Monday, December 20, 2010

Response to HP on Inequality

In my recent post on income inequality I got an extremely lengthy reply from my good friend Hispanic Pundit which can also be read here. Personally I think he should narrow the focus a bit just to make a response more manageable. It's the kind of response that usually wouldn't be addressed at all because it's just too much. However I am glad to get a response even if I'm not able to reply. It at least contains info pro and con so learning can occur.

But in this case I did go through every link he offered and I'm responding below. HP, I'm using the third person just because it was easier to write that way, so don't take it to be rudeness. Again, thanks for your reply and hopefully we can both learn a bit here.

HP has asserted, without evidence, that changing family structure is the reason for the increase in inequality that I've documented. But I did his work for him, showing that divorce rates and the # of children affected by divorce do not correlate with inequality. Divorce rates began increasing in the 60's and leveled off in the 80's. Income gains went to all sectors of the economy, poor and rich, from 1940 to the mid 70's. Inequality began skyrocketing in the 80's with divorce rates leveled off.

So in response HP offers what he says is evidence.

HP's first link offered as evidence says that the number of households has increased faster than the population. You could see why this would tend to suppress family income values. He offers a hypothetical explaining that if incomes doubled, but half the households divorce, then household income stays the same. OK. But does this in fact explain the rise in inequality? He doesn't try to show it. "Could be" is about as far as this can take us.

He says that though the population increased 38% from 1976 to 2006 whereas the number of families rose 60%. He says "presumably" this is due to an increase in the divorce rate. But the divorce rate didn't increase in that time frame and it isn't increasing now (I have data from 1940-1990, 1990-2002 and 2007-2009). The divorce rate is dropping and has been since the 80's.

On the other hand the marriage rate is reducing, so these things can offset one another. This is why the key in my view is the source I provided in the post HP is replying to. Family working hours are increasing. So to offer another hypothetical, if half the families divorced, but working hours for each of those working family members doubled, we'd expect no change in total family working hours. The fact that family working hours are increasing means that the net effect of divorce/delayed marriage is that Americans are working harder for less. The theory sounds plausible, but the data don't support the conclusion.

HP's second link notes, correctly, that the proportion of households headed by women has increased. OK. Has that increase correlated with inequality? No. It increased by a wide margin in the 70's, but not so much in the 80's and 90's. Recall that the total amount of income going to the top 1% has skyrocketed from a mere 10% in 1980 to 23% today. Why has the bulk of the inequality been generated when single motherhood was not increasing as much?

Let me digress for a second here. I get the feeling with HP's analysis that no matter what is occurring in terms of inequality he'll conclude that we can draw no conclusions. Single motherhood has increased. So no matter what other data might show we should dismiss it as of no concern. These same arguments would apply in Haiti or Jamaica. But doesn't that make the view unfalsifiable? Do a thought experiment. Suppose that the top 1% had 10% of all income in 1980 but 90% today. Would it make sense to dismiss it because there has been an increase in single parenthood? No. If you want to argue the point you need to do the work and show the correlations. HP doesn't do that, nor do his sources. They think by merely pointing out one factor which can cause inequality data to be misleading they've shown that there's no problem. I can agree that a rise in single parenthood can cause one to overstate inequality, but I don't think this means that Citigroup is wrong in their economic analysis. They say the economy is being restructured so as to cater to the wealthy. They say this is due to our corporate friendly government. They offer an investment strategy that is based on that conclusion. The fact that there has been an increase in the total number of households doesn't change that.

HP's third link merely repeated what was in the second, so there's nothing to address there.

The fourth link says it's due to increases in immigration. Of course many immigrants are well educated. In fact the % of immigrants with 8 years or less of schooling is less than the native population and is dropping (as it is for the native population.) Some of the highest educated people in this country are immigrants. But also many unskilled immigrants arrive illegally, which is why I noted in the post HP is replying to that the amount of illegal immigration has been dropping since 2007 though inequality continues to rise. So once again no real attempt to show any correlation.

The fifth link clarifies the fourth and in fact has a link to a study which claims that the net effect on wages of immigration is positive. This of course would suggest that immigration doesn't suppress wages, but in fact should increase them. So the cause of the increase in inequality would have to be elsewhere.

The sixth link talks about how people move about various income groups as they age. It says that this doesn't tell us anything and I agree, so I won't comment.

The seventh link makes points about divorce that I've already addressed.

The eighth link says that it's better to remain married for economic purposes. That's of course true, but the data he presents shows a falling number of children affected by divorce and a falling divorce rate since 1995, though inequality has continued to skyrocket. So obviously this is not explaining inequality.

The ninth link talks about the same divorce study and adds nothing to it.

And that's just HP's first comment. I'm exhausted.

OK, so let's move to his second comment. He says that if you consider total compensation, including 401k's and health benefits, you find that the inequality gap disappears. I addressed this claim directly in the post HP is replying to, but he says nothing of my comments. But let me add a further comment.

HP's evidence is in a paper that requires payment to see and as far as I can tell he hasn't seen it himself. I've asked him directly if he's seen it and he simply won't respond to that question. If we haven't seen the evidence how can we draw conclusions? Does this paper account for the vanishing pension plan or the fact that pension plans out perform 401k's? How does it factor in the additional cost of health care? Because the inequality evaluations are being done in terms of dollars that are adjusted for inflation. Are they adding in rising health care costs in terms of dollars not adjusted for inflation to income dollars that are adjusted for inflation? We haven't seen so we don't know and we can't evaluate it.

HP's next argument is that while things may appear bad, in fact if you modify the CPI as necessary to reflect the cost of goods the poor are most likely to buy you find that things in fact aren't so bad. Luxury goods are increasing in price at a more rapid rate than goods poor people would be likely to consume. Perhaps unbeknownst to HP the source of this claim is no longer available. But the opening sentences from the piece HP is recommending are interesting:

"Inequality is growing in the United States. The data say so. Knowledgeable experts like Ben Bernanke say so. Ask just about any economist and they will agree. (They may or may not think growing inequality is a problem, but they will acknowledge that there has been a sharp increase in inequality.)"

It's worth noting that my claims regarding inequality are the consensus of economic experts. Doesn't mean I'm right, but it does mean that HP's view starts with a presumption against it.

The consensus is wrong according to this unavailable study. Again this is hard to evaluate, but if you read the comments at another source HP provided on this same topic you see claims that this claim regarding inflation bias is only true for people making less than $15K/yr, not the bulk of the population.

Next we're directed to this link that offers a variety of what the author apparently thinks are plausible explanations for inequality. Rich people marry rich people now (as if they didn't before). People with college degrees marry people without a college degree at a lower rate now. Isn't that because fewer people lack a college degree? There's less people without a college degree available for marrying.

But maybe people are doing things like starting internet companies, which can either go bust or make them staggeringly rich, like Sergey Brin. Or maybe people want to be pop stars, so it's big money or bust. Just a bunch of haphazard guesses as to the causes and a final comment that there's probably not much the government can do about it. I'm not shocked to read that this guy is a fellow at the right wing American Enterprise Institute. From shilling for corporate interests on global warming to shilling for RJ Reynolds it's not surprising to see these scatter shot arguments in favor of the status quo from the AEI and it's hard to take it seriously in my view, especially in light of the fact that there's just not much of an argument there.

Some inequality is good we're told. Does that mean Haiti is the place to be? Nobody has argued for perfect equality so I don't see the point of this comment.

Finally we're told that it doesn't matter because life is getting better with technological advancement. That was true in slave societies as well as I already commented. That doesn't mean it's right that the vast bulk of the increases in productivity and efficiency gains are being enjoyed only by the super wealthy. The point is that a better system would be a system that allowed everyone to reap income gains.


Darf Ferrara said...

The only things that were better thirty years ago were nostalgia and sophistry. There's no way a communist would have published this kind of rubbish on their blog back then!

First of all, things have gotten orders of magnitude better in many areas. Do you contend that some redistribution mechanism would have made things better? How would you like the redistribution to be accomplished? Would you prefer less income inequality, but quality of life stuck at 1985 levels? Put a plan forward. If you don't then you're just whining about how you don't like it that other people have stuff. In other words, you are full of envy.

And I didn't mention it last time, but since you posted the link to the "Pensions are better than 401k" paper again, I'll bite. You're either being dishonest, or you haven't understood the paper. The paper says that pensions outperformed 401k's over one particular (relatively short) time period, the difference was slight over that time period, and furthermore IRA contributions are higher now than either 401k's or defined benefit plans, meaning that overall retirement package differences aren't known. Does this imply that pensions are better than 401k's? No, it does not.

Since you didn't respond to my point about you being a loon, I'll assume that that point stands.

HispanicPundit said...

I had trouble posting. I just sent Jon an email with my response in total and in order. Hopefully he will delete these posts and put a more complete one.

Jon said...

Here is HP's response that I'm posting on his behalf.

HP Response 1

Before I respond, I want to make sure we understand each other fully on what exactly I am arguing. Here is the gist of my argument stated in my first response:

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

Moreover, I am not arguing that any one thing here eliminates income inequality, only that it mitigates it. Jon sees income inequality as a grave danger. This is because he believes the magnitude and "feel" of it is much greater than what I believe it to be. I am here addressing that belief.

So when I bring up the divorce rate, or single mothers, or immigration, or age of population, or healthcare costs, or whatever, I am not arguing that it explains all of income inequality, or even the most of it (individually). Only that it reduces it, atleast somewhat. Which it does. So Jon's response has to be read again in light of this further clarification of mine (in which case, I don't need to respond to everything, since on some of those points Jon implicitly seems to agree - there is a mitigating factor but not a substantial one).

Jon said...

HP Response 2

One point I do think Jon especially missed the importance of is immigration. Jon dismissed it too quickly (which I don't blame him, these are long articles and one shouldn't be expected to read everything in detail) by stating, "The fifth link clarifies the fourth and in fact has a link to a study which claims that the net effect on wages of immigration is positive. This of course would suggest that immigration doesn't suppress wages, but in fact should increase them."

If you actually click through the link provided, you will see that Borjas argues for exactly the opposite of what you state here (and in all fairness, what is stated in Cafe Hayek, a pro-immigration blog, btw).

He writes:

Recent evidence on the national labor market impact of immigration is striking. The evidence indicates that the wage of the skill groups—defined in terms of educational attainment and labor market experience—that experienced the largest influx of immigrants grew most slowly over the 1960–2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3–4 percent for every 10-percent increase in the number of workers that can be attributed to immigration.

This is a double negative when seen from the eyes of income inequality, as Borjas explains further:

Although the entry of immigrants reduces the wages of comparable natives, it increases slightly the income of U.S. natives overall. Using a well-known formula in economics (a variation on the theme of the so-called Harberger triangle), we can estimate that immigration increases the real income of natives, but only by about 0.2 percent. U.S. natives’ economic gains from immigration, therefore, are relatively small: about $22 billion per year (in 2003 dollars). Of course, not everyone benefits equally from immigration; workers with competing skills lose, while owners of land and capital gain.

In other words, immigration harms those at the bottom and benefits those at the top. The rich governors of California benefit from cheap nannies and gardeners, but the black high school drop out is harmed by the competition (see more of Borjas on this here).

This is especially striking when you consider the drastic change in immigration policy from the 1970's onward. Check out the title page of this CBO report to see the explosion in immigration from the 1970's onward. This is further compounded by the fact that from 1965 onward, the demographic makeup of immigration drastically changed (more at the Borjas link above) from primarily European to primarily poor and of Latin American origins.

To summarize then, immigration fits precisely the pattern that Jon is looking for. It had a dramatic increase from the 70's & 80's onward, and its presence makes income inequality worse (harms the poor, benefits the rich). Again, this doesn't account for all of income inequality, but it certainly explains a good chunk of it.

Jon said...

HP Response 3

Regarding my second point, total compensation. I want to make clear that it did not address 401k's (why I didn't respond). It only addresses healthcare costs. And by just focusing on that one part of total compensation (ignoring 401k's, pensions, and others), and including it as part of "total wages", it claims to almost completely eliminate income inequality. Wow!

Jon tries to cast doubts by stating, " How does it factor in the additional cost of health care? Because the inequality evaluations are being done in terms of dollars that are adjusted for inflation. Are they adding in rising health care costs in terms of dollars not adjusted for inflation to income dollars that are adjusted for inflation? We haven't seen so we don't know and we can't evaluate it."

But it's important to remember that these are not sociology professors making the argument. These are two Cornell University professors in the Department of Policy Analysis & Management. They also didn't publish this from a blog. It is posted on the National Bureau of Economic Research, a peer reviewed organization that must pass through various economists hands in order to be deemed acceptable. Now granted, given all of this, they may still have made such a fundamental error, but the probability of doing so is very low.

Again here, its important to stress that the income inequality argument is not mine. It's Jon's. It's the lefts. It is their responsibility, not mine, to defend the position. For as much as you see Jon make the income inequality argument, you would think that a mere $5, would not be enough to prevent him from reading further on a rebuttal to his most cherished argument. And does Jon have a counter argument? Does he have a study that even claims to take healthcare costs into account and show the opposite conclusions? I'm not even asking for one that definitively proves the point, just one that atleast tries to address it???

The mere fact that one would expect healthcare costs to be included in "wages" and yet there are no such studies, save this one, that even attempts to include them speaks volumes, IMHO, of the academic integrity and objectivity of those that harp on the income inequality argument. It's like the economists intentionally cherry picked the data that most fits their already held conclusions. Don't you think?

Regarding the third point, consumption inequality, here is the data explained. Here is the gist of the argument:

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Jon said...

HP Response 4

Regarding the cultural causes of inequality, Jon responds, " People with college degrees marry people without a college degree at a lower rate now. Isn't that because fewer people lack a college degree? There's less people without a college degree available for marrying."

Jon doesn't even address the article at all. It specifically explains why there is such a stark difference today.

First, Since 1980, the proportion of never-married mothers among college graduates has stabilized near 3 percent, while the proportion among high school graduates has risen from 3 percent to 10 percent, and the proportion among high school dropouts has doubled to nearly 15 percent. These figures are important because, as Hymowitz points out, “Virtually all—92 percent—of children whose families make over $75,000 are living with both parents. On the other end of the income scale, the situation is reversed: only about 20 percent of kids in families earning under $15,000 live with both parents.”

There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago. For example, sociologists Christine Schwartz of the University of Wisconsin and Robert Mare of UCLA found that beginning in the early 1970s there was a striking “decline in the odds that those with very low levels of education marry up.”

This is backed up by research from economists Betsey Stevenson and Justin Wolfers at the Wharton School at the University of Pennsylvania (Not members, btw, of AEI or any rightwing organization).

Interestingly, these two points follow exactly the pattern that Jon is looking for: drastic changes in and around the 70's and 80's that would have a direct impact on income inequality. Yet Jon simply dismisses it out of hand?

The reason I included this argument is to show that atleast some of income inequality is cultural and can't be changed by legislation (unless you support regulating who marries who). It's a fundamental change in the preferences of our citizens.

Then there is the long rant against AEI. But Jon, if this is the case, then can I so easily dismiss the majority of your links, afterall, they do come from leftwing sources (just as leftwing as AEI is rightwing - ie, huffingtonpost, EPI, State of Working America etc)?

Let me conclude by pleading that the reader interested in this discussion read all the links provided. Both the ones that Jon listed and the ones I listed. Then read Jon's response and my response. Ask yourself, who is being fairer with the data? Is Jon really giving the counter arguments a fair share? Then remember, that this is a fundamental premise to his worldview. Without it, much of the rest of what he argues falls apart.

Sebastian said...

You guys can sit around and pick rhetorical link out of your belly buttons. The middle class is losing jobs, and what's replacing them isn't good enough. A good friend of mine (MBA, etc) lost her web marketing job to a firm in the Phillipines as part of a buyout/restructure. I just came back with a good job after 18 months of working retail and going to school.

We in the middle class can see the inequalities, no matter what the reasons are. Actually it's probably a combination of what the two of you propose, but you're too busy bitching like whiny bloggers to find your commonalities and come up with a solution.

That's all we in the middle class want. A solution. The rich look to us for solutions to keep their companies solvent and them in their big boats and Botox. The poor look to us for solutions on how to move up to the next step.

We know the problem isn't as Red v. Blue as the press wants us to believe. We know the solutions aren't as ideologically clean as well. We lived through the stagflation and big government 70's. And we're muddling through the aftermath of the debt-ridden no-government 2000s. We've seen the best that the true believers on the left and right have wroght. And both poles of the political axes sucked donkey dicks.

It's your blogs, you have the right to do with them what you please. It would be more interesting at the very least to read something that takes a stand about fixing something affecting the middle class than the endless droning about what's wrong. Without being intellectually funded by Heritage or MoveOn.

Jon said...

Sebastian, big government has come in in the 80's, 90's, and today. I don't know that it makes sense to point to the 70's as if it was a big government era and a problem.

My solution is to look to what worked and what failed. What worked was the post WWII economic boom. That ran from 1945 to about 1975. What's failed is everything since.

What has changed is a couple of things. 1-The dismantling of the Bretton Woods economic arrangement which limited capital flows. This led to 2-financialization of the economy and 3-global economic arrangements, grotesquely called "free trade" agreements though they have little to do with that. These in conjunction with things like Reagan's open admissions that he would not enforce the Wagner Act has dismantled our production base and imposed suffering on the poorer classes of our society. Changing these things I think would return us back to balanced and rapid economic growth such as what existed from '45 to '75.

Darf Ferrara said...

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

F.A. Hayek, The Fatal Conceit

This quote is overused, but it's apt in this case. There are a million professional economists with a million ideas about what has changed, what could have caused the recent crisis and what would fix everything. If you think that you're sure that you know what changed, and what would fix everything, then you might want to think about it some more.