Tag: poverty

Trump, Hillbillies, and Geographic Mobility

Following Trump’s electoral success in rustbelt states, the spotlight has been on white, rural, post-industrial poverty. J.D. Vance, author of the now-famous memoir Hillbilly Elegy, discussed some possible explanations for rural poverty yesterday in a podcast. In the interview, he suggests that geographic (im)mobility is partly to blame for the erosion of areas like Appalachia: the poor simply aren’t migrating to jobs. 

Vance is right that Americans have limited interest in relocating, and are relocating less than before. According to calculations[1] using University of Chicago data, the proportion of individuals unwilling to relocate for work is high: 42% of Americans say they will not move within the United States for work, and 68% of Americans will not move outside the country for work. A full quarter (25%) of Americans would not consider traveling further for a job, even if the decision resulted in unemployment. Meanwhile, Census data suggests that relocation—whether inter-state, inter-county, or intra-county—is down (Figure 1). 2016 had the lowest relocation rate in seventy years (Figure 2).

The Curse of Motivated Reasoning against Econ 101

Earlier this month, James Kwak penned an extensive critique for The Atlantic of the Econ 101 view that government-imposed minimum wage rates lead to job losses. There is a lot of muddled thinking in the article, not least that it constantly conflates poverty and inequality. But for the sake of brevity, here are 9 observations:

  1. The theoretical and empirical literature does suggest the minimum wage question is more complex than first imagined, and it should not surprise us that reality lies somewhere between the perfectly competitive model of the labor market and the monopsonistic one, depending on the time and sector analyzed.
  2. However, the bulk of the detailed empirical literature still supports Econ 101’s prediction that raising wages by government dictat reduces labor demand, particularly for certain groups (the young and lowest skilled). Of course, the “bite” of the minimum wage is significant. That an increase from $7.25 to $8 may not have a large effect on the labor market does not mean that a rise to $15 wouldn’t have a much bigger effect.
  3. Reductions in labor demand need not mean higher unemployment per se (and so tracking time series of unemployment against minimum wage rates is unhelpful.) It may affect hours offered, lower the quality of jobs as firms cut back on financing training, or lead to cuts to other employee benefits. More recent evidence also stresses the dynamism of the labor market – minimum wage hikes may not manifest themselves through immediate job cuts (not least because of redundancy costs and stickiness of contracts/orders), but can lower the propensity to hire in future and hence slow job growth.

Oxfam Counts Highly Paid Millennials with Student Debt Among the World’s Neediest

Every year, Oxfam releases a report meant to shock the public about the extent of income and wealth inequality. This year’s report claims that the eight richest people on Earth have as much wealth as the bottom half of the world’s population (3.6 out of 7.2 billion people). That’s certainly shocking. It’s also profoundly misleading. 

As others have pointed out, Oxfam reached that number with a questionable methodology, which also led them to several other absurd conclusions. According to their own graphs, more poor people live in North America and Europe than China (see the far left of the chart below). How can that be, given that traditional poverty measures show the opposite

Oxfam isn’t using a traditional poverty measure (such as the number of people with a purchasing-power-adjusted income of less than, say, $2 per day). Instead, they focus on something called “net wealth.” This is the sum of an individual’s wealth minus any debts. 

Of course, many people in rich countries carry debt due to university loans or a home mortgage, yet also enjoy high incomes and an enviable standard of living. 

Here are some illustrations of just how absurd it is to use net wealth as a measure of poverty. 

Consider this. Oxfam claims a penniless, starving man in rural Asia or Sub-Saharan Africa is far richer than an American university graduate with student debt but a high-paying office job, a $2,000 laptop and a penchant for drinking $8 designer coffees. 

Let that sink in. 

(I must credit Cato’s Adam Bates for that example). 

Here is another example, courtesy of Johan Norberg. He points out that his daughter, a child with only about twenty dollars in her piggy bank, is richer than 2 billion people by Oxfam’s logic. If that were true, then the solution would surely not be to take away the humble savings of his daughter and redistribute them among those 2 billion souls, but rather to generate more total wealth, “enlarging the pie” so to speak. 

That’s the core problem with obsessing over “inequality.” If the goal is to further human wellbeing, then instead of decreasing inequality through redistribution, we should focus on decreasing poverty by creating ever more wealth. Happily, thanks to the wealth-creating power of market exchange, we’re doing just that. The trend lines all show that poverty (by any reasonable measure) is in retreat.

On Baltimore’s Economic Plunge

After Monday’s acquittal of Lt. Brian Rice in the ongoing Freddie Gray saga, lead prosecutor Marilyn Mosby is batting a perfect 0-4. The three previous defendants were similarly acquitted, with two (and perhaps three) more officers to take the stand in the future. 

It appears that Marilyn Mosby’s prosecutions have been politically motivated and without foundation. The big problem, however, is that Freddie Gray has taken the focus off of Baltimore’s long and painful economic plunge – a plunge that can be laid squarely at the feet of Charm City’s long embrace of anti-market economic policies.

My colleague, Prof. Stephen J.K. Walters, and I wrote about this in the Investor’s Business Daily on April 22, 2016: “One Year After: Freddie Gray and ‘Structural Statism’.”

Here is some of what we wrote about how the path of structural statism has contributed to Baltimore’s poverty and associated problems.

“When Freddie Gray was born in 1989, Baltimore hosted 787,000 residents and 445,000 jobs. By the time his fatal injuries in police custody provoked riots last April, the city’s population had fallen by one fifth, to 623,000, and its job base had shrunk by one quarter, to 334,000.

Little wonder that throughout his life, Mr. Gray had never been legally employed. Nevertheless, friends and family considered him “a good provider,” according to The Baltimore Sun.

This was because he worked in the drug trade, which filled his city’s economic vacuum. An average day on the corner can yield take-home pay ten times that available in the low-skill warehousing or service jobs sometimes available to high-school dropouts like Gray.

The catch, of course, is that such rewards carry two great risks. The lesser of these is regular involvement with the justice system. Gray was arrested 18 times and served three years behind bars in his tragically brief life.

Far more dangerous is how competition works in illegal markets. When selling contraband, one does not pursue market share by advertising high quality or low prices. Sales are increased by acquiring territory from rivals, often violently.

For Baltimore’s drug cartels, the post-riot disequilibrium provided an opportunity for market expansion. Inevitably, each strategic assassination produced reprisals and collateral damage.

As a result, 2015 saw the highest homicide rate in Baltimore’s history, at 55 per 100,000 residents — over 13 times New York’s rate. This horrific suffering was concentrated in the African-American community: 93% of victims were black, of which 95% were male and 65% aged 18 to 34.

In Freddie Gray’s demographic, then, the homicide rate was 450 per 100,000 — higher than the peak U.S. combat death rates recorded in the wars in Iraq and Afghanistan.

The prevailing narrative is that all this is a by-product of structural racism and exemplifies a society “built on plunder” (according to the celebrated black radical Ta-Nehisi Coates). This is a myth.

It is not that racism doesn’t exist but rather that it is relatively constant. When explaining variations in economic and social outcomes, constants have little power.

It’s the application of destructive public policies that explain why neighborhoods like Gray’s Sandtown-Winchester are deprived. If one had to put a label on this malignant force, it might be structural statism: an addiction to market-unfriendly governmental approaches to every problem.”

Stay tuned: with several trials still to come, we’re bound to hear more about the Freddie Gray Sideshow, even as Baltimore’s plunge into poverty – and its causes – goes unnoticed.

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Globalization’s So-Called Winners and Losers

A recent Washington Post analysis has argued that political events as diverse as the Brexit and the rise of Donald Trump can be explained by a “revolt” of the world’s economic “losers.”

Before proceeding, it is important to keep in mind that all income groups in the world have seen gains in real income over the last few decades. That said, some have gained more than others. Between 1988 and 2008, for example, the lowest gains were made by people whose incomes fit beteen the world’s 75th to 90th income percentiles. That includes much of the middle and working class in rich countries.

The Washington Post calls the people in this group the bitter “losers” of globalization. But, are they?

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There are at least two problems with characterizing such people as “losers.” First, it seems to suggest that income growth rate matters more than absolute income level. Yet a person in the 80th income percentile globally would not want to trade places with or envy someone in the bottom 10th percentile, despite the latter’s much higher income growth rate.

Consider real GDP per person, adjusted for differences in purchasing power, in China and the United States. Between 1988 and 2008, China’s per person GDP grew by over 340 percent. America’s per person GDP, in contrast, grew by “only” 40 percent. China may be making gains more quickly, but it would be wrong to argue that the United States was a “loser,” for American GDP per person in 2008 was $52,704 and China’s $8,104.

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Poor countries are seeing faster income gains partially because their starting point is so much lower—it’s a lot easier to double per person GDP from $1,000 to $2,000 than from $40,000 to $80,000.

The second problem is that the Washington Post piece suggests that the incredible escape from poverty that has occurred in poor countries during my lifetime has come at the expense of the middle classes in the developed world. (This is a fascinating reversal of the more popular, but equally inaccurate, opinion that the Western riches came at the expense of poor countries).

Thus, the Washington Post piece claims, “global capitalism didn’t always work so well for workers in the United States and Europe even as—or, in some cases, because [emphasis mine]—it pulled hundreds of millions of people out of poverty everywhere else.”

Fortunately, prosperity is not a zero sum game.

When trying to understand the “winners” and “losers” of globalization, it is important that we do not compare income growth rates over the last few decades with some imagined ideal. Instead, we should compare income growth to what would have happened in a world without globalized trade. In such a world, hundreds of millions of people would have remained in extreme poverty. And the middle class of the developed world would also have made fewer gains. Just look at the amazing reduction in price of consumer goods that we have collected at HumanProgress.

A few individuals in select industries would benefit from protectionism, like the U.S. sugar industry does now. But on average everyone would be poorer, just as in 2013 Americans collectively paid 1.4 billion dollars more for sugar than they would have without protectionism. (The U.S. manufacturing industry, it may be worth noting, would not be among the “select industries” to benefit—most manufacturing job losses have come from mechanization rather than outsourcing, and have been offset by new jobs in other sectors).

Thanks to trade and exchange, people in all income percentiles have made real gains, and living standards for the middle class in advanced economies have soared in ways not captured by looking at income alone. America’s middle class is getting richer, and the people in the world’s 75th to 90th income percentiles are also winners.

The Luckiest Crop in History

Recently, the New York Times ran an opinion piece by Gregg Easterbrook, which draws attention to the disconnect between the gloomy public on the one hand and the real state of America on the other hand. The prevailing mood in the United States is one of pessimism. For prominent politicians on both sides of the aisle, to use Easterbrook’s words, “the impending apocalypse has been issue number one.” Yet in almost every measurable way, this is the best time in history to be alive. The evidence goes on and on [links added]:   

Pollutiondiscriminationcrime and most diseases are in an extended decline; living standardslongevity and education levels continue to rise … A century ago, most Americans worked in agriculture: Today hardly any do, and we’re all better off, including farmers. That manual labor, farm or factory, has given way to 60 percent of Americans employed in white-collar circumstances … In 1990, 37 percent of humanity lived in what the World Bank defines as extreme poverty; today it’s 10 percent.  

Where did all this progress come from? Easterbrook rightly credits, “interconnected global economics.” Through an intricate symphony of competition and exchange, humanity has driven technology forward and achieved heights of prosperity that would be unimaginable to our ancestors.   

Unfortunately, Easterbrook also gives credit to top-down government planning where none is due. He cites the Affordable Care Act as an example of a successful reform, but rising life expectancy and improved health outcomes are long-term trends that both predate Obamacare and extend far beyond U.S. borders. It is far too soon to attribute any part of those trends to that highly problematic policy.   

Easterbrook even claims that, “In almost every case, reform has made America a better place, with fewer unintended consequences and lower transaction costs than expected. This is the strongest argument for the next round of reforms.” That is a sweeping overgeneralization, as it obviously hinges on the specific nature of reforms. Plenty of reforms throughout American history are now universally recognized as horrible mistakes – just look at alcohol prohibition.   

Despite some confusion about the drivers of progress, Easterbrook’s opinion piece is a refreshing reminder of the incredible progress humanity has made and well worth a read. It ends with this heartening quote that the data backs up:   

Recently Warren Buffett said that because of the “negative drumbeat” of politics, “many Americans now believe their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.” 

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Capitalism, Global Trade, and the Reduction in Poverty and Inequality

Drawing on a new World Bank study, Washington Post columnist Charles Lane today notesa vast reduction in poverty and income inequality worldwide over the past quarter-century” – despite what you might think if you listen to Pope Francis, Bernie Sanders, and other voices prominent in the media.

Specifically, the world’s Gini coefficient — the most commonly used measure of income distribution — has fallen from 0.69 in 1988 to 0.63 in 2011. (A higher Gini coefficient connotes greater inequality, up to a maximum of 1.0.)

That may seem modest until you consider that the estimate’s author, former World Bank economist Branko Milanovic, thinks we may be witnessing the first period of declining global inequality since the Industrial Revolution.

Note that this hopeful figure applies to the world’s population as though every individual lived in one big country. When Milanovic assessed the distribution of income between nations, adjusted for population, the improvement was even more striking: a decline in the Gini coefficient from 0.60 in 1988 to 0.48 in 2014.

The global middle class expanded, as real income went up between 70 percent and 80 percent for those around the world who were already earning at or near the global median, including some 200 million Chinese, 90 million Indians and 30 million people each in Indonesia, Egypt and Brazil.

Those in the bottom third of the global income distribution registered real income gains between 40 percent and 70 percent, Milanovic reports. The share of the world’s population living on $1.25 or less per day — what the World Bank defines as “absolute poverty” — fell from 44 percent to 23 percent.

So maybe this is a result of all the agitation on behalf of a more moral or planned economy? No, says Lane, citing Milanovic:

Did this historic progress, with its overwhelmingly beneficial consequences for millions of the world’s humblest inhabitants, occur because everyone finally adopted “democratic socialism”? Was it due to a conscious, organized effort to construct a “moral economy” as per Vatican standards?

To the contrary: The big story after 1988 is the collapse of communism and the spread of market institutions, albeit imperfect ones, to India, China and Latin America. This was a process mightily abetted by freer flows of international trade and private capital, which were, in turn, promoted by a bipartisan succession of U.S. presidents and Congresses.

The extension of capitalism fueled economic growth, which Milanovic correctly calls “the most powerful tool for reducing global poverty and inequality.”

This is the good news about the world today. Indeed, it’s the most important news about our world. We hear so much about poverty, inequality, gaps, resource depletion, and the like, it’s a wonder any NPR listeners can bear to get out of bed in the morning. But as the economic historian Deirdre McCloskey says, this is the “Great Fact,” the most important fact about our world today – the enormous and unprecedented growth in living standards that began in the western world around 1700. She calls it “a factor of sixteen”: we moderns consume at least 16 times the food, clothing, housing, and education that our ancestors did in London in the 18th century. And this vast increase in wealth that began in northwestern Europe, mostly Britain and the Netherlands, has now spread to most of Europe, the United States, Japan, and increasingly to the rest of the world.

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