Monday, May 20, 2013

Income Inequality Doesn’t Make the Poor Absolutely Poorer

Assessing income inequality is a hornet’s nest for those who are weak at statistics.

First off, most of the data we have is averages, which can’t tell us anything about inequality.

Secondly, many people slip mindlessly between the concepts of absolute and relative poverty. The latter is having less than others, while the former is not having enough.

Relative poverty exists everywhere, and is what is important if you think that income inequality is a problem.

Essentially, absolute poverty no longer exists in developed countries. Yet when we worry about others “not having enough” this is the only kind of poverty measure that’s important.

Tim Worstall, writing for the Adam Smith Instituted, reprinted this chart that can clarify matters:


The bars show different countries. The data is on net income after taxes have been removed and benefits added back in, adjusted for international prices using PPP.

The endpoints of each bar show the income of the 10th percentile and 90th percentile in each country. So, it’s not the poorest (who are probably close to zero everywhere) or the richest (who are off the chart to the right). Having said that, the most expansive view of the “middle class” usually runs from the 20th to the 80th percentile, so this is getting us that plus the richest half of the poor on the low end and the poorer half of the rich on the top end. What’s key is that this isn’t showing averages.

And what does it show?

  • America has the most unequal distribution of income of the countries shown.
  • America’s poor are no poorer than the poor in other countries.
  • America’s rich are richer than the rich in other countries.

If you put these together it means that our inequality is not a result of our poor being worse off, but of our rich being better off.

And yet the world is fill of people who think America is somehow a bad place because of our inequality.

This is pretty dumb. An example may help:

  • The poor in countries A and B both eat only turnips.
  • The rich in country A eat a variety of fresh vegetables.
  • The rich in country B eat a variety of canned vegetables.

Would any rational person claim that people in country B are better than those in country A? To do so, you’d need to believe that people shouldn’t eat what’s best, but rather what’s closest to what their neighbors eat.

But that’s just silly … because it would mean you judge the wellness of your community by trying to match the contents of your grocery cart to that of the other people in the checkout line.

No one does that in real life. And yet the chart tells us that this is what people who are concerned about inequality in America think we should do.

Sunday, May 5, 2013

Some Sequester Facts

The Obama administration bemoans the cuts made by the sequester.

Time to put on our thinking caps. These are the facts about the process in May 2013:

  • Presidents propose budgets.
  • Congress passes, and the President signs, budgets that are often larger (and always different) than what the President proposes.
  • The sequester of 2013 went into effect in March. It was based on the continuation of the 2012 budget, because …
  • Obama didn’t propose his budget until April, and …
  • As if May 5, 2013, Congress has yet to pass a budget for 2013.

Which leads to this awesome little turn of events: there are some programs that are receiving higher funding after the sequestration of their budgets than Obama has proposed.

That’s right:

  • He’s actively complaining about budget cuts, that
  • Were passively imposed due to past budget rules,
  • Originally proposed by the Obama administration in summer 2011, while
  • Actively proposing bigger budget cuts, that are irrelevant because
  • The office of President is fairly passive in the process.

This is like “having your cake and eating too” (if the meaning is unclear, read the second paragraph here).

Except that it’s having your cake, and eating it, and having it, and eating it, and having it too.

Minority Treatment In Hungary

Macroeconomics is about well-being and quality-of-life. Politics is involved, not just for policy, but because restrictive political systems typically lead to bad outcomes for well-being and quality-of-life. Think: North Korea or Cuba.

On the other hand, restrictive political systems are often able to deliver short-term gains in well-being and quality-of-life to the majority (as in Nazi Germany) and long-term gains to the politically connected (as in “oil states” and contemporary China).

So, it was of interest in 2012 when Hungary started a system of labor camps, primarily targeted at Romani.

The justification was that the behavior of the minority was impacting the well-being and quality-of-life of the majority. I am usually dubious of such claims, and tend to regard them as a slippery slope.

More evidence of that popped up this week with news of increased anti-Semitism in Hungary.

Senior figures from the opposition Jobbik party, the third biggest … harangued the crowd with charges that Israeli President Shimon Peres had praised Jews for buying property in Hungary.

"The Israeli conquerors, these investors, should look for another country in the world for themselves because Hungary is not for sale," Jobbik chairman Gabor Vona told the rally near the neo-Gothic parliament along the Danube River.

"Our country has become subjugated to Zionism, it has become a target of colonization while we, the indigenous people, can play only the role of extras," Marton Gyongyosi, a Jobbik member of parliament, told the crowd.

Fear of foreign investors is a relatively common sentiment the world over. This is often nonsense produced by asymmetric thinking (one of the things that makes macro so hard). An example may help.

Investors in country A buy assets in country B. Typically we hear a lot about citizens and policy-makers in country B complaining about these foreign investors. The asymmetry is that we don’t usually ask what citizens and policy-makers in country A think about other citizens making foreign investments. There are two possibilities in country A: one is that they are glad that other citizens are taking their money out of their own country to buy up other country’s stuff, while the second is that they are upset that investors are sending their money out of the country instead of investing at home.

Now let’s put some names on things: country A is America, country B is Brazil, and the investor is Donald Trump. How often would you hear Americans say “I’m so glad Donald Trump is investing in Brazil instead of America”. My guess is … never … because Americans would think it indicated something wrong with themselves. And yet the Brazilians will say “I wish Donald Trump wouldn’t investor because he’s American”. There’s the asymmetry: both positions can’t be right. I tend to think that the first argument is usually correct, since Donald Trump’s voluntary investment decision does suggest that there’s something wrong with America because he thinks he can make more money in Brazil.

So, back to Hungary and Israeli/Jewish investors. The people that should be worried are the Israelis: clearly Israeli/Jewish investors are getting better returns in Hungary than Israel. And yet the Hungarians are worried about this. It’s unlikely they have a viable argument (thus all the emotionally-loaded words, like “conquerors”, “subjugated”, “target”, “colonization”, “extras”), and the probably outcome is that well-being and quality-of-life will not be as high in Hungary as they could be.