Neither do I

Don Boudreaux, of Cafe Hayek, explains why he doesn’t care about income inequality. I agree. At the end his post, Boudreaux adds a great comment from Steve Horwitz.

I also agree with a couple of comments to the post that say that concern for income inequality isn’t necessarily “envy elevated to public policy,” as Boudreaux claims at one point.

While I think envy plays a role for some of those concerned with the income-inequality-shiny-object, I think others are motivated by what they view as unfair processes for achieving wealth, which is also a concern of Boudreaux’s.

It’s just that Boudreaux and these folks have different views on what constitute unfair processes. Which, I believe, should take the discussion to the next stage: What are those unfair processes and why are they unfair?

Boudreaux and libertarians generally see wealth acquired through market activities as fair and wealth acquired by scratching the back of a politician as unfair.  But, others tend to see it the other way around.

But, those who see it the other way around don’t explain the processes they deem as unfair. They assume income inequality is proof that the processes were unfair.

Here’s something else I’ve noticed. Ask them about the wealth Steve Jobs earned before his death or that of their favorite movie stars and you’ll hear why these particular wealthy people deserve it. It’s because they produced something these folks personally value.

Ask them about the wealth of an oil or pharmaceutical company CEO and you’ll get a sneer.

Their idea of “unfair processes” generally is their own arbitrary assessment of whether the person deserves the wealth or not.

 

Reinhart and Rogoff: Lesson in statistical terms

Advocates of government spending are enjoying the recent news that errors were discovered in an often quoted 2010 analysis by economists Reinhart and Rogoff that showed countries with debt at levels (resulting from high spending) greater than 90% of GDP had an average GDP growth rate of -0.2%, which was statistically lower than countries with lower debt levels.

Recent corrections show that these countries actually had averaged 2.2% growth, not -0.2%, which is not statistically different from countries with lower debt levels.

Critics have accused R&R’s analysis of spurring irresponsible austerity in government spending and may have prevented more beneficial government stimulus spending around the world.

But, wait. The corrected analysis shows that countries with lower debt had higher GDP growth rates ranging from 3.1% to 4.2%. Yep. In this data set, apparently 2.2% is not statistically different from 4.2%.

That doesn’t mean that the data shows that government spending helps (or hurts) GDP. It also doesn’t mean that ‘austerity’ hurts or helps.

To be clear…it means nothing. Government spending advocates are not wise to use the the corrected stats bolster their case.

Not statistically different means that from the size and sample of this set of data, it cannot be concluded with high confidence that the differences in GDP growth rates are caused by the differences in debt levels.  But, it doesn’t rule it out either.

If anything, the analysis still provides directional support that debt may hurt, rather than help.

Personally, I’m not a fan of GDP. I explain why here, here and here. Basically, it’s because GDP treats an expense like an income.

The golden rule of liberty

In discussions about what government ought to do, rarely does one consider:

What if I’m wrong?

If there’s a chance that your policy causes more harm than good, or even any harm, shouldn’t you be more concerned? 

Good intentions and the gotta-do-something attitude are often accepted as valid justification for causing harm, but I think that’s a mistake.

If I’m walking by someone on the street who is having a heart attack, I could attempt to perform open-heart surgery. That would cause him more harm since I have no medical experience. Even though I had good intentions and a gotta-do-something attitude, most people wouldn’t give me a pass for with that reasoning.

Yet, we let so many people and politicians get by on that reasoning when it comes to public policy.

I hear proponents of the minimum wage, for example, support their position with a ‘greater good’, cost benefit analysis that sounds like this: Sure, it might make it harder for some to find a job, but it’s worth it if some people get paid more than they otherwise would.

My response: The folks who will have a harder time finding a job want to thank you for making that decision on their behalf.

They usually chuckle and say something like: Well, that’s okay. The ones who get paid more will also thank me.

What amazes me about such exchanges is how blase folks are about making decisions that might harm others, even if their cost-benefit analysis is correct, and how little they care about whether they are right or wrong. They act as if their good intentions gives them a pass for being wrong and causing harm. That’s reckless.

A key reason I appreciate liberty isn’t because I believe the costs (like those in the above example) outweigh the benefits (though I do believe that), it’s because I believe I should be very careful when I’m thinking in terms of who to harm — even if I believe the benefits exceed the costs.

I don’t like it when others decide it’s okay to harm me for what they think is the greater good, so what entitles me to inflict harm on others? Treat others as you, yourself, would like to be treated.

Few of the reckless greater-do-gooders like it when others decide it’s okay to harm them. Yet, they rarely make the connection that because they don’t like it, maybe they should refrain as much as possible from advocating harming others.

I’m not a fan of society-level cost-benefit analysis, because it separates the analyzers from the direct costs and benefits and makes it too easy to be careless and support the outcome that garners the most favorable agreement with peers.

It’s to easy to say this: I support this because I think we* have to do something. We* just can’t sit by and let these people suffer.

*Of course, by ‘we’, they usually mean others.

It’s not so easy to say: You know, it may be unfortunate, but we all have unfortunate things happen to us and need to make adjustments. Besides, if we do something to help them though government, that just means we’re causing harm to others. Maybe, if we really do believe it is worth it to help them we should open our own checkbook, volunteer our time or start an organization to help them, rather than just make empty declarations.

More Signals v Causes

I came across a couple good examples of confusing signals and causes this week.

1. Does language cause culture? In this case, do languages that “grammatically associate the future and the present, foster future-oriented behavior”? More likely: Language is shaped by culture. Cultures that save for the future evolve words that convey that part of their culture.

2. Does consumption of processed meats shorten life?  More likely: Folks who eat things that have been considered bad for you for the last 50 years also have other unhealthy behaviors that may contribute to shorten lives.

Thanks to the What We Think and Why blog for republishing my earlier Signal v Causes post.

Should we have a minimum wage?

Here’s my attempt at the using the Costco Connections Yes/No format to answer this question. I’d like to mention, this post was in the works before President Obama’s State of the Union address this week.

Yes

Otherwise, employers would seek to exploit workers by paying them as little as possible.

Workers need to make enough to live on. Employers have more power than low-skilled workers in the market, so the minimum wage helps offset that power.

No

The minimum wage may set a price floor for wages above what some people are willing to work for and some people are willing to pay. If so, this reduces job opportunities and increases unemployment for low-skilled workers, depriving them of chances to gain work experience that would make them more productive and able to earn a higher income in the future.

If the minimum wage is successful at allowing some people to earn more than they otherwise would, it may also cause other negative trade-offs for these people. For example, their employers can treat their low-skill staff worse because there are folks lined up to take their job and they don’t have as many opportunities to find work elsewhere. This might mean that low-skilled workers have less flexibility in work schedules or have to put up with mean bosses.

Many workers do not need to make enough to live on. Many folks are want to make some extra money and get job experience. Some of these folks include teenagers, college students, spouses of full-time workers, and sometimes folks with full-time jobs looking to make extra money for Christmas gifts and vacations. Not all jobs have to provide a living wage.

If an employee and employer come to a voluntary agreement on wages, why should ‘we’ care what the amount of the wage is? Everybody’s situation is different, so why should we impose our preferences on others?

The minimum wage is a largely a do-gooder’s ruse. It feels good to support it, but in reality many folks work for less than minimum wage. They just happen to be off-the-books in the gray and black markets.

My opinions:

When I was younger, I voluntarily took on jobs below the minimum wage. For example, I delivered papers and assembled bikes for a bike shop owner (I think some child labor laws were broken as well).

But, I was glad to have these opportunities (my parents were also more than happy to get me out from in front of TV to do something productive) and didn’t feel I was exploited. The reason these jobs didn’t pay much is because they weren’t worth much.

If my employers had stuck to the letter of the law, I may not have had those opportunities. By the way, the bike shop job was a pure black market job, to my last “No” point.

I should note, my ‘employers’ in my paper-throwing job were my delivery customers. Judging how hard it was to collect $2 a month from them, they didn’t place much value on getting that paper twice a week.

I should also note, the biggest reason I gave it up was scheduling, not pay. I disliked waking up at 5 AM on Saturday to fold and deliver papers. I’ve never been a morning person.

I soon discovered that I could make well more than minimum wage and — more importantly at the time — could set my work schedule, by pushing a mower. I also learned some good sales techniques as I developed my customer base.

It turns out that the thing many homeowners dislike even more than paying their paperboy is mowing their lawns, which is why the very same people (employers) who had such a difficult time coughing up a quarter per paper were more than happy to pay me $80 a month to save them from lawn-mowing dread.

It’s easy for us to advocate the minimum wage when it applies to faceless people. But, so rarely do folks examine their own behavior and try to draw parallels.

We all value things a differently. Think of some of the things that you willingly pay for now. Do you pay someone to mow your lawn, clean your house, babysit, kennel your dogs when you’re on vacation, make coffee for you or coach your kids in soccer?

What if someone else came along and judged that you have been paying too little for these services, that you have been exploiting these powerless folks and you must now pay them 20% to 50% more for the same service?  You and your service providers would probably tell them to butt-out and mind their own business because you both are perfectly fine with your existing relationship. If you’re forced to pay more, you too may cut back.

When you advocate a minimum wage, you’re butting into to the business of others’. In my opinion, that’s the strongest argument against the minimum wage, because if we feel we have the right to butt into this voluntary arrangement between two people, then there is likely no end to what other meddling we’ll entitle ourselves to.

Consultants and Mass Transit

I recommend listening to these Freakonomics podcasts, I Consult, Therefore I Am and Mass Transit Hysteria.

Over the years, I’ve had the pleasure of working with management consultants from some of the biggest names in the business. Based on those experiences, I agree with much of what was said in this podcast.

I was amused at how a former consultant interviewed on the podcast relayed how the consulting gig was described to him by fellow consultants:

50% of the job is nodding your head at whatever is said. 30% of it is just sort of looking good and the other 20% is raising an objection, but if you meet resistance, then dropping it.

Steven Levitt described some lessons from his young consulting days. One lesson he learned was that the answers can’t always be found in the data and he said:

I [now] have this incredibly deep appreciation that the people in the middle and bottom of the organization absolutely know what’s going on and a lot of time the people at the top have no idea what needs to be done.

The show host, Dubner, explored the key question: Why hire management consultants? Especially when many of them are inexperienced recent grads, their recommendations are often obvious (or dumb) and there’s limited (actually none beyond low-hanging fruit) evidence that consultants actually help.

Why? Executives may want to gain legitimacy for stuff they want to do anyway or they may want to buy plausible deniability.

In my experience, it has been the latter. Being an executive is rough because every decision carries a job-costing risk. Paying McKinsey or Boston Consulting Group a million bucks to tell you what to do gains you a bit of finger-pointing potential when the Board of Directors start hammering about your lackluster performance.  ”But these smart guys told me to do it.” The scapegoat doesn’t last long, but it often buys the exec one or two more shots. Of course the Board should point the finger right back at the manager and say, “But this smart guy hired them and followed their advice.”

I wrote more on the subject of consulting in my posts, …And that resulted in what? and Be leery of big words. I still like this paragraph from the latter:

Can you imagine what the owner of an NFL team would do if his head coach hired a consultant to tell him what strategy his team should use to win games?  That’s right.  And that’s what Boards of Directors should do to managers who do that in business.

Mass Transit

In the other podcast, they discuss something about mass transit that I rarely see mentioned: Actual ridership.

According to the guest on the podcast, when actual ridership is taken into account, cars are more energy-efficient than buses and trains aren’t much better.

That’s mass transit blasphemy, isn’t it?

Mass transit proponents like to present us with idealized scenarios of heavily loaded vehicles. But, it turns out in the real world that a train or bus that moves a lot of people in one direction in the morning and another direction in the evening, make a lot of return trips when they are empty.

Also, they are typically run on schedules throughout the day when ridership is very low.

An efficiency advantage our cars have is that they don’t drive around empty all day while they wait to carry us home.

 

keynesian economists misjudge the economy

Natural disasters like hurricane Sandy tend to spur the following food fight among economists.

One or more economists — seeking attention and a chance to look clever — say something stupid like well, at least, the rebuilding will be good for the economy.

In response, other economists quote Frederic Bastiat’s Broken Window Fallacy, ask why we don’t smash everyone’s house to help the economy and lecture us that economic metrics, like GDP, do not take into account the value lost in destruction.

However, I think that both sides of this food fight talk past each other. Silas Barta’s has similar thoughts.

While I agree with the second set of economists, I think they ignore what I think is one key point of the first set of economists argument — ‘slack resources’.

The first set of economists know destruction is bad, but believe that because the economy wasn’t operating at ‘full capacity’, it had slack resources that can now be put to good use in the rebuilding effort. The second set of economists never address this point.

Here’s how I would address the slack resources argument: ‘Slack resources’ is a subjective, incorrect and misleading way to characterize what’s happening in a bad economy. So is the idea of ‘full capacity’.

It looks right-enough that almost nobody questions it, even the second set of economists. Except, maybe, one that I know of (Arnold Kling).

And I can understand why so few people question the ‘slack resources’ hypothesis. When you see a friend who is unemployed and struggling to find work you tend to think of him as a slack resource.

It’s like seeing your kid doing nothing on a Saturday afternoon and you get this strong urge to put him to work. He or she appears to be a slack resource.

It’s natural for us to think — We should be able to put these folks to work! They’re ‘slacking’ off.

But, I believe the ‘slack resources’ characterization is incorrect and misleading. Scratch past the surface you will find more to the story.

Have coffee with that unemployed — slack resource — friend and you find out he has turned down three job offers, because they were for 20% less than what he made at his previous job.

You ask, why not accept the pay cut so you can get back to work? Maybe you’ll get in there, knock their socks off and be back to your old wage in no time.

Well, it turns out he had enough savings and unemployment benefits to allow him to hold out for a job that will pay him his previous wage. Why should I accept less until I absolutely have to (i.e. when I run out of unemployment benefits)?

We find out our friend isn’t a slack resource. Rather, his skills are being re-priced and he doesn’t like it.

I don’t blame him. Nobody likes to have their wages “re-priced” down, but it happens all the time and it happens due to decisions that you and I make.

When one of our favorite Hollywood superstars makes a stinker of a movie that we choose not see, he may have to accept lower pay on the next movie to get studios to hire him. He could say, if only my fans would have supported me and seen that movie. His fans might respond, if only you would have made a movie worth seeing.

The first set of economists in the food fight see a bad economy as having slack resources. But what they truly reveal to me is that they don’t understand what’s really happening — things are being repriced based on the decisions that we make.

This is lack of real understanding of a bad economy is readily apparent when you consider how many barriers to repricing the first set of economists have had a hand in putting in place.

Minimum wage is one such barrier. It’s also the reason why there are so many officially unemployed unskilled workers at the moment. The market clearing price for unskilled labor is below the minimum wage, which is a price floor. Econ 101 teaches us that when the market clearing price is lower than the price floor, we will have a situation where supply (workers) exceeds demand (jobs). That’s exactly what we have.

This is fodder for another post, but it never seems to bother these economists that their favored wage price floor is causing so much unemployment. They’d rather feel sanctimonious about supporting something that seems well-intended than allow the official price of unskilled labor to move below what they have deemed an acceptable level.

Unemployment benefits is another such barrier to repricing. Many people believe that the low amount one receives from unemployment insurance is not enough to prevent them from accepting  work and they may be right if we lived in a simpler world.

But, in this world we have folks who have some savings, working spouses and the ability to take on black and gray market jobs to earn some coin while also receiving unemployment. We also learn in Econ 101 that incentives matter. If I accept an official lower paying job, I lose my unemployment check. Why do that when I can accept an unofficial lower paying job and continue to receive unemployment — or ‘double dip’?

These barriers slow the repricing process and lengthens the ‘bad economy’. They are the reasons why our recessions seem to take longer and longer to recover from.

If our friend didn’t have a free unemployment check that he would lose by accepting an official job, he might accept an official job sooner.

So, the next time you hear an economist talk about slack resources, give some consideration to whether the resource is really slack or whether someone just hasn’t been willing to accept a lower price for that resource and why.

Coming soon…repricing downward is awful, but is it really that awful?

Beware the Bimodal

Missouri incumbent Senator Claire McCaskill thinks Missourians should vote for her because she is in the middle, #50, in a ranking of Senators based on how liberal/conservative they are.

Be careful of the political spin. This ranking doesn’t mean that she’s a ‘centrist’, as she likes to claim. This is the group that does the rankings and here is how it is calculated.

They grade on a curve. Think of a test in high school. If her and fellow Democrat Senators all scored 85 or higher there’s a couple of ways to look at the scores.

First, we might say they all scored well and deserve As and Bs.

Second, we could rank them by their scores and we’d find Claire ranked #50 with a score of 85.

Which method do you think is a better indicator of her true performance? The #50 ranking or the score of 85? I’d argue that the score of 85 is better.

By no means would we say that she’s closer in ability to a person that scores 50 or lower. But that’s exactly what she wants you to believe with her touting of the #50 ranking.

In statistics, a test score distribution where you have a clump of people at 85 and above and another clump of people scoring 40 and below, with very few in between, is a bimodal distribution (or two modes).

In the Senate, you are pretty much either liberal or conservative. Saying you are the least liberal doesn’t mean much, except that you are comfortable misleading people.

While I don’t agree with everything about all conservatives, I don’t very often see a conservative try to mislead folks into believing they aren’t conservative. It should be distressing to liberals when their candidates try to leverage the general public’s weak understanding of statistics to pretend they are not liberal.

 

Fallacies, Hokum and Contradiction

Commenter breedm asked what I thought of this TED Talk presentation about job creators from Nick Hanauer.

I think it provides some good examples of fallacies, hokum and an argument that contradicts itself.

At the 42 second mark, Hanauer presents this straw man:

…a policymaker who believes that the rich are job creators and therefore should not be taxed will do equally terrible policy  [as an astronomer who believes the Earth is the center of universe] .

The straw man is in bold. I know of no one who believes the rich should not be taxed. Comparing these fictional policymakers to fictional astronomers (that’s hokum) doesn’t make either group any more real.

Right after that, Hanauer enters the wealth discussion “in the middle” by claiming that job creation comes from the people who can afford to buy products, consumers. Without them, “all of those jobs would have evaporated,” claims Hanauer.

David Mamet and Thomas Sowell explain here that the “a priori question left unasked and unanswered” by folks like Hanauer is, where did the wealth of these people who can afford to buy products come from?

Wealth was not “descended from the heavens, like manna, and spread evenly over the ground,” Sowell writes. “It was created by individual expenditure of effort and individual willingness to undertake risk.”

At about the 1:15 mark, Hanauer says something I agree with:

Jobs are a consequence of a circle of life-like feedback loop between customers and businesses.

Sure. Customers buy products they value. Those purchases send signals to businesses about what consumers value and businesses make more of that stuff.

But, as Sowell pointed out, customers had to first acquire enough wealth to purchase these things in the first place.

This was done in the same “circle of life-like feedback loop” that Hanauer mentioned. Consumers acquired their wealth as workers or business owners that produced something of value for others.

Or, they somehow got their hands on a piece of the wealth these folks created. For example, children who spend their parents’ money got their hands on some of the wealth their parents created. Recipients of charity or government transfer payments, get a piece of wealth — either voluntarily or forcefully — from someone else.

But, I disagree with Hanauer’s very next sentence. I also think this sentence contradicts his previous and is the fundamental lapse in Hanauer’s thinking.

And only consumers can set in motion this virtuous cycle of increasing demand and hiring.

It’s not much of a “virtuous cycle” if only one player in that cycle can set it in motion, is it? Again, Hanauer’s basic flaw is not tracing back where those consumers acquired their wealth.

The next few minutes of Hanauer’s speech is filled with hokum. For example, he argues that when business people take credit for creating jobs, it’s like squirrels taking credit for evolution.

I wonder what Nick would say about politicians taking credit for job creation. Either way, it’s a hokum comparison. It’s more like squirrels taking credit for finding a good place to store nuts for the winter. Evolution may have favored the squirrels who do that, but that doesn’t mean that those squirrels aren’t working hard to make sure their families have enough food for the winter.

Hanauer really stretches the straw man and hokum meter at the 4 minute mark, claiming that the word ‘creator’ is an attempt to deify job creators.

It’s a small jump from ‘job creator’ to ‘the Creator’. It was, like, not chosen by accident. When someone like me calls himself a job creator, we’re not just describing how the economy works…we’re making a claim on status and privileges we deserve.

Or, maybe not.

Next, Hanauer claims that the 15% tax rate paid by ‘capitalists’ on dividends and carried interest, compared with the 35% top rate on work, is a privilege and hard to justify without deification.

That’s only if you don’t understand the difference and neglect that the ‘capitalists’, for the most part, had to pay that ’35% top rate’ on the income that was used to acquire the capital that is now producing dividends, as economist Steven Landsburg explains here. Landsburg’s conclusion:

Why is this so terribly hard for so many intelligent people to understand? Here, I think, is why. They see a guy with a million dollar capital gain on his investment, and they forget that in the absence of wage taxes, he’d have invested twice as much and earned a two million dollar capital gain. In that sense, the capital gain is taxed in advance.

Hanauer concludes that a strong middle class is the real driver of job creation and:

…that’s why taxing the rich to pay for investments that benefit all is such a fantastic deal.

Except that kills the consumer-business feedback loop ecosystem that Hanauer praised earlier in his speech, because the “investors” are no longer investors and consumer purchasing signals no longer matter.

That is, “investors” in Hanauer’s model do not have to respond to what consumers want. Investors in the “ecosystem” go out of business when they make something consumers are unwilling to buy, as they should. That’s the feedback part of his consumer-business feedback ecosystem.

When government “investors” (i.e. spenders) make something consumers are unwilling to buy, they don’t necessarily go out of business because the tax dollars are not directly dependent on whether their projects are consumers successes or not.

To sum up, Hanauer first argues that the economy is an emergent order, like evolution, that is not dependent on a centralized investment function. But, then argues that we should centralize it, which removes the emergent order aspect of it.

breedm, Does that help?

Dear Mr. Colmes,

I appreciate what Alan Colmes wrote in his piece in the Wall Street Journal yesterday, How Democrats Made America Exceptional.

I disagree with it, but I appreciate it for a couple of reasons.

First, I appreciate it when someone supports their position with more than “because I don’t like the other side and you just can’t change my mind, so don’t even try!” It allows me to see if there’s something I’m missing and maybe, possibly have a start of productive conversation.

Second, I appreciate that a younger me may have been swayed by some of what Colmes wrote.

There’s much to debate in what Colmes’ piece. I thought this would be a good place to start:

 It was Democrats who fought to extend unemployment benefits during this difficult time. For every dollar in these benefits, the return is $1.64.

In the sentence previous to this, Colmes wrote about the multiplier effect. I’ll assume his ‘return of $1.64′ is a sloppy way to repeat multiplier effect without using the same words.

Still, $1.64 for a multiplier effect is heady.

If Colmes believe this to be the case, I see why he might support expansion of government policies.

If so, he believes government spending flows through the economy creating more economic activity as the recipient of the dollar spends it at the grocer, the grocer spends it to buy more goods, the supplier uses it to pay his workers, and so on.

I remember learning about the multiplier effect in my Econ 101 course and being impressed with it.

I also remember realizing, sometime later, that the magical government mystery dollar had to come from somewhere to begin with: taxes.

It could either be taxed now, in which case that dollar isn’t so magical. The taxpayer could have spent it and got it flowing, no?

Or, if those pesky taxpayers are just being stubborn and not investing their money when I think they should, the government spending dollar could be borrowed against future taxes. Which seems even less magical and strangely inconsistent coming from the crowd who uses future generations to morally justify many other actions.

Well, some of them say, we expect the economy to be humming again by then and our grandchildren won’t notice that teeny extra debt we passed on to them.

But, I wonder if Colmes knows this. If anyone knows him, please ask him for me. Thanks.

Update: Thanks to the comment from Sonic Charmer that made me realize I wasn’t clear on my point. Believing the multiplier is greater than 1 means ignoring, or greatly discounting, where that dollar came from.

The way I understand it, Keynesian folks believe that it’s okay to borrow a dollar from the future in a slack economy to get give GDP a boost now and repay that dollar when the economy is humming. Even in that scenario, the multiplier effect only applies to the current period. The multiplier over time, now and in the future when the borrowed dollar is paid back, is less than one because you have to account for repaying the debt.

Let’s assume that Keynesian logic is good for a short-term GDP boost. That’s still not sound reasoning for someone like Colmes to support ever expanding government on the mistaken belief that government spending is good for the economy because it forever and always has a multiplier greater than one. It does not. That ignores the day when those dollars will be repaid. That’s where Greece is now.