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.

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.

Coverage for Exam 4

Chapter 5 from the text.

Chapter XI from the handbook.

All posts from April 24 to April 30.

All posts marked as “Exam 4 Only” on the post “Required for Exams 3 and/or 4”.

There will also be a “wild card” section consisting of questions that were on the last exam, but which were not answered by anyone.

How Bad Are Things In Europe?

Here’s a chloropleth from the April 26 article from The New York Times entitled “Southern Europe’s Recession Threatens to Spread North”

Note how few EU countries match the (below average) growth rate that America put up over the last year.

Also, recall that Russian money that fled Cyprus is now reported to be going to Latvia. Latvia is a member of the EU (like Cyprus) but is not a member of the EMU (unlike Cyprus) — so it’s reasonable to conclude that the situation won’t evolve the same way. Even so: check out Latvia’s growth rate: inflows of foreign cash are apparently good for you up until they’re bad for you.

Obama’s Government Recession

The economy grew at a below average annualized rate of 2.5% in 2013 I.

Part of the reason is cuts in government spending.

How is that possible given the level of spending coming out of D.C.?

The reason is that what we commonly hear in the legacy media as government spending is actually government outlays. In short, every check they write. But outlays includes both government consumption and investment (what used to be called government purchases of goods and services) and transfer payments.

But, only the former enters into GDP directly. Transfer payments enter into GDP as private consumption and investment.

So, the explanation is that Obama had doubled-down on the progressives’ nightmare: increasing transfer payments more than government consumption and investment. Thus, total outlays go up, while creating a direct drag on the economy.

You can see this in Table 1.3.3. in Section 1 here. It shows the components of GDP in index form: Federal government consumption and investment has declined for 6 straight quarters.

Real GDP Growth for 2013 I

The advance report came out this morning: 2.5% (annualized). With the final revision to the previous quarters growth of 0.4% (annualized), this puts total growth over the last 12 months at 1.8%.

That is not enough to exceed the population growth rate of around 2%, so we’re talking about continued declines in real GDP per capita.

It’s now been 15 quarters since the trough … making this expansion one of medium length already. Yet total growth is only 8.3%

For comparison, Bush’s weak recovery in 2001-5 put up 10.9% growth over the same number of quarters. The somewhat stronger Bush/Clinton recovery of 1991-4 (that was bad enough to get Bush I voted out of office) got 13.2% over the same period. Reagan got 20.2% in his recovery.