Details of economic perceptions in US

24/03/2014 Comments Off on Details of economic perceptions in US

The Pew Research Centre reviewed some interesting results. They start off saying that there’s a puzzle:

One of the biggest political puzzles of 2014 is why the public remains so bearish about the economy, and in turn critical of Barack Obama’s stewardship of it, given clear signs that economic indicators are improving.

First, they have been finding for the last few presidential administrations that perceptions of the economy are linked to party affiliation. That trend still holds. What is curious is that Pew thinks it is curious. It makes perfect sense, really. If your guy is in power, you are probably going to be pleased with how he’s running the place. If the economy is strong, it’s because of him. If it’s weak, he’s doing the right thing to make it better. So, the partisan gap isn’t surprising.

Secondly, they report a gap in perceptions of personal finances that correlates with education:

For example, college grads now size up their finances roughly as well as they did before the Great Recession took a toll on their outlook. In contrast, personal financial assessments of the less well-educated Americans have not improved as the economy has recovered after the Great Recession.

But again, this roughly reflects what’s happened. People with college degrees have tended to do better, both before the recession and after. The assessment of the non-college graduates is probably realistic: more unemployment, longer unemployment, lower wages, etc.

I’d be really interested in similar surveying for New Zealand and Australia. UMR Research, for example, has the Mood of the Nation survey. The reports on their site don’t break down results by demographics, though.

Why inequality? A reply

07/02/2014 § 4 Comments

Paul Walker asked a question recently — why are some of us focusing on inequality? That started a discussion on the Dismal Science feed at Sciblogs. Since I’ve been implicated by link, I figured I should say something.

Why inequality?

Well, first, other people are talking about inequality, but they are getting it wrong. One thing I’m trying to do is establish a sort of factual basis for the discussion. For example, people like to point to The Spirit Level as somehow the final word in the evils of inequality. So I’ve read the  book and pointed out its faults, which I think are serious enough that the book doesn’t prove its thesis. Or, alternatively, I’ve calculated that mobility of income quantile doesn’t tell you as much as you think it might. I’m doing this work 500 words at a time, so it takes a while.

Secondly, I’m interested in the economy as a human construction. We’ve designed it, and we can re-design it. Note that I’m not suggesting something like a New Socialist Man. I’m not advocating that we re-make people. But if as economists we believe that (a) incentives matter and (b) institutions matter, then changing incentives and institutions produces different results. So, I’m interested in exploring how we make changes to meet different goals.

Finally, I’m acting according to my preferences. I like fairness. I like symmetry and order. There’s something about equity that appeals to my sense of order. Now, perhaps you think the economy is fair, in the sense that people get what they deserve and actions lead to appropriate consequences.  Or, perhaps you think that life is not fair and that’s enough of an explanation. Me? I look around and see more than just the background cussedness of it all. I see people using power and privilege to maintain their own positions, and then saying that it’s just The Way Things Are. Or, more academically, that we shouldn’t turn away from the fraud that accompanied the global financial crisis, for example.

That’s why I’ve been writing about inequality. It’s just my tiny little effort to make the world a better place.

Poverty: plus ca change…

03/02/2014 Comments Off on Poverty: plus ca change…

While it is in vogue to talk about inequality, it would be better to focus on poverty. The inequality strategy is intended to reduce the ‘othering’ effect of poverty: the poor are those other people over there, who are different from us. However, it lets all of us non-poor, non-elite assume the stance of victim. We get to say that we, too, are suffering. In our heated houses and comfortable clothes, wondering what to eat from our full pantries.

The biggest mistake with the inequality strategy is that it activates our demands for fairness, which prompts people to make judgements about whether the poor are ‘deserving’. On the one hand are people arguing that it is inequitable for lots of children not to have enough to eat and two pairs of shoes, while on the other hand are people arguing that it is inequitable to take money from people who work hard and scrimp and save and give it to people who don’t. Two sets of judgements, two set of preferences, and no clear solution.

Barbara Ehrenreich had a column in The Atlantic last month, ‘It is expensive to be poor‘:

I was also dismayed to find that in some ways, it is actually more expensive to be poor than not poor. If you can’t afford the first month’s rent and security deposit you need in order to rent an apartment, you may get stuck in an overpriced residential motel. If you don’t have a kitchen or even a refrigerator and microwave, you will find yourself falling back on convenience store food, which—in addition to its nutritional deficits—is also alarmingly overpriced.

She also traced the development of attitudes towards poor people. The US War on Poverty started by President Johnson arose from the idea that government should do something to help the disadvantaged. The conservative backlash argued, instead, that people were not ‘disadvantaged’ — which is a social condition, and speaks of what is done to someone — but that ‘poverty arises from the twisted psychology of the poor themselves’. She continued,

pundits and politicians have bemoaned the character failings and bad habits of the poor for at least the past 50 years.

Of course, it has been going on much longer than that. I’m currently reading Emile Zola’s Germinal, a story about miners in a company town in the 1860s. The life of the miners is juxtaposed with that of the bourgeois investors, the Gregoires. Zola captures the attitude of the comfortable bourgeois towards the miners (source):

One must be charitable. They said themselves that their house was the house of God. Besides, they flattered themselves that they performed their charity with intelligence, and they were exercised by a constant fear lest they should be deceived, and so encourage vice. So they never gave money, never! Not ten sous, not two sous, for it is a well-known fact that as soon as a poor man gets two sous he drinks them. Their alms were, therefore, always in kind, especially in warm clothing, distributed during the winter to needy children.

In the meanwhile, M. Grégoire repeated aloud the reflections inspired by the sight of these starving ones.

“There is evil in this world, it is quite true; but, my good woman, it must also be said that workpeople are never prudent. Thus, instead of putting aside a few sous like our peasants, miners drink, get into debt, and end by not having enough to support their families.”

We are still having the same argument.

Another entry in the inequality discussion

31/01/2014 § 3 Comments

Pattrick Smellie’s column yesterday highlighted that Brian Easton has a new publication on inequality. Easton’s work is based in part on the thorough MSD report by Bryan Perry, which was highlighted in comments early this week (h/t Mary). Apparently, Easton is less complimentary about the Rashbrooke book, which I’ve covered before (here, here, and here).

That was a link-o-licious paragraph.

Easton and Smellie picked up on something that also struck me about Perry’s analysis (this from Smellie):

Between the mid-1980s and mid-1990s, Rogernomics cut a swath through traditional, subsidised industries; income tax cuts and GST were instituted, which hit the poor rather than the rich; and then the Ruth Richardson welfare cuts of the early 1990s completed a sharp decline in equality.

“The trend after the mid-1990s is more ambiguous,” Easton said.

“The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades.”

The trend shows up in this graph of the Gini coefficient in New Zealand over time (Perry, Figure D.17):

Gini_trend

The graph struck me for two reasons:

  • Commentators often wring their hands about New Zealand falling behind the rest of the world on incomes, productivity, etc. A lot of that falling behind happened in the 1980s and 1990s, with less of it in this century. That is, we have fallen behind, rather than we are falling behind. Apparently, there’s a similar trend with inequality: it did increase, rather than it is increasing.
  • The Occupy movement and commentary by Krugman, DeLong, Saez, etc. focus on the increase in inequality in the last 10 to 15 years, things like:

Yet the bulk of the rise in top income shares is in fact at the very top.

The experience in New Zealand appears to be different. It’s a reminder that we have our own economy with its own issues, and should be careful importing slogans and solutions from overseas.

Education policy: solving the wrong problem

24/01/2014 § 1 Comment

The big political news yesterday was the announcement by National of a new education policy. It will put in place a few experts — super-principals and super-teachers — to oversee and guide schools and regular principals and teachers. And, it will pay them a premium.

The usual economic models I use don’t seem to apply here. This is more about management, for which I have no ready models. If I fall back on thinking about incentives, I don’t see anything in here that changes the incentives for teachers. In fact, it creates incentives for the incoming managers to (a) overstate the deficiencies of the existing situation, and (b) institute new policies and procedures so as to be seen to be doing something. But I don’t have a great economic insight for you, sorry.

I do know a little about the education system, though, and it seems like this policy is solving the wrong problem, or a problem that does not exist. Education in New Zealand is generally good. Overall, students fare well on standardised exams and international rankings. They are able to go to overseas universities and do well. On average and in the main, education is on par with the rest of the developed world.

Whether warehousing kids for 13 years is actually good for their development as creative human beings, that’s another argument, but we’ll skip it here.

Despite the good average performance, the country has two problems:

  • the long, fat tail of low performance, which correlates with race and poverty
  • lack of public resources for top students, to help them achieve their potentials.

The first problem is that some kids in some communities are disadvantaged in all kinds of ways, and that shows up in school results. Improving their performance is partly about the schools themselves, and partly about helping the communities and families overcome the disadvantages. It also involves some reflection on why the disadvantage is there and continues, which is a massive social conversation that the inequality campaigners are attempting to have (but, in my opinion, going about the wrong way).

The second problem comes out of the drive for standards. If teachers are given incentives to lift kids to some arbitrary level, they will work towards it. Any kids who naturally get there will be ignored, because teachers aren’t paid to help them excel. This imposes costs on the families and communities, who have to pay for all the extracurricular stuff that helps the kids excel, or move them to the expensive schools that offer more options. It also creates losses for individuals and societies, who aren’t as creative and inventive as they could have been.

The new policy addresses neither problem. Creating a national system of administrators and consultants (which is what the policy seems to do) isn’t necessary. We need targeted intervention to help the poorest performing kids, and we need a shift in focus and policy to create incentives for teachers to nurture the best and brightest.

Again with Inequality

07/10/2013 Comments Off on Again with Inequality

I have already written about Inequality: A New Zealand Crisis, here on the introductory section and here in relation to evidence-based policies. Today, I’ll finish with it.

I still don’t buy the idea that inequality is bad for everyone (p. 13):

in less equal societies nearly everybody, not just the poor, is adversely affected.

The book cites The Spirit Level in support of these claims, but I’ve already addressed the weaknesses of that book. But then, the authors of Inequality don’t really believe this idea, either. Max Rashbrooke reviews the data on income equality and the divergence since the 1980s, and shows clearly how the top income decile has done well. Robert Wade explains how the divergence has been worst for the bottom 40%, best for the top 10%, and relatively neutral for the other 50% in the middle. Even amongst Maori, some have done better than others through the claims settlement process, according to Evan Te Ahu Poata-Smith.

They agree that some people do just fine out of inequality, thank you very much.

The book is good at making the case that inequality is more important than poverty. It runs through some of the standard arguments — that lack of options or access is necessarily comparative, that people need a minimum to participate fully in their society, that recognition of fundamental human rights requires greater equality. What convinced me more was that ‘poverty’ is othering, whereas ‘inequality’ recognises that we are all bound up in the process.

Several chapters are by economists: Robert Wade, Ganesh Nana, Paul Dalziel and Nigel Haworth. Wade does a good job of explaining the international context for New Zealand inequality and the zeitgeist that lies behind it. Nana wanders away from economics, which reduces the impact of his chapter. He calculates that the unemployed cost the country $27 billion in lost production. But his assumption relies on the idea that the unemployed would be averagely productive, even as the other chapters tell us about poor education and training. He forgets that better training would cost money, too. Dalziel (a former colleague of mine) focuses on what he knows well — education-employment linkages for school leavers — and provides some realistic ways to improve the situation.

Haworth has an interesting chapter. The central idea is one of path-dependence: New Zealand has become locked into a low-wage economy. Businesses are organised around low-skill, low-wage work, so workers don’t train or work more efficiently, and the process reinforces itself. Changing the situation requires pushing the whole country in a new direction, a la Singapore or Finland. Now, I’m not interested in living in either of those countries, but the idea of path-dependence is interesting.

The book could be better organised. For example, Dalziel provides a good framing statement but it is buried on pp. 187-188:

Inequality is entrenched in all five pillars of New Zealand’s welfare state — employment, income, housing, health and education.

Also, Jonathan Boston’s chapter is very good for setting up the whole notion of inequality — well, equality — but it’s several chapters in.

Another issue is focus. The book clearly starts with an intended focus on income inequality. Rashbrooke explains that income inequality is a key issue — income allows people to participate fully in society, and it is a clear outcome measure. Some chapters — like one on prisons and crimes — stray a bit too far from the central premise.

The book also doesn’t get its story straight. Gareth Morgan and Susan Guthrie tell us that

New Zealand superannuation delivers recipients a level of well-being that is exceptionally high by international standards.

But this statement comes soon after Mike O’Brien says:

This is not to argue that payments for superannuitants are too high: the evidence suggests that those living only on New Zealand superannuation (with no other income) are close to or below the poverty line.

So, the book is uneven. It covers the right material for people who are already concerned about inequality in New Zealand. I’m afraid, though, it isn’t well constructed enough to prod more people to do anything. It also doesn’t provide many recommendations, so it’s not clear what they should do and why.

Inequality, mental models, and counterfactuals

09/09/2013 § 4 Comments

In the recent book Inequality: A New Zealand Crisis, Jonathan Boston has a really useful chapter. It probably should have started the book as a way of laying some intellectual groundwork, instead of being Chapter 5. It raises the same point as Matt Nolan does at TVHE, quoting Amartya Sen, but with more detail. Here’s Boston:

As highlighted in this chapter, there is almost universal acceptance that equality matters. Yet there is no consensus on what kind of equality should be championed.

And here’s Nolan:

 Everyone, especially those who are more extreme in any given “political dimension” cares about equality of something – and the underlying reason why there are trade-offs stems from (as Sen discusses in the book) the heterogeneity of individuals!

Boston tries to cope with the different equality targets in two ways. First, he says that some equalities are more important than others, arguing that there is an inequality of equalities. With this, I believe he steps right back from his initial understanding — that reasonable people may reasonably disagree. Secondly, he suggests a certain pragmatism, or specific egalitarianism. While this seems attractive, it papers over the real conflict amongst theories of egalitarianisms with a poorly defined set of concrete goals.

In doing this, Boston shows how hard it really is to have evidence-based policies. When it comes time to make a decision, we have to take values and preferences into account. A particular set of evidence can be made to suit a range of policies, once you introduce different values. I’ve not read Peter Gluckman’s new report on evidence-based policies (pdf), but the reporting I’ve seen suggests that it is insufficiently attuned to this problem.

There is a second problem less well understood. When we make judgements about inequality, we are using mental models of social systems to create counterfactuals. For example, if one says, ‘they wouldn’t be poor if they weren’t lazy’, there is a mental model of society that underpins the judgement. That model has a weighting on ‘effort’, as well as weightings on other things like ‘education’, ‘social network’, ‘ethnicity’, ‘gender’, and more. The ‘effort’ weighting is sufficiently large to counteract any negatives from the other factors. We could, through interviews and surveys, estimate the parameters that people apply to those factors.

We all have these models. They are all wrong. I say that with conviction because ‘all models are wrong.’ They are always partial — they have missing variables — and the parameters are estimated from a sample of observations rather than the population. So, in my interpretation of my experience, it may be that ‘effort’ is sufficient to make a person not-poor. That doesn’t make it so, either for my experience (which suffers from observer error) or for the wider world.

In economic analysis, counterfactuals are hard to construct. You have to decide which factors are important and how important and over what time. If I’m being cynical, I might say that the counterfactual is the most important part of any cost-benefit analysis, and it is literally something we just make up. With data and evidence, mind you. But we make it up just the same.

How much harder is it, then, to understand the counterfactuals that people create from poorly-specified mental models of complex social systems?

More evidence would help, so it’s good to see Gluckman encouraging the government to find and use more. The findings will rarely be conclusive, however, as evidenced by Boston’s discussion of equality.

Questioning quintiles

31/07/2013 Comments Off on Questioning quintiles

I’m in the middle of Inequality: A New Zealand Crisis. An issue that is bothering me is the use of quintiles for talking about inequality, income and opportunities. There are actually two parts to my problem — a measurement issue and a normative one.

I’ll start with the measurement issue. Quintiles divide the sample into five groups, ranked in some order (say, smallest to largest). As such, it is necessarily a zero-sum game. For every person who leaves the bottom income quintile to join a higher one, someone else must fall back into the lowest quintile. Even if we were to lift everyone out of absolute poverty, we could still create income quintiles and have a lowest and a highest. We would always find inequality because the metric itself in a sense creates the inequality.

There is also no measure of dispersion or variance in quintiles. Now, I should mention that Inequality also uses Gini coefficients, which are all about measuring income distribution. The two measures together are useful. But quintiles themselves just show that one number is greater than another, without indicating how much greater.

The second issue with quintiles is the normative one: what do we want them to look like? What is the ideal towards which we are aiming? One of the uses of income quintiles is assessing intergenerational income mobility. Ongoing research in the US is using new datasets to create fine-grained maps of income mobility. Mobility varies tremendously, suggesting that where you were born is important to your economic fortunes. Of course, that’s true in all sorts of ways.

As I already pointed out, if the economy rewards talent and skill and they have some genetic basis, then class or income mobility will be limited. How limited depends on the relative rewards and genetic basis.

As a reductio ad absurdum, consider this alternative: perfect mobility. What if parents’ income had no correlation with children’s income? There are two clear problems with that situation. First, it suggests that incomes would be randomly assigned, which then suggests that incomes wouldn’t have anything to do with talent and skill (and hard work). Secondly, it also suggests that parents would not be able to influence their children’s outcomes. All the money spent on elocution lessons and finishing schools, all the time spent on proper use of knives and forks — all wasted. That situation would diminish the incentives for parents to invest in their children. Reducing the pay-offs to intergenerational investment would only serve to increase short-term thinking and create a sort of social Prisoner’s Dilemma.

Income quintiles are rhetorically useful, as a King of the Hill metaphor for people who prefer Parachute Games. For policy, though, they need to say what they really mean. What do they want the world to look like?

Inequality: I’m not yet convinced

29/07/2013 § 4 Comments

I have started the book Inequality: A New Zealand Crisis. It’s slow going but want to start teasing out my reactions, so I’ll review it piecemeal. Today, we’ll look at Part One, the introduction. My apologies at the start — this is long and somewhat rambling.

The reason it is slow going is that I’m having to weigh up each sentence. I think there are logical flaws, so the book doesn’t carry me along. I’m sure some readers will enjoy the outrage and devour the book — I’m not one of them.

A major premise of the introduction is that we are all worse off when inequality increases. They rely on Wilkinson and Pickett’s The Spirit Level for this argument, even reproducing a figure from the book (see here for my take on that book).  But they know themselves that this isn’t true. On page 17, we are told

We are all worse off for having wide income gaps in New Zealand.

On page 16, by contrast, the argument is

in countries with large concentrations of income, the wealthy can use their power to argue for policies that further their interests rather than those of the economy as a whole.

When you put these two statements together, the argument is that the wealthy are working against their own interests by arguing for policies that favour their interests. Obviously, this is illogical.

I also think it’s a tactical mistake. People working to lessen inequality are trying to get other people on board, to make equality politically popular. They are doing this by saying that equality is in everyone’s benefit. But this is simply not true, and obscures the fight they have on their hands.

(There is a similar retrospective argument going on over slavery in the United States during this sesquicentennial of the Civil War. One side says that slaveowners could have been bought out and everyone would have been better off. The other side argues that this wouldn’t have been possible.)

A second issue is that equality/inequality is a muddled concept throughout the Introduction. It seems to stand in for ‘things we don’t like’ rather than having an independent definition. This was quite striking with the second personal profile in the book. It’s a profile of a family with mum, dad and four children. They moved from Auckland to Whanganui, then mum lost her job and things got tight. But ‘tight’ is a relative term. For example, the family can afford some after-school activities but not all of them. Is that deprivation or not? Most important, though, is the notion of choice:

But even though she’d almost certainly get work in Auckland, Kristine doesn’t regret the move to Whanganui. ‘Being down here enables us to do so many more things for the children. We get a far better lifestyle here, with far more time together as a family.’

So how is this inequality? This family is choosing non-monetary rewards over monetary rewards and dealing with the consequences of that choice. They know they have other options and choose not to exercise them.

Another issue is that the statistical basis for the arguments is not consistent. Sometimes, the talk is of personal income, which includes all the superannuitants. We are told, for example, that 30% of individuals have incomes less than $15,000. In the very next paragraph, we move to a discussion of household incomes, which look much less dire (decile 1, single person, no children: $16,600 or less). Further on, the discussion moves to disposable incomes (after tax) for single households, but figures for the top 1% of those earners are given as pre-tax amounts because of data constraints. In essence, the number of people at the low end is inflated, and the incomes at the high end are inflated. It would have been better to work harder at a consistent measure of income to present a fair picture of the situation.

This kind of ‘worst case’ picture doesn’t stop with the incomes figures. For example, we are told that

this country has a relatively small earnings advantage to those with degrees.

As it happens, I know a little about this topic. The footnote (ftnt 66!) to the statement correct notes that the OECD has measured returns to tertiary education. However, that includes not only degrees but also sub-degree qualifications. The composition of New Zealand tertiary education (comparatively more sub-degree qualifications than other OECD countries) drags down our average return.

This statement about a small earnings advantage also shows the incoherence of the whole introduction. In a relatively equal society, we should have low returns to increased education. The premium should cover the time spent out of the workforce but not much else. Just because someone didn’t get an education is no reason for them to be disadvantaged in the workplace.

If this strikes you as a silly argument, that’s because you are thinking about productivity and economic efficiency. Clearly, the book recognises that some inequality is okay (degree holders should make more money), but too much is not. What I want is a clear statement about where they think that line is, and how they propose to measure it.

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