color: white;">Read the full piece <a href="http://thefederalist.com/2017/06/27/nope-evidence-still-says-income-inequality-not-problem/#disqus_thread">here</a>.</span></span>David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-79012826534848225372017-06-21T13:20:00.000-07:002017-06-21T13:20:06.366-07:00The Moral Case For Low Taxation<div class="separator" style="clear: both; text-align: center;">
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<span style="font-family: inherit;">The economic case for low taxation is familiar enough, but in my <a href="http://dailycaller.com/2017/06/21/the-moral-case-for-low-taxation/">piece at the Daily Caller</a> I make the moral case.</span><br />
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<span style="font-family: inherit;">A slice:</span><br />
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<span style="font-family: inherit;"><i>Important as these matters are, however, the case for reduced taxation is also compelled by moral considerations.</i></span></div>
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<span style="font-family: inherit;"><i>Every generation of Americans has understood that taxation is a fact of life. Ben Franklin famously remarked that in life “nothing can be said to be certain, except death and taxes.” However, our founders worked to keep taxes limited and uniform. “[A]ll duties, imposts and excises shall be<span style="box-sizing: border-box; line-height: inherit;"> uniform</span> throughout the United States,” reads the U.S. Constitution. [emphasis added] That is why they not only rejected <span style="box-sizing: border-box; line-height: inherit;">progressive</span> income taxation, but income taxation entirely. The early republic instead applied taxes primarily to goods, which provided maximum personal choice (to avoid the tax one could avoid purchasing the product).</i></span></div>
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<span style="font-family: inherit;"><i>This vision generally held until the early 20<span style="box-sizing: border-box; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">th</span> century, although there were two brief experiments with an income tax prior to that period. The first involved income taxation as high as ten percent during the civil war, which was repealed shortly thereafter. The second was in 1894, when congress passed an income tax that applied to the top two percent of wealth holders. However, it was quickly struck down by the Supreme Court as unconstitutional. As historian Burt Folsom notes, “At age 77, [Stephen] Field,” who was a Supreme Court justice at the time, “not only repudiated Congress’s actions, he also penned a prophecy. A small progressive tax, he predicted, ‘will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich.’”</i></span></div>
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<span style="font-family: inherit;">Read the full piece </span><a href="http://dailycaller.com/2017/06/21/the-moral-case-for-low-taxation/" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></div>
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David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-60394689947062805492017-06-01T08:00:00.001-07:002017-06-01T08:00:53.665-07:00We Don't Have An Income Inequality Problem, We Have An Ego Problem<div class="separator" style="clear: both; text-align: center;">
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In my recent <a href="http://thefederalist.com/2017/05/25/dont-income-inequality-problem-egomania-problem/">piece at the Federalist</a> I argued that we don't have an income inequality problem, we have a culture of entitlement problem.<br />
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A snippet:<br />
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<i>Despite what we routinely read in the news, we do not have an income inequality problem.<br /></i><div>
<i>First, as <a href="http://libertyunyielding.com/2015/07/22/america-does-not-have-an-inequality-problem/">I’ve previously argued</a>, we don’t refer to height differences as “height inequality.” Nor should we speak of income differences as “income inequality.” Doing so implies the deck is stacked for the “haves” and against the “have nots” before scrutinizing the facts.</i></div>
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<i>Second, the statistics are often misleading.</i></div>
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<i>A common tactic is to paint a dire economic picture by looking at statistical units— “households,” “families,” “income quintiles,” etc.—instead of individuals. For example, a<a href="http://www.nytimes.com/2013/09/18/us/median-income-and-poverty-rate-hold-steady-census-bureau-finds.html"> headline</a> from The New York Times reads: “Household Incomes Have Remained Flat Despite Improving Economy.”</i></div>
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<i>Another article claims that, “after adjusting for inflation, U.S. median household income is still 8 percent lower than it was before the recession, 9 percent lower than at its peak in 1999, and essentially unchanged since the end of the Reagan administration.” Moreover, we are repeatedly warned that increasing shares of income go to the “top one percent” of earners while the rest stagnate or worse.</i></div>
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For the full piece, click <a href="http://thefederalist.com/2017/05/25/dont-income-inequality-problem-egomania-problem/">here</a>. </div>
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David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-877043627476290472017-03-10T05:19:00.000-08:002017-03-10T05:19:31.690-08:00Do We Have a "Right" to Health Care?<div class="separator" style="clear: both; text-align: center;">
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My explanation is up in a piece at <a href="http://thefederalist.com/2017/03/10/nobody-right-health-care/#disqus_thread">The Federalist</a>.<br />
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A snippet:<br />
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<i>Buried beneath the Obamacare replacement debates is the philosophical question of whether health care is a “right.” Article 25 of the United Nations’ Declaration of Rights, for instance, declares it so. While this is correct as a means, it’s wrong as an end. Understanding the distinction is vital.</i><br />
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<i>For the first time in human history, the Declaration of Independence announced that “all men are created equal.” As Abraham Lincoln argued, everyone is equal because everyone is free, and everyone is free because everyone is equal. Hence no man has the authority to rule over another without the other’s consent. Furthermore, because this equality emanates from the “Laws of Nature and of Nature’s God,” it imbues every individual with the rights to life, liberty, and the pursuit of happiness.</i><br />
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Read the full article <a href="http://thefederalist.com/2017/03/10/nobody-right-health-care/#disqus_thread">here</a>.David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com1tag:blogger.com,1999:blog-3461503364269187599.post-87901743184561234022017-02-19T13:28:00.004-08:002018-08-20T10:55:38.622-07:00The Great Recession: This Time Really is Different<div class="separator" style="clear: both; text-align: center;">
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David has a <a href="http://dailycaller.com/2017/02/01/this-is-why-economic-recovery-has-been-so-weak/" target="_blank">piece</a> up at the Daily Caller highlighting an <a href="https://www.wsj.com/articles/the-reasons-behind-the-obama-non-recovery-1474412963" target="_blank">article</a> by economist Robert Barro, who claims that the U.S. economy should have recovered much faster from the recession than it did. David expands on this point, arguing that too much focus on <a href="https://en.wikipedia.org/wiki/Stimulus_(economics)" target="_blank">fiscal stimulus</a> is to blame for the anemic recovery. I don’t find either of these arguments very convincing.<br />
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David begins by referencing what I consider to be macroeconomists’ go-to resource for understanding what to expect after a financial crisis: “<a href="http://www.nber.org/papers/w14656" target="_blank">The Aftermath of Financial Crises</a>”, by economists Carmen Reinhart and Kenneth Rogoff. But David suggests that the <a href="http://www.nber.org/papers/w21871" target="_blank">work</a> of economists Robert Barro and Tao Jin should displace this resource from the all-star list.<br />
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Two thoughts: First, are Barro & Jin and Reinhart & Rogoff even addressing the same question? Second, despite the evidence on systemic financial crises, should we have nevertheless expected the economy to recover quickly?<br />
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On the first question: the details are a bit technical, but the goal of Barro & Jin’s paper is to improve our understanding of asset-pricing patterns, including the so-called “equity premium puzzle”—a conundrum that has left economists unable to reconcile the existence of large equity premiums with the way we think households make economic decisions. To do that, part of Barro & Jin’s approach is to model “rare macroeconomic events”—such as the world wars and the Great Depression—then use consumption data going back to 1851 to estimate them. Interestingly, the financial crisis of 2007-08 does not show up as a rare macroeconomic event in Barro & Jin’s paper.<br />
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By contrast, Reinhart & Rogoff ask how we should expect an economy to behave in the aftermath of systemic financial crises, such as the one we just experienced. In their own <a href="https://www.bloomberg.com/view/articles/2012-10-15/sorry-u-s-recoveries-really-aren-t-different" target="_blank">words</a>,<br />
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“We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries…Today, there can be little doubt that the U.S. has experienced a systemic crisis.” </blockquote>
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Translation: Barro & Jin tell us how we should <i>generally</i> expect an economy to recover after a very deep recession, but Reinhart & Rogoff tell us how we should expect an economy to recover <i>specifically</i> after a systemic financial crisis. Now, I don’t claim to be an expert on the rare events or financial crisis literature, but David’s conclusion that Reinhart & Rogoff’s work “doesn’t withstand scrutiny” is strange when the two papers seem to ask fundamentally different questions.<br />
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So should we have expected a faster recovery? I’m not so sure. In fact, <a href="http://www.calculatedriskblog.com/2008/02/housing-as-engine-of-recovery.html" target="_blank">several</a> <a href="http://www.nber.org/papers/w16567" target="_blank">economists</a> <a href="http://voxeu.org/article/fact-checking-financial-recessions-us-uk-update" target="_blank">have</a> <a href="https://krugman.blogs.nytimes.com/2008/01/22/deep-maybe-long-probably/" target="_blank">argued</a> from the very beginning that we would have a slow recovery. In part, that’s because the Federal Reserve (a.k.a., “the Fed”) <a href="http://diversityofideas.blogspot.co.uk/2014/02/fighting-recessions-monetary-policy-and.html" target="_blank">normally fights recessions</a> by cutting short-term interests, but this time, even pushing interest rates to zero wasn’t enough. David’s insinuation that we should have had a stronger recovery, even without the tools of conventional monetary policy is, to me, baffling.<br />
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Now, I don’t mean to suggest that the economy shouldn’t have done better—we could have, and should have, had a much larger fiscal stimulus than what we ultimately got. But David doesn’t like that answer either. In fact, he blames fiscal stimulus for the slow recovery.<br />
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This is a debate that David and I have <a href="http://diversityofideas.blogspot.co.uk/2014/02/why-government-spending-stimulates.html" target="_blank">had</a> <a href="http://diversityofideas.blogspot.co.uk/2014/03/striking-out-on-stimulus.html" target="_blank">several</a> <a href="http://diversityofideas.blogspot.co.uk/2014/03/for-last-time-why-david-is-wrong-about.html" target="_blank">times</a>. Yet David still asserts comically obvious fallacies, such as fiscal stimulus fails because “government must first remove a dollar from the economy to spend it in the economy.”<br />
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There are multiple problems with statements like this, but the most obvious is that it ignores the fact that the U.S. federal government, working through the Fed and the Treasury, is the <a href="http://diversityofideas.blogspot.co.uk/2014/08/a-government-is-not-household.html" target="_blank">monopoly issuer of the dollar</a>: there is no operational constraint on our government to “first remove a dollar from the economy” before it can purchase things like roads and bridges.<br />
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The truth is that there are <a href="http://www.nber.org/papers/w16759.pdf" target="_blank">plenty</a> <a href="http://economics.mit.edu/files/7102" target="_blank">of</a> <a href="https://www.aeaweb.org/articles?id=10.1257/pol.4.3.251" target="_blank">reasons</a> to believe that fiscal stimulus works. In fact, <a href="https://www.nytimes.com/2014/07/30/upshot/what-debate-economists-agree-the-stimulus-lifted-the-economy.html" target="_blank">most economists believe that it works</a>. One need only look at the <a href="https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion" target="_blank">natural experiment Europe has so kindly provided</a> to see that large changes in government spending during recessions matter. If David and his ilk were right about fiscal stimulus, then the <i>cuts</i> to government spending in Europe wouldn’t have had such negative economic effects.<br />
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Despite all this, David insists that fiscal stimulus merely amounts to a misallocation of economic resources, ultimately making the recession worse. Fortunately, it’s pretty tough to misallocate resources during a recession when there’s so many of them sitting idle—e.g., unemployed workers, empty factories—and literally not being used.<br />
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So don’t be fooled by David. Slow economic recovery is seemingly normal after systemic financial crises, so there’s no mystery here. It’s true that we could have done better, but not for the reasons David claims.Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-87021455493555525272017-02-08T13:38:00.001-08:002017-02-08T13:56:05.348-08:00The Myth that Tax Cuts Don't Work<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-LcqR1J1sWwa9qf0jRxJ8Si317o9kisguPBYgnjxvhGYrCxinnKopLL4V0brhn_wUxKukaUF46s0c535Cg3YTb2I8kYI7aMoJIDDDTi0_P429OHIpzho13KG45ibMk3tH0F7d-TzTjvM/s1600/Tax+Cuts.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-LcqR1J1sWwa9qf0jRxJ8Si317o9kisguPBYgnjxvhGYrCxinnKopLL4V0brhn_wUxKukaUF46s0c535Cg3YTb2I8kYI7aMoJIDDDTi0_P429OHIpzho13KG45ibMk3tH0F7d-TzTjvM/s1600/Tax+Cuts.png" /></a></div>
My <a href="http://dailycaller.com/2017/02/08/the-myth-that-tax-cuts-dont-work/">piece is up at the Daily Caller</a>.<br />
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It begins:<br />
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<i>Despite the preponderance of contrary evidence, myths persist that tax cuts primarily benefit “the rich” and have no discernible impact on economic growth.</i><br />
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<i>Months ago, for instance, Hillary Clinton charged that “slashing taxes on the wealthy hasn’t worked. And a lot of really smart, wealthy people know that.”</i><br />
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<i>She’s right that it hasn’t worked, but she failed to mention that it’s also never happened. The tired “tax cuts for the rich” canard is disproven by the 1920s, the 1960s, the 1980s and the 2000s, when tax rates were reduced for all—and especially low—income groups.</i><br />
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Read the full piece <a href="http://dailycaller.com/2017/02/08/the-myth-that-tax-cuts-dont-work/">here</a>.<br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-76238729733097383932017-02-01T11:52:00.000-08:002017-02-01T11:52:19.586-08:00This is Why Economic Recovery is So Slow<div class="separator" style="clear: both; text-align: center;">
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My <a href="http://dailycaller.com/2017/02/01/this-is-why-economic-recovery-has-been-so-weak/">piece is up at the Daily Caller</a>. <div>
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A snippet:</div>
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<i>“I actually compare our economic performance to how, historically, countries that have wrenching financial crises perform. By that measure, we probably managed this better than any large economy on Earth in modern history.” – Barack Obama</i></div>
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So say defenders of the sluggish recovery. But recent research belies that idea. The truth is our lackluster growth is the result of neglecting an essential economic concept.</div>
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According to Just Facts Daily, “even after the recession ended in 2009 average real GDP growth has been 35% below the average from 1960–2009, a period that includes eight recessions.” Moreover,</div>
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<i><span style="font-family: inherit;">In early 2011, the White House Office of Management & Budget projected that real GDP would grow by an average of 3.6% per year for five years after the Great Recession (see pages 14–16). Obama’s economists noted that this figure was lower than the typical post-recession growth rate of 4.2%, but they concluded that the “lingering effects from the credit crisis may limit the pace of the recovery,” even though the recession left “enormous room for growth in 2011.” Ultimately, GDP grew by an average of 2.2%, or 39% below the White House’s conservative estimate.</span></i></div>
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Read the full piece <a href="http://dailycaller.com/2017/02/01/this-is-why-economic-recovery-has-been-so-weak/">here</a>. </div>
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David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-10609897432144877592017-01-18T07:38:00.002-08:002017-01-18T07:42:00.390-08:00Making America Suffer Again<div class="separator" style="clear: both; text-align: center;">
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In December 2015, Mary Giliberti, CEO of the National Alliance on Mental Illness, wrote a <a href="http://www.huffingtonpost.com/mary-giliberti/namis-report-a-wish-for-m_b_8853772.html?utm_source=social&utm_medium=facebook&utm_campaign=yearend2015" target="_blank">call to action</a>. Her message was to those “who believe in the importance of mental health services and supports” to be better advocates for mental health reform in 2016. The year just ended, but I’d like to answer that call.<br />
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Since 2009, Republicans have waged a ceaseless war on President Obama’s signature policy achievement, the Affordable Care Act (a.k.a. Obamacare). So far, all efforts to repeal the law have been unsuccessful because President Obama currently occupies the White House. But that will soon no longer be the case. It’s probably safe to say that <a href="https://www.washingtonpost.com/blogs/plum-line/wp/2016/11/29/obamacare-is-probably-toast-and-a-lot-of-poor-white-trump-voters-will-get-hurt/?utm_term=.b4f620205de3" target="_blank">Obamacare is toast</a>.<br />
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That’s truly a shame, and not just because millions of Americans will needlessly suffer without health insurance. Repealing Obamacare will have overwhelmingly negative effects on <a href="http://www.theatlantic.com/politics/archive/2016/11/trump-healthcare-plan-working-class-whites/508325/" target="_blank">many groups of people</a>, but one group that will be disproportionately punished is the mentally ill. That’s because repealing Obamacare is very bad mental health policy, and even worse economics.<br />
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On mental health policy, Obamacare represents the largest expansion of mental health and substance abuse services <a href="https://www.mentalhealth.gov/get-help/health-insurance/" target="_blank">in a generation</a>. It also encourages greater coordination and integration of mental and physical health services, expands health insurance coverage to more people with mental disorders, and <a href="http://www.asaging.org/blog/implications-affordable-care-act-mental-health-care" target="_blank">improves mental health coverage and access to care</a>. While Obamacare is far from an elixir, never before has a piece of federal legislation addressed mental health policy on such a comprehensive scale.<br />
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Lest you think these investments aren’t all that necessary to begin with, consider the following: according to the National Institute of Mental Health, approximately <a href="https://www.nimh.nih.gov/health/statistics/prevalence/any-mental-illness-ami-among-us-adults.shtml" target="_blank">1 in 5 American adults</a> suffer from mental illness, <a href="https://www.nimh.nih.gov/health/statistics/prevalence/serious-mental-illness-smi-among-us-adults.shtml" target="_blank">1 in 25</a> suffer from a severe mental illness, and <a href="https://www.nimh.nih.gov/health/statistics/prevalence/any-disorder-among-children.shtml" target="_blank">1 in 5 American children</a> will suffer from a severe mental illness at some point in their lives. Approximately 10 percent of American adults either live with <a href="https://www.nimh.nih.gov/health/statistics/prevalence/schizophrenia.shtml" target="_blank">schizophrenia</a>, <a href="https://www.nimh.nih.gov/health/statistics/prevalence/bipolar-disorder-among-adults.shtml" target="_blank">bipolar disorder</a>, or had at least <a href="https://www.nimh.nih.gov/health/statistics/prevalence/major-depression-among-adults.shtml" target="_blank">one major depressive episode</a> this past year. In 2010, the Global Burden of Disease study <a href="http://www.thelancet.com/journals/lancet/article/PIIS0140-6736(13)61611-6/abstract" target="_blank">found</a> that mental disorders were the leading cause of years lived with disability (23%), accounting for approximately 7.4 percent of disability-adjusted life years (DALYs) (DALYs measure lost years of disability-free life).<br />
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One of the main ways Obamacare works to address these troubling statistics is by giving teeth to the federal mental health parity law established by the Mental Health Parity and Addiction Equity Act (MHPAEA) of 2008. Historically, health insurers have had an incentive to avoid enrolling people with mental health issues because they tend to cost more. That’s because people with mental disorders typically use both mental and physical health care services <a href="http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199238828.001.0001/oxfordhb-9780199238828-e-11" target="_blank">more than the average person</a>. So many insurers discouraged the mentally ill from enrolling in their plans by charging them higher premiums or imposing higher cost-sharing requirements (e.g., deductibles, copayments, or coinsurance) for mental health services.<br />
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In response, Congress passed the MHPAEA, which requires that physical and mental health care services have equivalent cost-sharing requirements in health insurance plans. The problem is, many insurers easily side-stepped the law by simply not offering mental health coverage at all. Obamacare rectifies this by classifying mental health and substance abuse treatment as one of the ten “essential health benefits” that insurers are required to cover. Of course, repealing Obamacare means we’re right back to square one.<br />
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And that brings me to the economics.<br />
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Mental health parity laws are fundamentally important from a policy and humanitarian perspective, but they also have considerable economic benefits. For example, <a href="http://www.sciencedirect.com/science/article/pii/S0167629615000740" target="_blank">recent evidence</a> from economist Martin Andersen suggests that parity laws may improve the wages and hours worked of moderately distressed individuals. This is consistent with the previous findings of economist Matthew Lang, who <a href="http://onlinelibrary.wiley.com/doi/10.1002/hec.1816/abstract" target="_blank">shows</a> that parity laws are effective at combating the effects of depression, and <a href="http://www.sciencedirect.com/science/article/pii/S016762969700043X" target="_blank">Ernst Berndt and his colleagues</a>, who show that those treated for clinical depression are more productive on-the-job.<br />
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Given this evidence, it’s not all that surprising that independent studies conclude that failing to adequately address mental health issues has a profoundly negative impact on economic growth. Indeed, a recent report by the World Economic Forum and the Harvard School of Public Health ranked mental health conditions as the <a href="http://www3.weforum.org/docs/WEF_Harvard_HE_GlobalEconomicBurdenNonCommunicableDiseases_2011.pdf" target="_blank">top driver of lost economic output</a> (35%) among all non-communicable diseases. This means that failing to address mental illness comes at incredible economic cost—more so than cardiovascular diseases, and more so than cancer, chronic respiratory diseases, and diabetes <i>combined</i>.<br />
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In summary, then, repealing Obamacare would do a lot of irreparable harm to a lot of people, particularly the mentally ill. Even simple economics says it shouldn’t happen. Yet here we are.<br />
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There are some who say that Republicans will never go through with this, that repealing Obamacare simply wreaks too much havoc. For the country’s sake, I hope they’re right.<br />
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Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-50356319834867815792017-01-12T13:13:00.000-08:002017-01-12T13:15:04.774-08:00Is it Time to End the Electoral College?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgULoacguOZJrlPTpNoeKPuvAWpVG_N8Q3GgLu5IatAo12R-vhdq8A8SLOY5bCKyO3Nkap5fklw7YKbK-HvqJEShPOSEBpI4s7ht25oEcZU87w08hDWTKb_QBJ7WgqOrNeG1-r7s-CTOl0/s1600/Electoral+College.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="150" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgULoacguOZJrlPTpNoeKPuvAWpVG_N8Q3GgLu5IatAo12R-vhdq8A8SLOY5bCKyO3Nkap5fklw7YKbK-HvqJEShPOSEBpI4s7ht25oEcZU87w08hDWTKb_QBJ7WgqOrNeG1-r7s-CTOl0/s320/Electoral+College.jpg" width="320" /></a></div>
My <a href="http://dailycaller.com/2017/01/12/is-it-time-to-end-the-electoral-college/">piece</a> defending the Electoral College is up at The Daily Caller.<br />
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It begins:<br />
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“Time to End the Electoral College,” announced the New York Times.</blockquote>
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“Monday’s Electoral College results prove the institution is an utter joke,” declared Vox. </blockquote>
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The Electoral College is a “vestige” and a “carryover” from the past, proclaimed the president of the United States. </blockquote>
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It is a sign of our failing education system that reputable news outlets and intelligent people don’t understand the Electoral College. Its preservation is vital for securing the rights of the minority and averting the tyranny of pure democracy.</blockquote>
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Yet seemingly unfamiliar with these arguments, the New York Times (NYT) haughtily pronounced that:</blockquote>
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<i>By overwhelming majorities, Americans would prefer to elect the president by direct popular vote, not filtered through the antiquated mechanism of the Electoral College. They understand, on a gut level, the basic fairness of awarding the nation’s highest office on the same basis as every other elected office — to the person who gets the most votes.</i> </blockquote>
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The editors of the Times would do well to consult the history books. “Antiquated” is a term better applied to the idea of a direct popular vote. Millennia ago, Greece and Rome attempted what the NYT celebrates as a novel idea, and both collapsed.</blockquote>
To read the piece in full, click <a href="http://dailycaller.com/2017/01/12/is-it-time-to-end-the-electoral-college/">here</a>.<br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-1741741157716029192016-11-05T10:40:00.003-07:002016-11-05T10:40:35.691-07:00The Problem with our Public Discourse<div class="separator" style="clear: both; text-align: center;">
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My piece is up at the <a href="http://www.americanthinker.com/articles/2016/11/the_problem_with_our_public_discourse.html">American Thinker</a>. A slice:<br />
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This political season has become especially emotion-driven. That may be understandable for the general public, for whom politics is neither a passion nor a preoccupation, but it is another matter when our “elite” who shape public opinion and whom we expect to elevate public discourse promote non-thinking.</blockquote>
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Consider three examples. </blockquote>
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First is a leading <a href="http://uk.businessinsider.com/why-i-left-republican-party-register-democrat-2016-10?r=US&IR=T">editorialist</a> who excoriated various Republicans for their support of Donald Trump, whom the author labels a “dangerous fascist:”</blockquote>
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<i>I am talking, for example, about Sen. Marco Rubio, who in the primary called Trump an "erratic individual" who must not be trusted with nuclear weapons -- and then endorsed him for president.</i></blockquote>
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<i>I am talking about Sen. Ted Cruz, who called Trump a "pathological liar" and "utterly amoral" -- and then endorsed him for president, even though Trump never apologized for threatening to "spill the beans" on Cruz's wife and suggesting Cruz's father was involved in the assassination of President John F. Kennedy.</i></blockquote>
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<i>Most of all, I'm talking about House Speaker Paul Ryan, a man whose pained, blue eyes suggest he desperately wants to cry for help. He's a man who runs around the country pathetically trying to pretend that Trump does not exist and that the key issue is his congressional caucus' "Better Way" agenda. And he's a man who, of his own free will, seeks to help Donald Trump become president.</i></blockquote>
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One would think that a writer critiquing his opponents would demonstrate familiarity with their thinking. But here not even a cursory understanding of it is demonstrated. After providing nothing but a few obscure quotes from the primary season, he smears Messrs. Ryan, Rubio, and Cruz by concluding that their support of Trump is proof that “they love their careers more than they love America.”</blockquote>
To read the full piece, go <a href="http://www.americanthinker.com/articles/2016/11/the_problem_with_our_public_discourse.html">here</a>.<br />
<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-16057091734602783362016-09-13T08:24:00.001-07:002016-09-13T08:24:20.604-07:00Freedom vs. Equality<div class="separator" style="clear: both; text-align: center;">
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My article on freedom and equality is up at <i><a href="http://thefederalist.com/2016/09/13/freedom-equality-dont-create-good-life/">The Federalist</a></i>. A few snippets:<br />
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Modern politics is generally framed as a struggle between freedom and equality. But which is the greater end? Although both are important, in accepting either we’ve lowered our sights from the classical ideal of virtue.
The modern mindset can be demonstrated by two examples: taxes and the minimum wage. Opponents of tax hikes often appeal to the right of individuals to keep the fruits of their own labor, while advocates argue the wealthy must “pay their fair share.”<br />
<br />The same applies to the minimum wage. Critics decry government criminalizing arrangements the parties involved have freely agreed to simply because it may not seem “fair” to an outsider, while supporters counter that everyone is entitled to a “living wage.” To be sure, freedom and equality are indispensable to our republic (<a href="http://dailysignal.com/2012/04/20/what-does-equality-of-opportunity-mean/" style="border: 0px; color: #ea370b; font-family: inherit; font-style: inherit; font-weight: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;">although equality of opportunity as opposed to equality of outcome</a>), but both fall short of the ideal of virtue. <a name='more'></a></blockquote>
<blockquote class="tr_bq">
Classical philosophers like Socrates, Plato, and Aristotle recognized the importance of freedom and equality, but regarded the ultimate aim of politics, or the “best regime,” to be the pursuit of the good, or “virtuous,” life. This meant living in accordance with human nature and its needs—which consisted of courage, temperance, wisdom, and justice—and which stood as the highest ideal among political theorists for millennia.
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Read the full piece <a href="http://thefederalist.com/2016/09/13/freedom-equality-dont-create-good-life/">here</a>.<br />
<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-2562903001873894292016-06-28T11:20:00.002-07:002016-06-30T08:27:29.591-07:00Does Capitalism Cause Recessions?<div class="separator" style="clear: both; text-align: center;">
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Why do recessions occur? This question divides free market economists. After recently <a href="http://diversityofideas.blogspot.com/2016/04/how-keynesian-economics-has-distorted.html">blogging on the classical conception of the business cycle</a>, in which I described how “classical” economists believed that economic crashes are due to production errors, a commenter linked to an alternative perspective which suggests that recessions are the result of central banking. While this is true some of the time, it doesn’t explain why recessions plagued the economy before the introduction of the Federal Reserve (Fed) in 1913.<br />
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According to classical economists like John Stuart Mill, David Ricardo and others, discoordination between the structure of production and the structure of demand may lead to business failure and possibly recession. How? If producers produce the wrong goods and services for public consumption, producers fail to earn a positive return and their production goes to waste. If production errors are sufficiently large and widespread, the economy may be brought to a halt. Because economic growth begins on the supply side (production), demand-side remedies, such as fiscal stimulus, must fail.<br />
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However, the <a href="http://gerardjackson.com/the-real-classical-school-theory-of-the-trade-cycle-2/">link</a> which the commenter posted posits that the banking system is universally responsible for the coordination failure described above. How? As the central bank lowers interest rates by expanding the money supply, it fuels “‘insane speculation’ and disproportionalities,” which eventuates in a crash.<br />
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To better understand this, the theory suggests that interest rates set by the Fed not only signal the price of money, but allocate real resources in the economy. A low interest rate signals that savings are high—that consumers are saving now and deferring consumption (spending on goods and services) to the future. When that happens, businesses are incentivized to invest in hopes of earning future consumer demand. But once firms realize the impossibility of completing all of the projects at the top of the cycle that were commenced at the bottom of the cycle, a crash and subsequent correction ensue, whereby structural imbalances work their way back into alignment. Indeed, this is one of the popular explanations of the 2008 economic crisis.<br />
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This explanation is valid in some cases. In fact, classical economists don’t disagree that government can and often does cause recessions. Mill, for instance, wrote at length about the disproportionalities often caused by the credit creation process, which likely played a pronounced role in the ’08 crash. But it is difficult to claim the economy would grow uninterrupted were it not for central banking. After all, successfully anticipating the desires of consumers one hundred percent of the time is an impossibly difficult task, which is why classicalists recognized that either a large miscalculation or a series of simultaneous ones can collapse the economy, including major downturns in 1819, 1837, 1857, 1873, 1893 and 1907, well before the creation of the Fed.<br />
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Moreover, classicalists denounced demand-side fiscal policies—“stimulus” packages—as misguided exercises that only divert resources into unproductive ends. While palliative measures are optimal which target the supply side – that is, target forms of expenditure that might be expected to earn a positive return – the economy can only truly recover when left to rebalance itself.<br />
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Although this notion is far outside the lines of our fashionable economic theories, it’s crucial to understand the proper dynamics of the economy. And that means that while government sometimes causes recessions, the key is understanding that it is not demand deficiency but the disharmony between production and demand that is the problem in recessions. Until that is embraced, we have no hope of advocating sound policy.<br />
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<i><a href="http://libertyunyielding.com/2016/06/30/capitalism-cause-recessions/">Cross-posted at Liberty Unyielding</a></i></div>
David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-78171020568801707052016-05-08T11:43:00.001-07:002016-05-08T11:44:25.815-07:00Is Classical Theory Irrelevant?<div class="separator" style="clear: both; text-align: center;">
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For the last 70 years, macroeconomics has become so entrenched within a demand-side framework that arguments that don’t operate within that paradigm are often derided as irrelevant.<br />
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A couple weeks ago I wrote a <a href="http://diversityofideas.blogspot.com/2016/04/how-keynesian-economics-has-distorted.html">piece</a> explaining classical business cycle theory and its denial of demand deficiency. Someone from a prominent think tank (not my former employer) messaged me, asserting that although he agreed classical theory is routinely misunderstood, he didn’t understand why it mattered:<br />
<blockquote class="tr_bq">
It seems to me that the piece is really about …the fact that goods will command some price in the market - that demand for them will never literally reach zero – [which] is not a terribly interesting finding … and I would really like a clear explanation of why this matters...</blockquote>
Given the difficulty of discarding the macroeconomic lens that has prevailed since the 1930s, this misunderstanding and subsequent dismissal of the argument isn’t surprising. Virtually all modern theory is rooted in an “aggregate demand” paradigm—that is, demand management is understood as the key to a well-run economy. This is true for “Monetarists,” “Keynesians,” and even many free market variations, where disagreement has been reduced to whose model best achieves that end.<br />
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<a name='more'></a>Classical theory, however, rejects not merely the dominant models, but the framework itself. It provides an entirely different one through which to model the economy. The key to its framework is not that “goods command some price in the market,” which, as economist Steve Kates <a href="http://www.e-elgar.com/shop/free-market-economics-second-edition">instructs</a>, ignores that the economy is made up of entrepreneurs attempting to find buyers who don’t simply cover <i>some</i> but <i>all</i> of the costs of production. Rather, the point is understanding that the economy begins and ends with production, which determines the level of demand. As I <a href="http://diversityofideas.blogspot.com/2016/04/how-keynesian-economics-has-distorted.html">stressed</a>, when production increases, purchasing power—or “demand”—rises; when production diminishes, demand shrinks. The key, then, is to coordinate the structure of production—supply and demand. Economic fluctuations result from the discoordination of the two.<br />
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The implications of this paradigm are enormous. Many of our current policies, such as food stamps, minimum wage laws, infrastructure spending, and various welfare and green energy programs, are justified at least partly by arguing that spending will help the economy. But the classical framework suggests these policies are useless at best and destructive at worst, and that boosting the economy requires encouraging production—entrepreneurialism, risk-taking—by peeling back disincentives such as high tax rates and regulatory burdens.<br />
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But given the gravity of asking the vast majority of the economics community to accept that its fancy models, sophisticated math equations and strongly held worldviews may be utterly mistaken, it’s no wonder they often dismiss the relevancy of classical theory. But reversals in economic orthodoxy are not impossible. It happened in the 1930s. Let’s hope it might happen again.<br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-69172628338780099052016-04-13T08:01:00.000-07:002016-04-13T14:35:23.930-07:00How Keynesian Economics Has Distorted Economic Thinking (Somewhat wonkish)<div class="separator" style="clear: both; text-align: center;">
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For the better part of a century, most economists have believed that recessions are caused by overall demand failure—total purchasing power dropping below the number of total goods on the market.<br />
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Part of the reason for the predominance of this thinking is that the man who popularized it, John Maynard Keynes, mischaracterized “classical” arguments in order to better refute them. Unfortunately, few are aware of the success these distortions have had on economic theory.<br />
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Keynes began his criticisms of the classical school by insisting that it offered no explanation for “involuntary unemployment”—or forced unemployment—and hence recessions:<br />
<blockquote class="tr_bq">
Classical theory…is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, <b>unemployment, which in the above sense involuntary, cannot occur</b>… [emphasis added]</blockquote>
He then added to his criticism by accusing his opponents of fallaciously arguing that “supply creates demand,” which Keynes would repudiate:<br />
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<blockquote class="tr_bq">
I believe that economist everywhere up to recent times … <b>have not extricated themselves from his [Jean-Baptiste Say’s] basic assumptions and particularly from his fallacy that demand is created by supply. Say was implicitly assuming that the economic system was always operating up to its full capacity</b>, so that a new activity was always in substitution for, and never in addition to, some other activity. Nearly all subsequent economic theory has depended on, in the sense that it has required, this same assumption. Yet a theory so based is clearly incompetent to tackle the problems of unemployment and of the trade cycle. [emphasis added]</blockquote>
Problem is, both of his arguments were disingenuous. Not only did classicalists like Jean-Baptiste Say, James Mill, Robert Torrens, John Stuart Mill, David Ricardo and others describe situations of involuntary unemployment, but they disavowed Keynes’s oversimplified notion that “supply creates demand.” Moreover, they categorically rejected what became the central tenet of Keynesian economics—overall demand deficiency—as an obvious fallacy.<br />
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Let’s first examine the classical business cycle theory, which began with the uncontroversial idea that, in order to obtain a good or service on the market, one must produce and offer something in exchange. For example, in order for a shoemaker to procure the watchmaker’s watch, the shoemaker must make and exchange a shoe for the watch. Of course, the classical school realized that we don’t operate in a barter economy, and that money acts as the medium of exchange (more on that below). But the point was that production was the key to economic booms and busts: When production increases, purchasing power—or “demand”—rises; when production diminishes, demand shrinks. “Men err in their production; there is no deficiency of demand,” asserted David Ricardo.<br />
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From here, however, Keynes took the argument and twisted it into the chimerical characterization, “supply creates its own demand”—that is, he accused the classical school of believing that simply producing a good guarantees its sale (“demand”). But had he read further, he would have known that none of his opponents believed such an absurd proposition. In fact, they went to great lengths to stress that production creates demand, only if consumers desire what’s produced. Here’s Ricardo:<br />
<blockquote class="tr_bq">
Mr. Say, in the new addition of his book…supports, I think, very ably the doctrine that demand is regulated by production. Demand is always an exchange of one commodity for another. <b>The shoemaker when he exchanges his shoes for bread has an effective demand for bread…. And if his shoes are not in demand it shews that he has not been governed by the just principles of trade, and that he has not used his capital and his labour in the manufacture of the commodity required by society</b>, -- more caution will enable him to correct his error in his future production. Accumulation necessarily increases production and as necessarily increases consumption [demand]. [emphasis added]</blockquote>
In other words, if a producer fails to meet the demand preference of consumers, production goes to waste. Contemporaries of Ricardo, such as Robert Torrens, agreed: Production creates demand, as long as there are “proper proportions”—that is, assuming the structure of supply matches the structure of demand:<br />
<blockquote class="tr_bq">
In every conceivable case,<b> effectual demand is created by and is commensurate with production, rightly proportioned</b>…. Vary our suppositions as we will, <b>increased production, provided it be duly proportioned, is the one and only cause of extended demand</b>, and diminished production the one and only cause of contracted demand. [emphasis added]</blockquote>
And, contrary to Keynes’s unfounded allegations, the lack of “proportions” is precisely how these economists explained recessions:<br />
<blockquote class="tr_bq">
<b>The want of due proportion </b>in the quantities of the several commodities brought to market, which operates thus injuriously upon capitalists, <b>inflicts equal injury upon the other classes of the community</b>…. The ruin of the cultivator involves that of the proprietor of land; and when the motive and the power to employ productive capital are destroyed, the productive labourer is cut off by famine. [emphasis added]</blockquote>
In a word, failure in the structure of production—the disharmony of supply and demand—may reduce income and employment, ending in recession. But seeking a remedy via demand stimulation was viewed as a flagrant fallacy. The right prescription, according to Jean-Baptiste Say, was to stimulate production:<br />
<blockquote class="tr_bq">
The encouragement of mere consumption [demand] is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption [demand]; and we have seen, that production alone, furnishes those means. Thus it is the aim of good government to stimulate production, of bad government to encourage consumption [demand].</blockquote>
Furthermore, while many Keynesians have denied this, classical economists accommodated the role of money. According to the Keynesian argument, classicalists ignored the fact that money isn’t simply a medium of exchange—or “neutral”—but is also a commodity that can be demanded, especially during recessions. When that happens, overall demand for goods and services falls (as people prefer holding money to purchasing goods), in which case the economy faces total demand failure, requiring a demand-side remedy.<br />
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But even while recognizing the recessionary impact of higher money demand, the classical school maintained its rejection of demand deficiency. Here’s John Stuart Mill:<br />
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It is a great error to suppose…that a commercial crisis is the effect of a general excess of production [insufficient demand]. … Its immediate cause is a contraction of credit, and the remedy is, not a diminution of supply, but the restoration of confidence.</blockquote>
Put differently, during recessions money demand may rise and production may slow, but it is caused not by too little demand but from fear in the marketplace. Once confidence is restored, production resumes along with demand.<br />
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Contrary to popular belief, Keynes and many of his followers have misrepresented classical economics. This has led many to renounce classical theory without realizing that it not only offers logical explanations for the business cycle, but that the classicalists were well-versed in and rejected Keynesianism before it became known as Keynesianism. And that’s a fact that merits more attention.<br />
<i><a href="http://libertyunyielding.com/2016/04/13/keynesian-economics-distorted-economic-thinking/"><br /></a></i>
<i><a href="http://libertyunyielding.com/2016/04/13/keynesian-economics-distorted-economic-thinking/">Cross-posted at Liberty Unyielding.</a></i><br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com2tag:blogger.com,1999:blog-3461503364269187599.post-18065531496051054172016-01-25T18:18:00.001-08:002016-01-25T18:27:13.291-08:00What is economic mobility?<div class="separator" style="clear: both; text-align: center;">
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Tim wrote a thoughtful <a href="http://diversityofideas.blogspot.com/2016/01/king-for-day-reconsidered.html">rebuttal</a> to my <a href="http://diversityofideas.blogspot.com/2016/01/a-deeper-look-at-economic-mobility.html">posts</a> on <a href="http://diversityofideas.blogspot.com/2015/09/misinformation-on-economic-inequality.html">economic</a> <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">mobility</a>, but it seems we’re at least partly talking past one another.<br />
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One of Tim’s central arguments is that some of the studies I highlighted miss the point he has in mind—whether “someone from a poor or lower-income family has the same or better chance of attaining such a position than in an earlier generation”—and instead reflect the fact that part-time high school and college workers rise to higher income brackets over time. <br />
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But whether someone poor rises relative to his predecessors’ position is separate from whether people remain stuck at a given income level over time, which is the view promulgated by the media and our cultural elite, and which the studies I cited by the U.S. Treasury, the Federal Reserve and the University of Michigan debunk. Most people in the United States rise to higher income quintiles as they gain education and experience. Economic stagnation is a myth. <br />
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The question of whether the impoverished have a better chance of rising than in an earlier generation is one that’s trickier to assess. Statistics alone may not provide the answer. For instance, certain groups may remain destitute over periods of time, which would seem to indicate a lack of mobility, but that cannot be assumed to be due to a lack of economic opportunity. As my former colleague and current Chamber of Commerce economist JD Foster points out, “What if someone's choices (education, personal habits, attitude) preclude their doing better? Is it then society's fault they fail to prosper? Alternatively, what if someone consistently does great work. Is the system failing when they stay "rich"?”<br />
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That is why I argued that, to the extent that certain groups may remain impoverished, and among other factors, my view is that our expanded welfare state combined with the absence of middle-class values at least partly encourages immobility. <br />
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Perhaps a forthcoming post will explore the idea, but the case is compellingly presented in books such as “Losing Ground,” “The Dream and the Nightmare,” and “Life at the Bottom.”<br />
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The larger point, however, is that Tim and I differ partly due to the fact that we’re emphasizing different aspects of mobility. With respect to the idea that people in the middle- or lower-income groups stagnate year after year, the data clearly demonstrates that isn’t the case.<br />
<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-64965969594402229022016-01-18T06:35:00.000-08:002016-01-18T10:55:25.987-08:00King for a Day, Reconsidered<div class="separator" style="clear: both; text-align: center;">
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A couple of weeks ago, I <a href="http://diversityofideas.blogspot.com/2016/01/king-for-day.html#more" target="_blank">critiqued</a> a <a href="http://diversityofideas.blogspot.co.uk/2015/07/inequality-fallacies.html" target="_blank">number</a> of <a href="http://diversityofideas.blogspot.co.uk/2015/09/misinformation-on-economic-inequality.html" target="_blank">David’s</a> <a href="http://diversityofideas.blogspot.co.uk/2015/12/inequality-households-are-not-people.html" target="_blank">pieces</a> on the topic of income inequality. In those pieces, David seemed to accept that income inequality had grown over time, but claimed that it was no big deal because people move up and down the income distribution over the course of their lives—what economists call ‘income mobility’. I pointed out that one of the main sources for David’s claims—a study conducted by the <a href="https://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf" target="_blank">U.S. Treasury in 2007</a>—seemed to 1) confirm the notion that income mobility is low in the U.S., yet still managed to 2) overstate the amount of income mobility we actually have. David promptly composed a <a href="http://diversityofideas.blogspot.com/2016/01/a-deeper-look-at-economic-mobility.html" target="_blank">follow-up post</a> responding to the former but ignoring the latter, arguing that<br />
<a name='more'></a><br />
<blockquote class="tr_bq">
“…more than half of the top one percent were no longer in the top one percent by 2005; and, as previously noted, only 25 percent of those in the top 1/100 of one percent remained there by 2005. What’s more, if only 75 percent remained in the top five percent, that means a full one-fourth had already dropped out of that income group within a mere ten years!”</blockquote>
While this argument sounds convincing, it ignores the <a href="https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/10-25-HouseholdIncome_0.pdf" target="_blank">findings</a> I presented from the Congressional Budget Office (CBO) showing that even though some individuals may fall out of the ‘very rich’ category over time, that’s typically because their income fell from, say, $10 million to $9 million, not because they went back to being middle class. Moreover, those who replace them at the very top are typically those who were living just below the ‘very rich’ threshold the year before.<br />
<br />
David does attempt to critique the CBO by claiming that because it looked at households rather than people, we should discredit the findings since households are “simply another category that disguises the mobility of living and breathing human beings.” The implication is that because the average household size today consists of fewer working people than the average household a few decades ago, income mobility is actually much higher than CBO’s household data would suggest. Fortunately, CBO already addressed this point, <a href="https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/10-25-HouseholdIncome_0.pdf" target="_blank">noting</a> that its household income estimates are “adjusted for differences in household size.”<br />
<br />
But never mind the results of just one study, David tells us, because “the Treasury’s findings are not unique; in fact, they’re confirmed by scores of major studies…” Of those other studies, David mentions two: one from the <a href="https://psidonline.isr.umich.edu/" target="_blank">University of Michigan</a> and another from the <a href="https://www.dallasfed.org/assets/documents/fed/annual/1999/ar95.pdf" target="_blank">Federal Reserve Bank (Fed) of Dallas</a>, the latter of which reports on the findings of the former. Unfortunately, the Fed study suffers from problems similar to those I raised for the Treasury study in my original post. To give just one example, the study follows a group of families from 1975 to 1991, then points out that several members of those families moved up the income distribution over that time frame. That sounds impressive until you realize that the study counts sixteen-year-olds from very rich families working as, say, part-time baristas as “low income.” Of course, working teenagers of millionaires aren’t low-income in any meaningful sense of the term.<br />
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It’s no surprise then that the Fed study found that the average earnings of the bottom fifth of the income distribution in 1975 was just $1,153 per year (in 1993 dollars)—far less than anyone could actually live on. As mobility expert Peter Gottschalk <a href="http://www.nytimes.com/1996/04/25/business/economic-scene-good-news-for-the-down-and-out-or-are-the-data-misleading.html" target="_blank">points out</a>, these individuals are “probably not the poorest individuals, but the ones who worked only briefly in 1975…most of them were part-time workers with marginal links to the formal labor force: students with after-school jobs, housewives who worked at the post office in the Christmas rush, and so forth.” By 1991, the Fed study tells us, the average earnings of this same cohort had risen to $26,475 (in 1993 dollars). “I'd be surprised if my teen-ager, who now earns pocket money delivering newspapers, doesn't do equally well,” Gottschalk added.<br />
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There are other issues with the Fed study, but the broader point is that most studies that track individual income over time, rather than family or household income, are prone to overstating actual income mobility. As I said in my original post, these types of studies tend to miss the point of the income mobility debate entirely: what matters is whether someone from a poor or lower-income family has the same or better chance of attaining such a position than in an earlier generation—what economists call intergenerational income mobility. Unfortunately, there is a preponderance of evidence showing that, by this measure, income mobility is <a href="http://stateofworkingamerica.org/subjects/mobility/?reader" target="_blank">quite low</a> in the U.S. David suggests that this may be due to our “swollen welfare state,” but if that’s the case, someone forgot to tell <a href="https://en.wikipedia.org/wiki/Scandinavia" target="_blank">Scandinavia</a>—all of the countries in that region have larger welfare states than the U.S., and also <a href="http://www.slideshare.net/whitehouse/the-rise-and-consequences-of-inequality-in-the-united-states-charts" target="_blank">higher intergenerational income mobility</a>.<br />
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Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-73958196086290071802016-01-04T15:48:00.000-08:002016-01-05T12:16:31.939-08:00A deeper look at economic mobility<div class="separator" style="clear: both; text-align: center;">
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I recently wrote <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">several</a> <a href="http://diversityofideas.blogspot.com/2015/09/misinformation-on-economic-inequality.html">posts</a> on the issue of <a href="http://diversityofideas.blogspot.com/2015/12/inequality-households-are-not-people.html">income differences</a>. My central argument is that, to meaningfully measure the economic gap, one must observe individuals and how they fare over time. <br />
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Regrettably, most studies instead take a snapshot of statistical categories in time—such as the “top one percent” and the “bottom 99 percent”. Problem is, categories are not people, which is why <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">major studies</a> that track individuals over time contradict the popular studies.<br />
<br />
My counterpart Tim differs with me, and in a <a href="http://diversityofideas.blogspot.com/2016/01/king-for-day.html">recent post</a> he makes his case in large part by critiquing a study from the U.S. Treasury, which shows high income mobility. There are a few points he raises that are worth further reflection. <br />
<a name='more'></a><br />
But before diving in, and in the context of focusing on the merit of a single study, it’s worthwhile to note that the Treasury’s findings are not unique; in fact, they’re confirmed by scores of major studies, including research from the University of Michigan, the Federal Reserve, and private economists and public policy institutions. Indeed, the Treasury report itself carefully pointed out that “the degree of mobility in the overall population and movement out of the bottom quintile in this study are <b>similar to the findings of prior research on income mobility"</b> [emphasis added]. Still, let’s take a look at where my counterpart and I differ.<br />
<br />
Tim acknowledges the Treasury’s findings that “roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005,” but he questions whether there’s high mobility because the “study also found that 75 percent of individuals in the top 5 percent in 1996 were still there in 2005”.<br />
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While this is true, it’s important to recognize the mobility <i>within</i> that category. For instance, more than half of the top one percent were no longer in the top one percent by 2005; and, as previously noted, only 25 percent of those in the top 1/100 of one percent remained there by 2005.<br />
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What’s more, if only 75 percent remained in the top five percent, that means a full one-fourth had already dropped out of that income group within a mere ten years! One wonders how many more fell out after 15 or even 20 years.<br />
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Tim also maintains that the top regions of the income scales are largely populated by the same people year after year—the “very rich” and those “just barely below that threshold”—and cites as evidence a report from the Congressional Budget Office: <br />
<blockquote class="tr_bq">
Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income.</blockquote>
But note that the CBO is looking at <i>households</i>, not individuals. “Households” is simply another category that disguises the mobility of living and breathing human beings. As <a href="http://diversityofideas.blogspot.com/2015/12/inequality-households-are-not-people.html">I’ve explained</a>:<br />
<blockquote class="tr_bq">
Household sizes have changed over the years and have thus masked individual income growth. For instance, the average household today consists of fewer working people than the average household a few decades ago. If average household income today is the same as average household income from 1980, that cannot be assumed to represent income stagnation. For example, $50,000 in household income in 1980 may have consisted of three income earners, whereas $50,000 in household income today may consist of two earners—which represents a 50 percent increase in income per person over that period. As it turns out, that is exactly what has happened.</blockquote>
Hence why studies that follow people over a period of years reach contrary conclusions. To cite research from the University of Michigan:<br />
<blockquote class="tr_bq">
Among individuals who are actively in the labor force, only 5 percent of those who were in the bottom 20 percent in income in 1975 were still there in 1991, compared to 29 percent of those in the bottom quintile in 1975 who had risen to the top quintile by 1991. <b>More than half of those in the bottom quintile in 1975 had been in the top quintile at some point during these years [emphasis added].</b></blockquote>
Quite the opposite of a largely permanent group of people huddling at or near the top. <br />
<br />
Finally, Tim raises a thoughtful question about the cycle of poverty—whether someone from a poor or lower-income family has a better chance of rising than in an earlier generation. My own view is that, to the extent that the impoverished remain there over time, the swollen welfare state combined with the war on traditional middle-class values has at least partly encouraged economic stagnation or worse.<br />
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But despite these negative forces, evidence from overwhelming amounts of research demonstrates strong economic mobility. Only by observing categories rather than people can we pretend the reverse.<br />
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<i><a href="http://libertyunyielding.com/2016/01/05/76510/">Cross-posted at Liberty Unyielding</a></i>David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-83256197782228616752016-01-01T04:40:00.000-08:002016-01-01T04:54:58.090-08:00King for a Day<div style="text-align: center;">
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Over the past few months, David has posted several times on the topic of income inequality (for example, see <a href="http://diversityofideas.blogspot.co.uk/2015/07/inequality-fallacies.html" target="_blank">here</a>, <a href="http://diversityofideas.blogspot.co.uk/2015/09/misinformation-on-economic-inequality.html" target="_blank">here</a>, and <a href="http://diversityofideas.blogspot.co.uk/2015/12/inequality-households-are-not-people.html" target="_blank">here</a>), which he deems to be a non-issue. To support his case, a recurring point of his is that comparing percentiles of the income distribution—such as the ‘top one percent’ and the ‘bottom 99 percent’—is fallacious. In a recent <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/" target="_blank">column</a>, David explains that</div>
<blockquote class="tr_bq">
"The late economist Joseph Schumpeter compared income groups to hotel rooms: just as the former ranges from high to low, so the latter ranges from high-end to low-end. But the different categories fail to reflect who occupies them and whether occupants move to higher categories over time." </blockquote>
In other words, if we have high income mobility—that is, lots of movement up and down the income distribution—then comparisons between different portions of the distribution are meaningless. But unfortunately, we don’t have high income mobility.<br />
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<a name='more'></a>One of the main sources for David’s claims about high mobility is a study conducted by the <a href="https://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf" target="_blank">U.S. Treasury in 2007</a>. David <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/" target="_blank">tells</a> us that “roughly half of taxpayers who began in the bottom quintile in 1996 moved up to a higher income group by 2005.” That’s true, but the study also found that 75 percent of individuals in the top 5 percent in 1996 were still there in 2005. To borrow David’s analogy, that means if 100 people occupied high-end hotel rooms in 1996, 75 of them still occupied those rooms in 2005.<br />
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Okay, so the ‘very rich’ aren’t <i>exactly </i>the same people from year to year, but they’re mostly the same. Certainly enough to say that comparing income groups isn’t meaningless.<br />
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But it gets better: as Dean Baker <a href="http://cepr.net/blogs/beat-the-press/the-post-gives-another-defense-of-the-one-percent-mobility" target="_blank">points out</a>, the Treasury study used all adults in its sample rather than prime-age working adults (ages 22-55). Combine that with the fact that earnings tend to peak between the ages of 45 and 65, and it becomes clear that a sizable chunk of those who were no longer in the top 5 percent in 2005 can likely be explained by people choosing to retire. As for the rest, well, they likely weren’t that much worse off than they were before, as the Congressional Budget Office <a href="https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/10-25-HouseholdIncome_0.pdf" target="_blank">explains</a>:<br />
<blockquote class="tr_bq">
“Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multiyear income measures also show the same pattern of increasing inequality over time as is observed in annual measures.”</blockquote>
So yes, many people who are ‘very rich’ may fall out of that category over time, but that’s typically because their income is <i>just barely</i> below that threshold. Moreover, those who replace them are typically those who were very close to being classified as ‘very rich’ the year before, not Joe the Plumber fulfilling the American dream. Yet it’s the latter that David has in mind when he talks about mobility.<br />
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And what about those 50 percent of taxpayers who managed to move up the income ladder? Even that figure is misleading. It is likely that much of the movement out of the bottom income quintile were individuals who were, say, medical students in 1996 but were doctors in 2005. Of course, this misses the point entirely; medical students have traditionally been upwardly mobile. Instead, what is useful to know is whether someone from a poor or lower-income family has the same or better chance of attaining such a position than in an earlier generation—what economists call intergenerational income mobility. It seems obvious that mobility within one’s lifetime—for example, the chance of becoming a doctor—is no greater now than it was before. On the other hand, intergenerational income mobility is quite low in the U.S., <a href="http://www.oecd-ilibrary.org/docserver/download/1210031e.pdf?expires=1451583397&id=id&accname=ocid195693&checksum=B254A5866C5EDC2BE8CFA70A863F09AF" target="_blank">especially compared to other advanced nations</a>.<br />
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So the evidence David presents for high income mobility in the U.S. is exaggerated, yet he still believes the American dream is alive and well. Of course, this is not unique to David, as Brookings Institution scholar Julia B. Isaacs <a href="http://www.pewtrusts.org/en/about/news-room/press-releases/2008/02/20/economic-mobility-project-releases-comprehensive-study-of-income-mobility-in-the-us" target="_blank">explains</a>:<br />
<blockquote class="tr_bq">
“Americans are particularly optimistic about their chances of moving up the economic ladder…but a growing number of studies show that when compared to other industrialized nations, the United States stands out as having less, not more, economic mobility.”</blockquote>
Contrary to David’s posts, not only does America have an income inequality problem, it also has a mobility problem. In fact, <a href="http://www.bostonfed.org/economic/wp/wp2011/wp1110.htm" target="_blank">new evidence suggests</a> that high inequality and low mobility actually move in tandem, so that as inequality worsens, so too does mobility. <a href="https://en.wikipedia.org/wiki/Gilded_Age" target="_blank">Gilded Age</a>, here we come.Tim Mitchellhttp://www.blogger.com/profile/05912145691084274512noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-18769850934125480582015-12-21T09:48:00.004-08:002015-12-21T10:48:37.933-08:00Income inequality: Households are not people<div class="separator" style="clear: both; text-align: center;">
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Distinguished Harvard economist Martin Feldstein penned a <a href="http://www.wsj.com/articles/the-uncounted-trillions-in-the-inequality-debate-1450046600">recent column</a> in the Wall Street Journal making the point that economic differences are less drastic than advertised. <br />
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He writes:<br />
<blockquote class="tr_bq">
The Federal Reserve recently estimated total household net worth in the U.S. to be about $80 trillion, including real estate and financial assets. And data from the Fed’s Survey of Consumer Finances imply that the top 10% of households by net worth hold about 75%—or $60 trillion—of this total. The bottom 90% of households therefore have a net worth of about $20 trillion.</blockquote>
But, as he notes, this picture “leaves out the large amount of wealth held in the form of future retirement benefits from Social Security and Medicare”:<br />
<a name='more'></a><br />
<blockquote class="tr_bq">
Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth. This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn’t count the value of unemployment benefits, veterans’ benefits, and other government programs that substitute for conventional financial wealth.</blockquote>
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<br />
This is a valid point, but it’s important to realize what is and isn’t being said. Feldstein is analyzing a statistical category (“households”), not individual human beings. While he rightly points out that the income gap between households is smaller than the media and the inequality warriors hype, more relevant is how individuals fare over time.<br />
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Household sizes have changed over the years and have thus masked individual income growth. For instance, the average household today consists of fewer working people than the average household a few decades ago. If average household income today is the same as average household income from 1980, that cannot be assumed to represent income stagnation. For example, $50,000 in household income in 1980 may have consisted of three income earners, whereas $50,000 in household income today may consist of two earners—which represents a 50 percent increase in income per person over that period. As it turns out, that is <a href="http://www.amazon.com/Economic-Facts-Fallacies-Thomas-Sowell/dp/0465022030">exactly what has happened</a>:<br />
<br />
<blockquote class="tr_bq">
It is an undisputed fact that the average real income–that is, money income adjusted for inflation–of American households rose by only 6 percent over the entire period from 1969 to 1996. That might well be considered to qualify as stagnation. But it is an equally undisputed fact that the average real income per person in the United States rose by 51 percent over that very same period.</blockquote>
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<br />
So, not only are household data underinflated by leaving out entitlements and other government benefits (Feldstein’s point), but individuals themselves have risen economically over time. That is why <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">studies that follow human beings consistently contradict the alarmist studies which portray economic stagnation or worse for the middle-class</a>. The latter studies look at categories of a snapshot in time, which disguise the underlying reality of living and breathing human beings. <br />
<br />
While Feldstein reminds us that the gap between rich and non-rich households isn’t as wide as we’re frequently told, we must not fall into the trap of confusing categories with people. Only by observing the latter can we seriously measure economic differences.<br />
<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-15152019369652879322015-12-10T14:32:00.001-08:002015-12-12T10:44:52.061-08:00'The most honest three and a half minutes on television, ever'?<div class="separator" style="clear: both; text-align: center;">
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A few years ago, an anti-American television tirade went viral. Typically, such a rant would not escape the boundaries of Hollywood, but this one has collected millions of YouTube views and has been hailed as the “most honest three and a half minutes on television, ever.” But it’s propaganda.<br />
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The harangue aired on the popular TV series, “The Newsroom.” Will McAvoy, fictional news anchor, is asked by a college student, “What makes America the greatest country in the world?” Here is his response:<br />
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Emotional, accusatory, and flamboyant—three substitutes for a lack of substance.<br />
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Let’s begin with McAvoy’s assertion that “there is absolutely no evidence to support the statement that we're the greatest country in the world.” To make his point, McAvoy indignantly fires off a list of statistics where we’re ranked something other than one:<br />
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<blockquote class="tr_bq">
We're seventh in literacy, twenty-seventh in math, twenty-second in science, forty-ninth in life expectancy, 178th in infant mortality, third in median household income, number four in labor force, and number four in exports. </blockquote>
A clever ploy, but as another blog <span id="goog_707727226"></span><a href="https://www.blogger.com/">pointed out<span id="goog_707727227"></span></a>, while many of these statistics are either misleading or wrong, the point is not whether we rank lower than one in some individual categories, but whether we rank <i>consistently high</i> across categories. By that measure, a legitimate case <a href="http://www.zebrafactcheck.com/the-newsroom-speech-is-america-not-the-greatest-country-in-the-world/">can be made</a> that America is number one. Even so, McAvoy falsely claims: <br />
<br />
<blockquote class="tr_bq">
We lead the world in <i>only three categories: number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending, where we spend more than the next twenty-six countries combined, twenty-five of whom are allies [emphasis added].</i></blockquote>
Checkmate in one. According to available data, America leads in <span id="goog_707727235"></span><a href="https://www.blogger.com/">manufactured goods<span id="goog_707727236"></span></a>, <a href="http://www.smirkingchimp.com/thread/yellow/61438/us-leads-in-foreign-direct-investment-growth-debunking-conservative-myths-about-our-bad-business-climate">foreign direct investment</a>, <a href="http://www.prnewswire.com/news-releases/us-leads-world-in-clean-tech-innovation-investment--electric-vehicles-earns-poor-marks-for-high-energy-consumption--emissions-300084423.html">clean tech innovation</a>, <span id="goog_707727246"></span><a href="https://www.blogger.com/">medical research and innovation<span id="goog_707727247"></span></a>, and <a href="http://www.scimagojr.com/countryrank.php">peer-reviewed science publishing.</a> We also possess the largest economy in the world, own eight of the top ten universities (including the top four), <span id="goog_707727253"></span><a href="https://www.blogger.com/">we’re the leading natural gas producer and the leading oil producer<span id="goog_707727254"></span></a>, and <span id="goog_707727256"></span><a href="https://www.blogger.com/">we admit by far more immigrants annually than anyone </a><span id="goog_707727257"></span>else. Checkmate.<br />
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Equally egregious, at one point McAvoy cavalierly dismisses the idea that freedom is what makes us great (as he shrugs off, 180 nations “have freedom”). But immigration patterns undercut his argument. <br />
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As foreigners <a href="https://www.youtube.com/watch?v=TiJIYdgkF9M">tell us</a>, America offers unique opportunities for themselves and their families that simply don’t exist in France, Britain or Canada. As the New York Post pointed out:<br />
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Even in Britain and Canada there is no First Amendment. In both countries you can be prosecuted for what you say. In the UK, a college student spent two months behind bars this spring for tweeting racist remarks about a soccer player.</blockquote>
Hence why no one speaks of the “French Dream,” “British Dream,” or even the “Canadian Dream,” while they do of the American Dream. And to take that for granted, as many of our Hollywood elites do, is to commit the sin of ingratitude.<br />
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Of course, America is not without legitimate criticism. No nation is perfect. But as Abraham Lincoln put it, America is “the last best hope of the earth.” And only when we recognize the truth can we be grateful for the unprecedented blessings our country provides us. <br />
<i><a href="http://libertyunyielding.com/2015/12/11/75376/"><br /></a></i>
<i><a href="http://libertyunyielding.com/2015/12/11/75376/">Cross-posted at Liberty Unyielding.</a></i><br />
<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-21133205802747445742015-10-20T12:56:00.001-07:002015-10-20T12:56:34.385-07:00What's wrong with democracy?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja8AVh7BWiMWSmAZhTettJqwHgozDtNbDLmw9cPQsctfrzR8gIlcMNeJXWTmWZ4Wzq0rRj-VWuZ-F3LMqwGCDRs_9Z2iMPPel4oAPKpSB89_AA62381eypJa_jA8PxUOSIeeU-PMM7XK8/s1600/Adams.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="137" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja8AVh7BWiMWSmAZhTettJqwHgozDtNbDLmw9cPQsctfrzR8gIlcMNeJXWTmWZ4Wzq0rRj-VWuZ-F3LMqwGCDRs_9Z2iMPPel4oAPKpSB89_AA62381eypJa_jA8PxUOSIeeU-PMM7XK8/s320/Adams.jpg" width="320" /></a></div>
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My piece on the problems of democracy is <a href="http://dailycaller.com/2015/10/20/whats-wrong-with-democracy/">up at the Daily Caller.</a></div>
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A few snippets:<br />
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America is a democratic republic. But today, any mention of the republican nature of our democracy has all but disappeared from the public square. Indeed the very idea of a republic has fallen into disrepute. </blockquote>
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Why? <a name='more'></a></blockquote>
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The roots of republican philosophy lie in self-government; but self-government suggests self-restraint. After all, one cannot govern oneself without knowing how one is to behave. And the “how” assumes there is an ideal to pursue, which used to be referred to as “republican virtue.” In a word, republicanism puts a demand upon the citizen to lead a life of virtue. This notion, which animated millennia of classical political philosophy, was upheld by the leading founders of our democratic republic. </blockquote>
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But we have undergone a profound political and philosophical transformation. For many, if not most, Americans today, the term “virtue” is at best a foreign concept, and at worst one worthy of rejection. This outlook reflects the change from a republican mindset to a democratic one.</blockquote>
For the full piece, click <a href="http://dailycaller.com/2015/10/20/whats-wrong-with-democracy/">here</a>.David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-10898725007891656592015-09-20T10:01:00.000-07:002015-09-20T16:01:46.020-07:00Misinformation on economic inequality<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPeT3G0-28F_e4aUXiKkyHZWwWooaLgQjoUlpSO-0bN1l0bUgkVbCfvou9HY9cPfAxhYg4v5Q1X0D7L7-hYND5tZkIS3ieUyAgR7USgxfU4XMSVzoBnVi-Ku3P10BvBF8j5YVIrI0IW-M/s1600/Bernie+Sanders.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="139" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPeT3G0-28F_e4aUXiKkyHZWwWooaLgQjoUlpSO-0bN1l0bUgkVbCfvou9HY9cPfAxhYg4v5Q1X0D7L7-hYND5tZkIS3ieUyAgR7USgxfU4XMSVzoBnVi-Ku3P10BvBF8j5YVIrI0IW-M/s320/Bernie+Sanders.jpg" width="320" /></a></div>
A recent piece of mine titled "<a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">Bernie Sanders’ Inequality Fallacies</a>" created confusion among readers. Typically, those who disregard an argument and reply with misinformation can be ignored. But given the pervasiveness of misinformation among the intelligentsia and general public, it merits a response.<br />
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My article pointed out that a widespread fallacy about economic inequality is drawing conclusions based on statistical categories rather than human beings. This point seemed to escape many commenters:<br />
<blockquote class="tr_bq">
“So the fact that real wages have been flat or declining while GDP triples and productivity doubles in the past four decades are meaningless?” </blockquote>
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“Wages have been frozen since 1969, but actual physical productivity has increased approximately 90 % over that time period.” </blockquote>
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“The result of more than forty years of conservative driven economic policies is that wages have stagnated for forty years, not six. That is just a fact.”<br />
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These people either did not read or do not understand the argument at hand. Looking at a statistical category of a snapshot in time, like real wages, and drawing conclusions, rather than looking at the individuals who earn those wages and whether they rise between wage categories over time, indulges the very fallacy my article critiqued. Stating that real wages have been flat or declining (which they haven’t) is like saying mid-level hotel rooms have not improved or have gotten worse. But the crucial point is: <i>those claims ignore who occupies those hotel rooms and whether the occupants move to higher-level rooms over time.</i> Indeed <a href="http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/">studies which follow individuals over time demonstrate that it is far from uncommon to rise through income categories</a>. As I made clear, one reason top income categories are expanding while lower ones are contracting is that more people are rising to higher categories.<br />
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Not only did readers miss that fundamental point, but their point about real wages is unfounded. Wages have been neither flat nor declining. As a liberal economist <a href="http://dailysignal.com/2011/03/11/why-does-income-inequality-matter/">has argued</a>:<br />
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Americans today are more likely to live in single-adult households than they were 30 years ago. Adjust incomes to take into account this shift, along with increasing employer contributions to retirement savings and to health insurance premiums, and you find that the <b>real middle-class median income has risen 33 percent, or $18,000, since 1979</b>. </blockquote>
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Economist Alan Reynolds similarly <a href="http://www.wsj.com/articles/alan-reynolds-the-mumbo-jumbo-of-middle-class-economics-1425340903">notes</a> a Congressional Budget Office study which concluded that, “Measured in 2013 dollars, after-tax median income rose briskly from $46,998 in 1983 to $70,393 in 2008…”<br />
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Note, too, the upward trend in this graph of real total compensation—wages plus benefits—per hour <a href="https://research.stlouisfed.org/fred2/series/COMPRNFB">provided by the St. Louis Federal Reserve</a>:<br />
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But the confusion did not stop there. One commenter added:<br />
<blockquote class="tr_bq">
Well, no, these economic categories actually do represent living human beings. And the residents of these categories do not float about randomly changing so that we are not talking about specific people, but only numbers and statistics. The Forbes 400 is not being turned over by a steady stream of incoming new wealthy persons. The top 15 persons on this list are pretty much the same year after year. Just these top 15 persons have seen an increase of $170 billion to their personal wealth over the last two years, a figure equal to the entire wealth of the bottom 130 million Americans, nearly half the country. And they are not being asked by the GOP to contribute a single additional cent of their newly acquired wealth to support the nation that has made it possible for them to become so wealthy.</blockquote>
Note the lack of empirical data to counter the numerous studies which show individuals generally do rise over time. Offering anecdotally that the top 15 richest people in America are “pretty much the same year after year” is not only insufficient evidence for reaching conclusions about economic mobility, but it’s wrong. Comparing the <a href="http://www.apnewsarchive.com/1990/Forbes-400-List-of-Wealthiest-Americans-With-PM-Forbes-Richest-Bjt/id-64a97ffd61c3c807b7bedf53d992d7d5">15 richest people in 1990</a> to the <a href="http://www.statista.com/statistics/201426/the-richest-people-in-america/">15 richest in 2015</a> shows that only five of the 15, or one-third, remained in that category by 2015. That is hardly demonstrative of a permanently wealthy class of individuals. It in fact illustrates the difficulty of remaining on top over long periods of time.<br />
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Regrettably, fallacies and misinformation permeate too much thinking on economic inequality. Fortunately, the facts are available for anyone willing to look deeper than media hype.<br />
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<i><a href="http://libertyunyielding.com/2015/09/20/a-deeper-look-at-bernie-sanderss-income-inequality-fallacy/">Cross-posted at Liberty Unyielding</a></i><br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-18884847482995651712015-08-06T10:26:00.000-07:002015-08-06T10:47:20.855-07:00The economic spending fallacy<div class="separator" style="clear: both; text-align: center;">
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One cannot help but marvel at the pervasiveness of the misguided idea that spending is good for the economy.<br />
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The other day, for instance, an acquaintance lamented that his weekly restaurant expenses were hard on his pocket book, but he then quickly rejoined that at least his lavish dining habits boosted the economy. Such thinking is hardly uncommon. Indeed most cultural and media elite attribute upticks in economic growth to surges in spending and the opposite to reductions in spending. Presidential aspirant Bernie Sanders has gone so far as to suggest $1 trillion in public infrastructure spending over five years partly to <a href="http://www.washingtonpost.com/local/trafficandcommuting/sen-bernie-sanders-wants-to-spend-1-trillion-on-infrastructure/2015/01/27/21fda102-a65b-11e4-a7c2-03d37af98440_story.html">“help the economy.”</a><br />
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On its face this thinking appears to make sense, but when examined it does not wash. Consider the following scenario.<br />
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<a name='more'></a><br />
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Imagine that Person A spends money on a movie ticket. The money that paid for the ticket partly pays the income of person B, the worker at the movie theater. Person B then spends money at the grocery store, partly funding the income of Person C, the grocery clerk, who then spends money somewhere else, partly funding the income of Person D, and so on.<br />
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While this scenario seems to affirm that spending is the source of economic activity, digging deeper reveals otherwise. To see why, trace the spending chain back to its genesis. How does Person A first procure money to spend? He does so through his productivity and work effort. Producing something provides him income to spend. Production thus precedes income and spending.<br />
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But although identifying production as the first step is important, even that misses the more crucial point. As my former colleague JD Foster points out, while pinpointing the first step “solves the mental quandary of the chicken or the egg, economies are already in motion.” So the key, he stresses, is “the need to choreograph three processes occurring simultaneously – production, income, and consumption (spending).” That choreography is best orchestrated by the pricing mechanism, which, although not perfect, beats the alternatives.<br />
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However, our misidentifying spending as the first and most essential step has perverted that choreography and thus stunted growth.<br />
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Politicians and intellectuals, for instance, regularly justify policies like <a href="http://www.motherjones.com/politics/2013/10/food-stamps-statistics-SNAP-economic-benefits">food stamps</a> and <a href="http://www.raisetheminimumwage.com/pages/stimulus">minimum wage laws</a> as economic stimulants, indulging the fallacy that spending fuels the economy. In reality, these policies misallocate resources, throwing a monkey wrench into the very pricing system so essential for economic decision making.<br />
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The same applies for several so-called “stimulus” packages, including those of 2001, 2008 and 2009. Multiple doses and trillions of dollars of spending accomplished nothing but price distortion, thereby choking off the possibility of a strong recovery. Indeed tepid growth is <a href="https://www.uschamber.com/above-the-fold/three-down-quarters-weak-recovery">what we’ve received</a>:<br />
<blockquote class="tr_bq">
One oddity in the current recovery has been the lack of particularly strong growth periods. Typically, there's a strong bounce back. So far, in the 23 quarters since the recovery began in 2009 the economy has managed to crack 4 percent only four times, and only once did this occur in consecutive quarters. The average has been a pedestrian 2.2 percent.</blockquote>
Backward economic thinking should be obvious for anyone willing to scrutinize it. But as George Orwell warned, “We have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.”<br />
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<a href="http://libertyunyielding.com/2015/08/06/the-economic-spending-fallacy/"><i>Cross-posted at Liberty Unyielding.</i></a><br />
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<br />David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0tag:blogger.com,1999:blog-3461503364269187599.post-78584045465275243512015-07-22T11:57:00.002-07:002015-07-22T14:40:11.115-07:00America does not have an economic inequality problem<div class="separator" style="clear: both; text-align: center;">
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Language manipulation is nothing new in politics, but describing economic differences as “economic inequality” is a linguistic act we should reconsider. It not only falsely suggests unique unfairness in economic life, but the notion itself rests on an unfounded assumption.<br />
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No aspect of life—economic or otherwise—escapes unfairness. Height, strength, birth place and natural talents are all largely determined by the luck of the draw. More than that, chance is at least partly responsible for our discovering our talents. While luck first blessed Michael Jordan with basketball prowess, he was twice lucky for deciding to pick up a basketball in the first place (and thrice lucky for being born into an environment that allowed him to do so). Yet, we resist describing the unfairness in our natural height differences or in the talent gap between Michael Jordan and the rest of us as “inequality.”<br />
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<a name='more'></a>But the idea of “economic inequality” suffers a more fundamental problem. As the late Peter Bauer noted, the notion itself implies the baseless assumption that, except for some nefarious force distorting the nature of things, individuals are equally economically endowed. Not so.<br />
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While we recognize that varying levels of success in other fields is attributable to disparate levels of talent and hard work (which is why we do not regard Michael Jordan as a better basketball player due to “inequality”), we seem to forget this in the economic sphere, where those factors are equally responsible for economic variance. For instance, even assuming a completely level playing field, people vary in ability to perceive and seize economic opportunities. This mere fact alone, Bauer remarked, “is of great significance in explaining economic differences in open societies.”<br />
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Neutral language like “economic differences” rids the subtle bias against this explanation that the term “economic inequality” implies. For this reason alone, the language surrounding the issue should be re-evaluated.<br />
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While we have every right to discuss American economic conditions and their public policy import, we should do so accurately—for we do not have the right to misuse language.<br />
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<i><a href="http://libertyunyielding.com/2015/07/22/america-does-not-have-an-inequality-problem/">Cross-posted at Liberty Unyielding</a></i>.David Weinbergerhttp://www.blogger.com/profile/08970717387996912586noreply@blogger.com0