Friday, February 9, 2018

Two for the Price of One

It’s February 9th. In class this week I spent two days talking about stocks and flows, and how policy analysts need to pay more attention to this distinction.

In today’s issue of The Wall Street Journal there are two articles, on the same page, illustrating the right way and the wrong way.

The right way is in a piece by David Henderson. He’s a well-known economist at the Naval Postgraduate School who writes occasional op-ed pieces for a variety of publications. In this case, he’s writing about how Oxfam, an NGO that advocates on behalf of the global poor, does not make the stock-flow distinction. The result is a comparison that looks persuasive but is in fact not a comparison … at all.

The report also compares the income of the poor with the wealth of the rich. For instance: “Between 2006 and 2015, ordinary workers saw their incomes rise by an average of just 2% a year, while billionaire wealth rose by nearly 13% a year.” But it’s a false comparison: one person’s paycheck versus another’s net worth.

To get the story right, you need to compare income for both groups. Two economists, Tomas Hellebrandt and Paolo Mauro, studied this and concluded, in a 2015 paper published by the Peterson Institute for International Economics, that global income inequality declined between 2003 and 2013 due to rapid economic growth in poor nations.

This is even more impressive than it sounds, given the math involved. Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family.

You might want to do the math. In this case inequality will continue to get worse for about 15 years, but within 40 years the poor will have more income than the rich.

The wrong way is in a piece by Peggy Noonan. She’s a Pulitzer Prize winning columnist and writer today, who’s best know for being one of President Reagan’s speechwriters.† She’s a Republican, but not a Trump fan, who lately writes a lot about what people see or infer about Trump. This is from a section about three current events from the week, including the declining stock market:

… I would add the big secret everyone knows both here and abroad and that occasionally springs to the forefront of the mind: A fundamental is unsound. Compared with other countries we look good, but compared with ourselves we do not. Our ratio of total debt to gross domestic product has grown to more than 100% and can’t keep growing forever. Because of it, no matter how high the market goes it will never feel sound. There is no congressional appetite for spending control because there is no public appetite for it.

No one in Washington is forging a plausible solution to the problem.

Noonan can be forgiven for not knowing better. But … she also seems super-bright and well-informed, so I find it hard to believe she hasn’t digested that this statistic isn’t an answer to a question bright and informed people ask.

David Henderson’s piece is entitled “A War on the Rich Won’t Help the Poor”. Peggy Noonan’s piece is entitled “I Love a Parade, but Not This One”. Both appeared on the op-ed page in the February 9, 2018 issue of The Wall Street Journal.

† Two of her speeches are ranked in the top 100 speeches of the 20th century. She’s also known for the Bush I phrases “kinder, gentler nation”, “thousand points of light”, and “read my lips, no new taxes”.

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