Income Inequality

So, income inequality is on the rise. No huge surprise - taxes were cut a few years back and we have a progressive tax system. Still, it is what it is, and it's going to matter during this election cycle. I've made a point of avoiding the humdrum of primary debates, yet I've still managed to catch clips of Giuliani talking up supply-side and Laffer Curve, and both Obama and Edwards bemoaning the workers who were "left behind." So, is this a bad thing?

Yes:

• It's not a healthy society that allows some to be billionaires while others are unable to afford a doctor's visit.
• The productivity of the worker has increased too: it would appear that workers have been unable to fully reap the benefits of their own improved skillsets.
• The prices of healthcare, housing and college educations have been rising faster than inflation. These costs were formed a higher percentage of middle class budgets to begin with and are therefore disproportionally eating away at the the already disproportionately small wage gains.
• As a practical matter, humans value relative wealth over absolute wealth. I'd rather that we both earned $10 than for you to earn $20 while I earned $15. Conspicuously large differences in relative wealth are bad for social stability.
  

No:

• Even if incomes have been rather stagnant, average overall compensation has been rising with productivity. How can wages stagnate when compensation increases? Well, employers pay a pretty big share of the rapidly rising healthcare costs, right? Is there a better claim to "fair" distribution of income than that income match productivity?
  
• As discussed earlier, the whole "real wage" thing is still comparing apples and oranges. The rich earned their windfalls in part by driving the technological gains that improve the goods available for purchase. Even if low earners can't buy many more things than before, it's worth noting that a lot of the things they buy are better. Cell phones instead of regular phones, broadband instead of dial-up. Many of these improvements might be luxuries, but some are probably driving significant increases in quality of life.
• India and China have much wider income gaps than we do, they're growing faster than we are and they're kicking our ass at manufacturing and low-skilled services. If we have any hope of keeping our place in the world economy, we're going to need to adapt quickly, probably turning into a service-based knowledge economy. Someone has to replace the Big Three at the top of the list, and the stratospheric compensation packages are going to draw those people. Basically, we need to make sure that the next Google is founded in Silicon Valley instead of Bangalore or Hong Kong (n.b., SarbOx isn't helping there).
  
• We can't just take the money from the rich and spend it on healthcare anyway. Healthcare is already a scary-large portion of our economy and we'd be burning the candle at both ends if we sacrificed economic growth (what the rich would otherwise be doing with their money) in order to increase healthcare spending. Healthcare might be a problem that we just need to grow our way out of?

What am I missing here?

All work and no play

So, since we just finished talking about earnings stagnation, I figure it's time to note another inequality gap that's been growing over the years: the Leisure Time Gap. Modern technology and productivity aids have allowed Americans to enjoy ever more free time each week. Unfortunately, not some segments of the population have been left behind. It looks like the rich haven't gotten their fair share of the leisure time gains.

Now, there are some free marketeers who don't see a problem here. In their minds, the rich are making a free choice, opting to work harder and longer for more money instead of taking a break and earning less. They don't see a problem with a society where honest rich folk are forced to make a decision between surplus earnings and free time.

But I do see a problem. Asking a rich person to sacrifice some of his money in order to get some time with the kids is liking asking a Wal-Mart employee to sacrifice some of his free time in order to take night classes and train up for a better job. That's being a little cold-hearted, isn't it?

My proposal? A fair-minded progressive tax. We can set a "leisure poverty line" at 80 hours worked per week or so. Any CEOs, attorneys, surgeons, or other folk who work more than 80 hours per week would be considered impoverished and would not have any obligations under the system. Those working 80-60 hours/week would be taxed 10% of their leisure time, those working 60-40 would be taxed at 15%, 25% for 40-20 and 35% for 20-0. The numbers could be adjusted as we see fit, but you get the general idea.

As with the income tax, the purpose of the progressive taxation would be redistributive. Using needs-based screening, we'd aim to place the maximum amount of leisure time in the hands of those who have the least under the current system. A workaholic CEO for instance might currently be working 90 hours a week and earning $10 million a year, clearly well below the leisure poverty line. The beggar camped out in front of the CEO's office building might be earning a hundred dollars a week on 0 hours of productive work. Under my system, the beggar would be taxed 35% of his windfall leisure time and would be expected to perform 39.2 hours/week of unpaid labor for the CEO. That's 168 hours, minus a 56 hour/week sleep allowance, multiplied by 35%. We might also consider allowances for eating and/or exercising, subject to such restrictions as might be negotiated in committee or decreed by the executive branch after enactment.

Certainly there are some inefficiencies in the system. The beggar might for example lack poise in the board-room or might not be fully informed about the market in which the CEO's company is engaged. While these potential inefficiencies are readily acknowledged, we must accept that equality is worth some minor sacrifices from society at large.

Hat tip Tim @ 4HWW.

On Inflation and Real Wage Stagnation

When someone tells you that real wages have stagnated, or declined, or failed to keep up with inflation, what does that mean? I thought it meant that a worker in year X could purchase more with his take-home pay than a similarly employed worker presently. I've become convinced though that inflation might not mean what we think it means.

They tell me for instance that 50 cents spent in 1980 would get you the same amount of goods and services as a dollar spent in 2000. Okay, so an iPhone costs $400 today, which means that our mid-80's counterparts were shelling out about $200 right? Small price to pay for being able to listen to Air Supply albums on your phone! Now let's go back to the chart and figure out what the Greatest Generation was paying for their MRIs in 1950...

I heard John Edwards talking about how many of us Americans have been "left behind" by economic growth in the last few decades. I think I might be one of those Americans, but I can't seem to find any data on what a developer of rich internet applications earned in 1980. Can anybody help me out?

Okay, so the CPI isn't measuring exactly what we seem to think it's measuring, is it? I think it was Locke that said something about paupers in London living better lives than the kings of savages. Maybe he was on to something. The Crown Jewels of London couldn't buy a transistor in 1900, and there was never a Roman Emperor who could muster the wealth to purchase a single coach-class plane ticket from Rome to Gaul.

Yes, this is a "rising tide floats all boats" argument. It's a "smaller piece of a bigger pie" argument. It's a "apology for economic inequality" argument. But is it a bad argument?

On Sennholz

So, Ron Paul's economic theory is of the Austrian school. Paul credits Hans Sennholz both for inspiring his enthusiasm and influencing his economic theory. Sennholz has passed, but his writings live on: was he legit? Let's see...

In July of 2000, Hans notes the potential danger of derivatives based on mortgages:

Rising debt is not the only threat to the economic boom. Derivatives are the single greatest danger, especially to financial institutions. These are options, futures, and options on futures which are highly leveraged speculation on virtually everything: interest rates, stocks, stock indexes, and foreign currencies. Even bonds and mortgages may yield derivatives as they are split into the interest-only portion and the principal-only portion. American commercial banks, brokerages, and insurance companies are the primary source and traders in derivatives now exceeding $35 trillion. What would happen to derivative players if the markets should suddenly begin to readjust, if interest rates should rise suddenly or price inflation should return in force?

Fair enough. He predicted the 2007 crisis right before the 2001 crisis. Right reason, wrong readjustment. What did Sennholz have to offer more recently? Well, in Feb of 2006, he gets is almost exactly right:

And where in the cycle are we today? Most symptoms seem to point to the third phase when goods prices begin to rise and the inflators become inflation fighters....Surely consumer goods prices have been rising at modest rates because massive imports from China and other Asian countries have diminished the price pressure. But these countries compete for raw materials and energy products, such as petroleum, which has raised those prices significantly. Moreover, American real estate prices have been soaring, which enabled many home owners to consume the rising equity and go deeper into debt....The fourth and final phase of the cycle is not yet in sight. Yet we must face and get ready for the ordeal that is bound to come at home and abroad.

So, we have a dog and a tail: monetary policy and the business cycle. But which is dog and which is tail? Does the Fed create the business cycle by over-inflating the economy until it breaks under the pressure and readjusts and the cycle continues? Or does the business direct the Fed to make what attempts it can to smooth out an exogenous boom-bust process?

Sennholz, Paul and their ilk think that the dog is chasing it's tail: using a sub-market lending rate to inflate the economy is the problem, not the solution. It's an argument that makes sense, but someone's being left out. Even if the Fed put the gun in our hands, it didn't pull the trigger. Someone had to be buying all those houses, brokering all those mortgages, and investing in all those derivatives. Sure all that money has to go somewhere, but sometimes a bad investment is just a bad investment.

Did you know the Korean War was over?

Me neither, but here it is. Look at the bottom of the "Legacy" section. Of course this is just between the Koreas: Bush has suggested that we'd sign a peace treaty if Kim gave up his nukes. Then again, Congress never declared war on Korea anyhow, so there's no "war" to conclude anyway...

Identity Crisis

So, there are three things I want to be doing on June 1:

1. Running the San Diego Marathon my friend Olivia
   
2. Running the State Street Mile with my dog.
3. Attending RailsConf in Oregon.

I think there might be three semi-distinct "I's" wanting each of those three things...

On Structural Unemployment and Fair Trade Coffee

Okay, so there's a glut of coffee, and it stands to reason that situation isn't temporary. Coffee growers are too productive and they've made more coffee than the world has use for. As in any case of structural un- or under-employment, the obvious long-term solution would be for a substantial portion of coffee growers to get jobs doing something else. The United States once had its vast majority employed in farming, but now fewer than 1 in 20 US citizens is involved in agriculture. The same progression from field to factory to office has taken place in Europe and is taking place in China and India right now. In the long run, there isn't much future in coffee farming.
Fair enough, but "in the long run," Keynes reminds us, "we're all dead." What to do about the coffee over-production now? Let's explore our options:

• Nothing. Let the farmers respond to market incentives on their own and switch to more profitable sectors. Which sectors? In Latin America, narcotics and cattle come to mind. The former is profitable but a country dipping its fingers too deep into the narcotics trade risks getting the kind of US "support" that no nation wants. The latter is less profitable, more legal, and probably worse for the environment. Plus, cattle ranching and coffee farming are pretty distinct skill-sets. Ultimately, we'd hope that coffee-glutted countries could focus resources on education and industrial development, providing the training and job opportunities necessary to employ a workforce at a higher rate of productivity. Chavez demonstrates that we ought to know better than that: growers and their economic planners will eschew the "long run" and opt instead for a short run... to the Left.


• Make the purchasers pay more. This is the kind of outside-the-box thinking that might earn you a Green Party nomination. Well, pay more to whom? The problem is that there's too much coffee, somewhere, someone is making coffee that the market doesn't need. Do we pass a law requiring Starbucks to buy the remaining world surplus and let it rot? That spirals out of control - artificially propping the price will either raise supply, reduce demand, or both. If demand (and Starbucks's margins) are resilient enough in face of the higher prices, the producers will supply MORE, leaving us worse off than before. In the end, consumers are paying more for their coffee, Starbucks is making less money. Worse, we now have even more farmers producing even more coffee that the world doesn't want instead of learning to produce something that the world does want. Finally, how much "more" must the purchasers pay? Market prices are set by supply and demand, but who decides what price is "fair," and by what standard?


• Have the government pay more to make up the "difference." This is basically the same thing as making the purchasers pay more, except that the "more" comes from a broad tax-base instead of the actual consumers of coffee.


• Have the government pay growers NOT to grow coffee. No, I'm not joking, paying farmers NOT to work is a time-honored tradition. We solve the glut problem and prop the market price, but the cost of the subsidy is still a drag. More importantly, instead of paying coffee growers to grow useless coffee, we're now skipping the middle man and simply paying them to be useless. This might be a good stop-gap, but economies can't stand long with large portions of the economy being dead weight. Eventually we'd want to wean the farmers off of the dole, a trickier process said than done. Agricultural lobbies in industrialized countries have shown themselves to be incredibly tenacious in defending subsidies, so Latin American governments would be wise to proceed with caution here.


• Count on responsible consumers to pay more out of the kindness of their hearts. This is the Free Trade premise: instead of paying $X for coffee, pay $X for cofee + $Y for guilt-removal. It's an interesting gambit, and it might even work if the proponents got the market right. What do I mean by "getting the market right?" Well, the Free Traders seem convinced that Starbucks sells coffee. This is a conception that, while certainly valid, misses the point. It's like saying that an artist sells canvases and ink. Starbucks isn't making money by importing coffee from Brazil, marking it up X%, then selling it to sheeple. If they were, a competitor would come along, import the same coffee, and sell it for X-Y%. Starbucks differentiates by adding value, most obviously by brewing the stuff for you, but also by providing a consistent product line that's available wherever you go, offering pleasant facilities, opportunities for socializing, and whatever else. If your coffee chain got those things more or less right and made up for the any deficits by differentiating on social policy you'd might be able to stay afloat. Basically "feel-good" doesn't cost you anything in terms of overhead, so you can pass whatever market advantages you get from it on to the farmers. All that said, the effect is going to be pretty small. You're counting on good will, Starbucks is counting on contemporary decor and the pull of the familiar...


• Help Starbucks help you. Nope, not kidding here either. Starbucks is popular, prevalent and well-marketed -- a combination that boosts overall demand for coffee. Higher demand leads to higher price, which leads to happier farmers. The effect probably isn't big enough to erase the long-term need for coffee growers to innovate, differentiate, or get out of the market, but it might help a bit in the short term.

So, what's a socially-minded, coffee-drinking consumer to do? Quit focusing on keeping farmers afloat in a dead-end career and do what you can do to help them become more productive. Take out a micro-loan. Support educational visas so that developing countries can send more folks abroad to train and then bring the skills they learned back to their local economies. Do what you can to oppose for the War On Drugs, which leads to violence and corruption in producing countries, threatening the stability and rule of law necessary for economic growth. Don't vote for politicians who advocate protectionist policies since the bubbles they create will eventually burst, making an immediate disaster out of what should have been a gradual adjustment. It might be a lame sound bite, but it's the only way I know how to close: The only fair trade is free trade.

On State Unemployment

First quick thought since returning to Blogger... I was looking at some recent state unemployment data (via Wikipedia, if you're interested) the other day, and I noticed that of the 10 states with the highest unemployment rates in the country, 8 have minimum wages higher than the federal minimum (and, IIRC, Louisiana was one of the ones that didn't, and it was hit by a hurricane). Of the 10 states with the lowest unemployment, only 3 have wages higher than the federal minimum.

So, coincidence? If not, which way does the causal arrow point? Do states with high unemployment vote in Democrats, who in turn raise minimum wage? Or does raising the minimum wage increase the cost of labor, causing businesses to purchase less of it? My vote is with the second. You can't violate the Laws of the Market, and one of those is: ceteris paribus, demand decreases as price increases.