Coyote Blog

When I saw the headline of this post by Kevin Drum -- Our Personal Data Is Worth a Lot. Facebook Should Pay For It -- I was just going to use it as the starting point for a quick post saying that if we should be paid by Facebook for our personal data, the government should pay my company for all the data (Census, DOL, etc) that we are asked to provide.

However, when I actually read the post, I was simply amazed at the way Leftists think about solutions to this.  To me, the least intrusive solution is say that Facebook needs to be transparent about the data it gathers so users can decide intelligently if they want to be on the platform.  Or, if we decide that Facebook is not a near-monopoly common carrier, the second least intrusive solution is to require Facebook to allow users to opt out of having their private data used for things beyond providing core services of the platform.  If Facebook can't make that business model work, they might charge users $10 a month but waive the charge if you opt in to their using the data for a defined set of other purposes.  Because we already are being paid for our data in the form of free usage of a (to some) valuable platform.  Its just a very non-transparent transaction where both the costs and benefits are hard to evaluate.  The best role for the government is to make it easier for us as individuals to better understand this cost-benefit tradeoff.

But here are the default solutions from two folks on the Left:

Shapiro thinks we all deserve a cut of that since this personal data is, after all, ours. He suggests a complicated mechanism where the government collects the money and then cuts everyone a check. But why not just levy a tax and be done with it? That would be simpler. Put all the money in a special fund designed to . . . I dunno, fight income inequality or buy everyone computers. I’ll bet Elizabeth Warren could come up with a plan for it.

Ugh, really?  If I did not read his blog all the time I would almost think Drum's personal solution is parody.   Does he really think giving my money to Elizabeth Warren to spend is a way for me to recover any value?

I know that for many folks today, history seems increasingly irrelevant.  Millenials will say that anything a bunch of old white guys were doing 500 years ago has no bearing on their lives.  Or perhaps more accurately, they don't want it to have any bearing on their life.

I love history in and of itself, but studying it has real value in understanding public policy choices. The problem in public policy is that we can seldom run good controlled studies (e.g. half of you will live under socialism and half capitalism and we will see who does better).  And even when we do inadvertently run A/B tests (e.g. blue state fiscal and regulatory model vs red state) we seldom pay attention to the results in part because we are just too close to them and too invested in them in one way or another.

But if you look back through enough time and across enough different civilizations, humans have already run millions of experiments and we can read the results.  I find it impossible, for example, to look at our government today without thinking of Rome and the Gracchi brothers in the 2nd century BC.  People today are trying to throw out institutional checks and balances, rules of decorum, traditions of collegiality, and limitations on power because they feel these are standing in the way of (mostly) well-meaning improvement programs ( in areas such as climate, income inequality, racism, etc).  But history teaches that such efforts always end the same way.  As in Rome in 133BC or Russian in 1917 or Cuba in 1957 or in many other historical cases, the inroads made by well-meaning idealists in weakening limits on individual power just open the door for real iron-fisted authoritarians to take the helm.

A while back I wrote:

Is it possible that inflation exists but it shows up mainly in financial assets (stocks, bonds, perhaps real estate) that don't really factor into standard inflation metrics?  Every step the Fed has taken, as well as other western central banks, appears to me to be crafted to pump money into securities markets rather than into main street.  Certainly we have seen a huge inflation in the value of financial assets and real estate over the past several years.

It was an honest question -- I am not an economist.  Business school gives one a pretty good working knowledge of micro but macro is usually outside my ken.  However, I see this is not a new idea and others make the same point.  Saw this chart on the Zero Hedge Twitter feed

I will add that progressives want to use this data to make some sort of fairness / income inequality point about wages vs. rich people's asset holdings, but this chart is not a natural result of unbridled capitalism.  It is the predictable result, even the desired result by its creators, of Fed policy in general and quantitative easing in particular.

The Seattle city government commissioned a study (pdf) to see what the actual effects were of their increasing the city minimum wage to $13 (bless their hearts, politicians actually tried to evaluate the actual effects of a controversial policy change).  The study authors had access to a uniquely rich data set.  Unlike folks like Card and Kruger, who had to use proxies for low-skill labor employment such as employment in the fast food industry, this study's authors had access to individual wage and hour data by person by location.   The result was one of the highest measured negative net effects of a minimum wage yet calculated:

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.

Note what this means -- the amount of pay raise some low-skill employees got was less than the pay lost by workers who had their hours reduced or eliminated.  This is against a backdrop of a huge boom in Seattle in total employment, meaning that the minimum wage greatly increased income inequality, reducing income to lower-skill workers at the same time higher-skill workers were making a lot more money.  This is not surprising given the data here, which shows the difference between low-income and middle class to be more than 80% due to hours worked, not wage rates.

To some extent, the severity of these results was influenced by the limited region to which the wage applied (making it easier for customers to run for the border, so to speak, to find lower-priced goods and services).  But it is telling that the study with by far the best data shows the biggest negative effects.  To this end, the authors actually evaluate the Card and Krueger approach of looking narrowly at fast food employment, and actually are able to replicate Card and Krueger's results (of limited employment effect of a minimum wage increase in the fast food industry) in Seattle.  This means that Card and Kruger, with their limited proxy, would have said Seattle had no negative employment effects while better more comprehensive data shows the opposite.

Thus, by using the imprecise proxy of all jobs in a stereotypically low-wage industry, prior literature may have substantially underestimated the impact of minimum wage increases on the target population. Finally, column 5 returns to evaluating effects on total hours, but now for all 34 jobs in NAICS 722. While the estimates continue to be insignificant, they are now more negative, averaging -3.3% in the last three quarters. This result is consistent with Neumark and Wascher’s (2000) critique of Card and Krueger (1994).

In a traditional C corporation, the corporation pays its own taxes, and then income that is passed on it its owners in the form of dividends is taxed again as personal income on an individual's 1040.  The S-corporation was an positive innovation that has corporate income passing through to the tax return of the owners, and getting taxed only once on these individual returns.  Over the last 50 years, there has been a steady shift of small businesses from C corps to S corps.

Over a decade ago, I suggested that this shift may be in part to blame for the rise in income inequality.  Entrepreneurial profits that would have stayed before in a C-corp are now showing up immediately on individual tax returns.  In January, 2007 I wrote

The introduction of the "S-corporation" means that an increasing amount of entrepeneurial income is showing up on 1040's.  With C corporations, the incentive was to delay taking any income from the company for as long as possible to avoid double taxation, preferably taking it at time of the company's sale.  With S-Corporations, there is no double taxation problem so corporate income flows through to the individual 1040.  Business owners are suddenly reporting more income not because they are making more, but because they are recognizing it in a different way in a different tax form.  Much of the rich getting richer is actually just the rich recognizing their corporate income in small businesses in a different way

I am happy to see empirical proof of this hypothesis start to arrive:

Since 2000, different measures of top income inequality have exhibited very different trends. Top income shares based on measures of total income show a continued rise, whereas top income shares based on wage and salary income show no increase in inequality post-2000. The most important difference between these two measures of income is the income that accrues to S-corporations....

But interpreting trends in the S-corporation component is extremely difficult. Feenberg and Poterba (1993), Gordon and Slemrod (2002), and Cooper et al. (2016) warn that much of the recent increase in S-corporation income is income that previously accrued to C-corporations. Such income is not “new” income earned by top earners but is simply income that was previously labeled as corporate income rather than household income.

Yesterday at an event called One Day University, I saw a talk by William Burke-White of Penn and formerly of the Obama state department (I think he was one of many consultants, but I can never figure out seniority from people's biographies - his is here).

Mr. Burke-White was discussing the liberal world order created by the US after WWII and recent decline / threats to this world order and American power.  He discussed five trends or forces driving changes, and you probably can predicts many of them.  He discussed the rise of new world powers (e.g. China), the rise of powerful NGO's (e.g. ISIS) and the expansion of the Internet (which can destabilize traditional powers).  All fine, I have no particular comment on that stuff.  He also discussed climate change, with a picture of Manhattan underwater, and though I am tempted, I won't even respond to that.

What caught my attention was his fifth point -- about income inequality.  He showed a slide with the meme that 8 people (Warren Buffet et al) had more wealth than something like half the world's population put together.   His conclusion was that the liberal world order had failed because so much wealth had been concentrated in a few hands.

Well, if American power and influence is declining in the world and Mr. Burke-White is an example of the thinking of the Obama administration over the last 8 years, I now have a better understanding of why.   Sure there are really rich people.   There were probably 8 really rich guys in 1400 (though they would have all been Kings and Emperors rather than private business people).  The really different, world-changing event over the last 50 years has been the emergence from poverty of over a billion people, as facilitated by market capitalism.  Never before in all of the history of the planet have so many people been pulled out of poverty in such a short time.  Never before has such a large percentage of the globe moved beyond pure subsistence farming.  If the leaders of this country find it impossible to communicate this simple good news, then of course the post-WWII liberal world order is going to struggle.

Look, I understand that baby boomers (a group of which I am barely a member) have a hard time figuring out how to cope with this country's many past missteps.  Yes, we have been ham-handed (and that is generous) in exercising our power and we have often failed to live up to our stated values.  But helping to unleash a wave of market capitalism on the world is among our true successes.   And this is the US's one true source of power, this wave of prosperity we have helped to birth.  Other supposed sources of our power -- a big military and atomic bombs -- are horrifying.  Market capitalism is our one source of strength that is genuinely positive.  If we are staffing the state department with people who don't get this, then no wonder we are losing influence in the world.

Kevin Drum, in commenting on a Binyamin Appelbaum article in the NY Times, writes that the Presidential candidates should be talking more about poverty in part because the US is way behind Europe.  Specifically, Appelbaum quotes a Harvard Sociology (!) Professor as the source for the poverty claim:

“We don’t have a full-voiced condemnation of the level or extent of poverty in America today,” said Matthew Desmond, a Harvard professor of sociology. “We aren’t having in our presidential debate right now a
serious conversation about the fact that we are the richest democracy in the world, with the most poverty. It should be at the very top of the agenda.”

Drum argues that Desmond is right, because of this chart from the OECD:

One of the dirty secrets about poverty measurement is that the actual measurement seldom has anything to do with absolute well-being.  And this is the case with the OECD numbers.  The OECD's poverty measurement is based on the country's median income, and is the percentage of people who are below a certain percentage (generally 50%) of the country's own median income.  As such, this is more rightly thought of as a graph of income inequality rather than absolute poverty.

Here is an example.   Image country A with a median income of $50,000 and an income of the 20th percentile at $20,000.  Now imagine country B where the median income is $30,000 and the 20th percentile income is $15,000.  In this example, the poorest 20th percentile in country A are better off on an absolute basis, but the OECD (and most other poverty numbers) will show country B doing better because the poor are closer to the (much lower) median income.  In an extreme example, if everyone in a country were equally impoverished, the OECD would show that country as doing the best on poverty -- Yes, you read that right.  By this metric, the OECD would show a country where every person made just $10,000 a year as having 0% poverty.

Obviously, what one would really like to do is compare across nations the absolute well-being of the lowest 10th or 20th percentile.  On a purchasing power parity basis, which country's poor has, after transfers and taxes, more money?  Unfortunately, you likely have never ever seen this.  Yes, the data comparison is hard, but it is possible, so one has to wonder if there is some ulterior political motive for never showing this quite obvious analysis.

I tried to do this analysis myself for years (I describe some false starts here) but was unsuccessful until I actually identified a data source that would work, ironically from two folks on the Left (Kevin Drum and John Cassidy) who were using data from the LIS Cross-National Data Center to make comparisons of income inequality.  It turned out the data they were using could do what I wanted.

So now we get to the chart I call the poverty Rorschach test.  It is a comparison of the absolute income, by income percentile and including transfers and taxes, of the US vs. Denmark (the country by Drum's chart that should be the "best" on poverty)

(The date is old, alas, because this kind of cross-country data is only gathered every so often)

This chart shows, on a purchasing power parity basis, that for every single income percentile, all the way to the bottom, an equivalent person in the US has more income than that a similarly situated person in Denmark.  In short, the poor in the US are wealthier than the poor in Denmark.  The only reason Denmark does better than the US in the way the OECD and others measure poverty is that the middle class in the US are a LOT wealthier than the middle class in Denmark.

I call it the Rorschach test because one either sees the US doing a good job, because everyone is better off, or the Danish doing a better job, because everyone is more even.  Proponents of the latter view tend to believe that the size of the economic pie is an exogenous variable, unrelated to the method one chooses to slice it.

I picked the Danish because they were the obvious comparison from Drum's chart, but here is the US vs. all the European countries for which there was data in the survey.  The US is better than all but 3 at the 10th percentile and better than all but one country at the 20th percentile.  And better -- by a huge margin-- for the middle class than any of the countries in Europe.

Update:  One more note on Drum's chart.  As I said above, the exact definition of the OECD numbers is percentage of people with income less than 50% of the country's own median income.  The US has a median household income, per the OECD, 41% higher than Denmark's.   So the US has 9% more people under a number that is 41% higher.   That is hardly a fair or meaningful comparison.

For reasons that are beyond my understanding, I am banned at Mother Jones so I cannot post the comments directly to his article.  If someone wanted to cut and paste this under his or her own name, I wouldn't complain.

I am going to reprise parts of an article I wrote in Forbes several years ago, because I think the conclusions are particularly relevant given the Democrats' discussion of income inequality and the Scandinavian economic model.

When folks like Bernie Sanders say that we have more income inequality than Sweden or Denmark, this is certainly true. By just about any test, such as Gini ratios, we have a much wider range of incomes.

However, we Sanders implies that this greater income equality means the poor are better off in these countries, he is very probably wrong.  Because the data tends to show that while the middle class in the US is richer than the middle class in Denmark, and the rich in the US are richer than the rich in Denmark, the poor in the US are not poorer than those in Denmark.

And isn't this what we really care about?  The absolute well-being of the poor?

I am not a trained economist or economic researcher, but I have looked for a while for a data source to get at this.  I can find Gini ratios all over the place, but how do I compare the absolute well-being of poor in one country to poor in another?

The first clue that I was maybe on the right track was this chart that actually came from a left-wing group trying to promote the idea of reducing income inequality.  The chart is hard to read (the study is no longer online and all I have is a bad screenshot), but it seemed to show that the poor in the US were no worse off than the poor in Denmark and Sweeden

So the data had to be there somewhere.  Finally I found a set of data that seemed to does the trick.  I used data from the LIS Cross-National Data Center.  I cannot vouch for their data quality, but it is the same data set used by several folks on the Left (John Cassidy and Kevin Drum) to highlight inequality issues, so I used the same data source.  I then compared the US to several other countries, looking at the absolute well-being of folks at different income percentile levels.  I have used both exchange rates and purchasing price parity (PPP) for the comparison but my feeling is that PPP is a better approach when we are comparing consumer well-being.

You can click through the Forbes article to see all the comparisons, but I will focus here on Sweden and Denmark since they are very much in the policy-making discussion on income inequality.  As usual, you can click to enlarge:

What does this mean?  If the data is correct, it means that all the way down to at least the 10th percentile poorest people, the poor in the US are as well or better off than the poor in Denmark and Sweden.  And everyone else, including those at the 20th and 25th percentile we would still likely call "poor", are way better off in the US.

All this talk about reducing income inequality by emulating Denmark is thus not about making the poor better off, but just about cutting the rich and middle class down to size.

From San Francisco Board of Education member Sandra Fewer:

“Choice is inherently inequitable”

Because some people make choices that their betters, like Ms. Fewer, do not agree with, government needs the power to override individual decision-making.  We will come back to this, but it turns out the problem here may not be too much choice, but too little.

The entire article is about school choice (defined VERY narrowly as the ability to pick what monopoly government school you want to attend, not the ability to take a voucher and pick any school) leading to a greater racial sorting, rather than mixing, in San Francisco schools.

I have no idea why that would be.  And I still have no idea, because the article presented absolutely no facts.  Oddly, my first guess -- that racial sorting of schools might match racial sorting of neighborhoods since people want to send their kids to a school that is close with kids and parents they know -- is not even mentioned until, in passing, it comes up around the 35th paragraph.

One of the issues that seems to be confusing the author is that people sometimes express preferences they don't act on.  You see that in the very examples in the article.  All the parents interviewed say they want a multi-cultural school, perhaps because they are really passionate about that or perhaps because they know they are supposed to say that, but it is not hard to see that these folks care more about having a school nearby with kids and parents with whom they are culturally comfortable.   I find it a little weird that the city with possibly the most famous ethnic neighborhood in the country (ie Chinatown) has trouble understanding that there are totally non-racist reasons why ethnic groups, particularly those who speak other languages, might voluntarily sort.

One funny thing in the article that I have pointed out in other contexts: in the absence of facts people like to explain bad trends (and it is not even established that this is necessarily a bad trend, just a trend that planners don't like) with whatever they were against before the trend revealed itself.  Teachers don't like the school choice system, so school choice is to blame.  Social activists are concerned with income inequality, so they blame the problem on income inequality.

In fact, a lot of the article pursues the inequality thesis, but the interesting lede, in my mind, was buried way way down in the article:

Though the number of racially isolated schools jumped by 22 percent over three years, according to a district study, to date none are more than 60 percent white. Yet in a broader sense, white children are the most isolated in the city.

Whites are 42 percent of the city’s overall population, 33 percent of the children but only 12 percent of public school students. Why aren’t more white children in public school? Again, money appears to be the key factor: The average white San Franciscan makes three times more money than the average black resident. Whites on average also make 66 percent more money than Latinos, and 44 percent more than Asians. Possibly as a result of this wealth, white children are much more likely to be enrolled in private schools than other racial groups.

So the reason public schools are sorting into minority-majority  schools is that whites have mostly bailed from the school system altogether.   My response to this is not that "choice" has created inequality but that choice hasn't gone far enough.  Don't just give public school kids a choice of which crappy public school they want to attend, but hand them the public money the system was going to spend on their education and let them go anywhere for school, just like rich kids.

The Left spends a lot of time railing against the rich and large corporations.  But in practice, they seem hell-bent on lining the pockets of exactly these groups.  Today the ECB announces a one trillion plus euro government buyback of public and private securities.

Between Japan, the US, and now Europe, the world's central banks are printing money like crazy to inflate securities values around the world -- debt securities directly by buying them but indirectly a lot of the money spills over into stocks as well.  This has been a huge windfall for people whose income mostly comes from capital gains (i.e. rich people) and institutions that have access to bond and equity markets (i.e. large corporations).  You can see the effects in the skyrocketing income inequality numbers over the last 6 years.  On the other end, as a small business person, you sure can't see any difference in my access or cost of capital.  It is still just as impossible to get a cash flow loan as it always was.

Most folks who lament income inequality have the following model in their head:  Wealth comes at a fixed rate from a fountain in the desert, and the rich are the piggy ones who hog all the output of the fountain and won't let anyone else in close to drink.  The more anyone takes from the fountain, the less that is available for everyone else.  And this was probably a pretty good model for considering pre-capitalist societies.  The actual robber barons, before the term was abused to describe successful industrialists of the 19th century, were petty nobles (ie the government of the time) who did absolutely nothing useful except prey on those around them and on those who passed by conducting rudimentary commerce, taking from them by force.  That is not how most people become wealthy today, with the exception of a few beneficiaries of cronyism (e.g. Terry McAuliffe).

These issues are dealt with quite clearly from a surprising source -- this review by an economist of the movie "Elysium".   I don't really get the schtick at the end with the Adam Smith cameo, but the rest is quite good

Postscript:  A while back I was reading the Devil's Candy (terrific book) and thinking about movie-making.  Perhaps it is not surprising that wealthy movie stars think in zero-sum terms.  I suppose much of their success can be thought of as zero-sum.  If I get the part, someone else does not.  If I get an extra point of the gross, that is less for everyone else.  If this movie does well, that probably means less revenue for another movie that came out the same weekend.   Particularly for actors trying to make it or on the rise, movies have a fixed sum of value and they are trying to grab a larger share of that value.

It is interesting that in their own sphere of influence, I never hear about such folks seeking any sort of income redistribution.  Perhaps I have missed it, but I never hear Matt Damon say "hey, take one of my gross points and split it up among all the craft folks on the movie, or share it out with the 20 guys who didn't land my part."

I have seen this fact a number of times and am always amazed when I read it, since poverty figures are never, ever presented with this bit of context

LBJ promised that the war on poverty would be an "investment" that would "return its cost manifold to the entire economy." But the country has invested $20.7 trillion in 2011 dollars over the past 50 years. What does America have to show for its investment? Apparently, almost nothing: The official poverty rate persists with little improvement.

That is in part because the government's poverty figures are misleading. Census defines a family as poor based on income level but doesn't count welfare benefits as a form of income. Thus, government means-tested spending can grow infinitely while the poverty rate remains stagnant.

Rector argues that poor today is very different than poor in  Johnson's day, and that perhaps we might celebrate a bit

Not even government, though, can spend $9,000 per recipient a year and have no impact on living standards. And it shows: Current poverty has little resemblance to poverty 50 years ago. According to a variety of government sources, including census data and surveys by federal agencies, the typical American living below the poverty level in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. His home is larger than the home of the average nonpoor French, German or English man. He has a car, multiple color TVs and a DVD player. More than half the poor have computers and a third have wide, flat-screen TVs. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.

Remember what I presented a while back.  This is what the Left thinks, or wants us to think, American income inequality looks like -- our rich are richer than comparable European welfare states because our poor are poorer.

And this is what income inequality in the US actually looks like -- our rich and middle class are richer, but our poor are not poorer.  A less redistributionist approach floats all boats.  I compared the US to many European welfare states, using the Left's own data source.  Here is an example, but hit the link to see it all.

I have a new column up at Forbes.com, and it addresses an issue that has bothered me for a while, specifically:

Do we really care about income inequality, or do we care about absolute well-being of our citizens?  Because as I will show today, these are not necessarily the same thing.

What has always frustrated me about income inequality arguments is that no one ever seems to compare the actual income numbers of the poor between countries.  Sure, the US is more unequal, and I suppose from this we are supposed to infer that the poor in the US are worse off than in “more equal” countries, but is this so?  Why do we almost never see a comparison across countries of absolute well-being?

I have never been able to find a good data source to do this analysis, though I must admit I probably did not look that hard.  But then Kevin Drum (in a post titled “America is the stingiest rich country in the world”) and John Cassidy in the New Yorker pointed me to something called the LIS database, which has cross-country income and demographic data.  I can't vouch for the data quality, but it has the income distribution data and it struck me as appropriate to respond to Drum and Cassidy with their own data.

In short, Cassidy made the point that the Gini coefficient (a statistical measure of income inequality) was higher in the US than for most other wealthy western countries.  Drum made the further point that the US is "stingy" because we do the least to coercively alter this pattern through forced redistribution.

But all we ever see are Gini's are ratios.  We never, ever see a direct comparison of income levels between countries.  So I did that with the data.  I won't reiterate the whole article here, but here is a sample of the analysis, in this case for Sweden which has one of the lowest Gini ratios of western nations and which Drum ranks as among the least "stingy".  This is the model to which the Left wants us to aspire:

I argue that the purchasing power parity(ppp) numbers are the right way to look at this since we are comparing well-being, and on this basis Sweden may be more equal, but more than 90% of the people in the US are better off.  Sweden does not have a lower Gini because their poor are better off (in fact, if you consider the bottom quartile, the poor are better off in the US).

We are going to see months of obsession by the Left and Obama over income inequality -- but which country would you rather live in, even if you were poor?

Read the whole thing, there are lots of other interesting charts.

I am working on some posts on income inequality, especially as compared between nations.  One thing I have been thinking about is whether the US GINI (a measure of income inequality) is overstated because the US has a tiered retail system that gives lower income people access to lower prices (though for sometimes lower quality goods).  We have Wal-Mart and Family Dollar, discount retail concepts that are rare, and often illegal (due to limitations on retail discounting) in European countries.

On a sort of purchasing power parity basis, I wonder if this has any impact in narrowing the US effective GINI.  Of course, this mitigating factor is somewhat mitigated itself by the fact that a number of urban areas with some of the poorest families (e.g. Washington DC) restrict entry of these low-cost retail establishments.

Bloomberg does a ranking of where one should go if he is unemployed.  Before we go to their ranking criteria, lets think about what criteria I would recommend to someone:

1. Go where the jobs are.  Duh.  Pay particular attention to where there are jobs that match your skills, but in general a rising tide will lift all boats (e.g. you don't just have to be an oil field worker to find opportunity in North Dakota, they are paying a fortune for waitresses and retail clerks to handle the new demand).
2. Look at pay for your skills vs. cost of living.  Manhattan may pay the most for waitresses but living costs there are insane.  You can get good work in Vail, Colorado over the winter but good luck finding a low cost place to live anywhere nearby.
3. Think about tax rates.  You may be exempt now, but hopefully as things get better you will care about income tax rates, and if you are unemployed you certainly are going to care about sales tax rates

OK, so let's look at Bloomberg's ranking criteria.  They also have three:

1. Unemployment rate.  So far so good.  Go where the jobs are.
2. State unemployment payment rates.  Seriously, their criteria is not cost of living or average payments for new workers, but how much one can extract from the government for NOT working?  But OK, this still makes some sense  (though there are a lot of barriers to crossing state lines for a better unemployment deal).
3. Income inequality.  WTF?  What in heavens name does this have to do with unemployed people and how easily they can improve themselves.  Is this psychological -- ie you will feel worse about being unemployed if there are a lot of rich people around?  The average unemployed American is a service worker (if you are a skilled manufacturing worker, say a machine operator, and can't find work, you are in a minority).  Rich people drive demand for service workers.

What state has the highest income inequality?

Hint:  Think Hunger Games

Answer here.  It turns out that this was a trick question.  It was not any of Districts 1 through 50.  It is the Capitol, the District of Columbia.  By far.  Second place New York (district one) is not even close.

I don't have time to comment or peruse the study in depth, but this looks interesting.  From Randal O'Toole:

Harvard economists have proven one of the major theses of American Nightmare, which is that land-use regulation is a major cause of growing income inequality in the United States. By restricting labor mobility, the economists say, such regulation has played a “central role” in income disparities.

When measured on a state-by-state basis, American income inequality declined at a steady rate of 1.8 percent per year from 1880 to 1980. The slowing and reversal of this long-term trend after 1980 is startling. Not by coincidence, the states with the strongest land-use regulations–those on the Pacific Coast and in New England–began such regulation in the 1970s and 1980s.

Forty to 75 percent of the decline in inequality before 1880, the Harvard economists say, was due to migration of workers from low-income states to high-income states. The freedom to easily move faded after 1980 as many of the highest-income states used land-use regulation to make housing unaffordable to low-income workers. Average incomes in those states grew, leading them to congratulate themselves for attracting high-paid workers when what they were really doing is driving out low- and (in California, at least) middle-income workers.

As Virginia Postrel puts it, “the best-educated, most-affluent, most politically influential Americans like th[e] result” of economic segregation, because it “keeps out fat people with bad taste.” Postrel refers to these well-educated people as “elites,” but I simply call them “middle class.”

I have not read the study, but I think the word "proven" in the first sentence likely goes to far.  Economic systems are way too complex to absolutely show one variable among millions causes another.  I am convinced that the way we have regulated the housing market and promoted home ownership has reduced labor mobility.

I have been reading a lot of the data flying around of late about income inequality and mobility.  And it struck me that income mobility may be a large part of what is driving many OWS protesters.

Despite assumptions to the contrary on the Left, wealth is not a zero-sum game.  Steven Jobs got richer by making me better off.  But the one thing that is zero-sum is presence in the top 1%.  When someone joins the club, someone, by operation of basic math, drops out.

That does not mean that the other person who drops out is poorer, it just means that they are no longer as rich relative to their peers.  This same effect works int he top 10% and 20%, etc.

Looking at OWS protectors, they seem to be disproportionately children of the upper middle class or even of the rich.  They have expensive college educations, live in nice homes, and have gobs of stuff (OWS must be the most iPhoned event in history).  My guess is that they are of the upper two quintiles, or at least their parents were.

I am wondering if the problem is not income inequality but too much income mobility.  After all, a third of the top two quartiles in 2001 had dropped into the bottom three in 2007 (while an equal number moved up). Are these the angry proletariat, or are they children of the well-off who are upset their college degree in puppetteering did not automatically keep them up with the Joneses?   Are they, in other words, Philip Rearden?

This chart, from a book by Branko Milanovic via Carpe Diem reinforces a point about income distribution I make all the time -  for all we talk about income distribution in this country, our poorest 20% would be middle class in many countries of the world.  While I would love to see our poor doing even better, it begs the question of whether distribution or absolute prosperity is more important.

Just to give you a feel for reading the chart, the US's lowest ventile, or bottom 5%, have income that would put them in the 68th percentile worldwide.    Our poorest 20% (the first 4 ventiles) would be upper middle class or better in Brazil, China, and India.

When comparing to European social democracies, it turns out that while the US's income distribution is wider, that is almost entirely due to the top end being higher.  The poorest 10% make about the same as the poorest 10% in Europe, and I would argue that this analysis (from a leftish think tank) actually underestimates a quality of life advantage for American poor, who come out higher even than the middle class in Europe on things like living space and appliance ownership.

Perhaps more importantly than income inequality, income mobility remains high in this country. More on income inequality concerns here.

My new column is up at Forbes, and is on the Democratic push to raise the prices of Chinese goods (either through currency policy or tariffs).  This has to be one of the craziest campaign themes of all time -- please, let us raise your prices.

We should be thrilled that the Chinese government and its people see fit to spend their own money to subsidize lower prices for American businesses and consumers.  Last week, President Obama put substantial pressure on the Chinese prime minister to revalue Chinese currency, a revaluation that would have the effect of raising prices of all Chinese goods in the United States.  What possible sense does such a move make, particularly in a recession?

Christian Broda and John Romalis, a pair of University of Chicago economists, have been doing work on income distribution.  A couple of years ago they published a paper that showed how our measures of income inequality may be exaggerated because the metrics assume that both rich and poor experience the same rate of inflation.  In fact, the researches found, over the last decade or so the poor have seen much lower rates of inflation than the rich, in large part due to goods of the type imported by China and sold at Wal-Mart (another institution Democrats like to demagogue against).

Sadly, prices for low-income Americans could be even lower were it not for past protectionist measures.  When one looks at the goods that have the highest import tariffs, one sees the very same goods that typically make up a disproportionate share of the poor's purchases:  Tobacco, clothing, tires, auto parts, fruits and vegetables.  All of these have their prices raised 20-350 percent by import tariffs.

This means that at the same time Democrats have again raised issues of rising income inequality, they are trying to stop some of the most powerful forces at work mitigating these income differences.  There is no question that if Democrats are successful in changing China's currency policy and/or imposing new tariffs (taxes) on Chinese goods, prices will rise for all Americans, but particularly so for the lower income brackets that are supposedly the Democrats' constituency.

The most frustrating part of this whole effort is that it is aimed at a myth: the declining American manufacturing base.  In fact, American manufacturing output continues to hit new all-time highs "” despite the current recession, American manufacturing output today is still 40% higher than it was in 1990.

First, I have not doubt that income inequality--  in whatever way the folks who care about such things measure it -- has increased.  The analysis that has been making the rounds of liberal blogs show the rich "capturing a higher share" of total output.  The very terminology here reveals their faulty core assumption, treating wealth as a zero-sum that must be grabbed and fought for and can only be gained to someone else's disadvantage.  They always write about incomes as if GDP is a sort of natural fountain in the desert, and the piggy rich crowd in too close to get more than their fair share of water from the fountain.

This is silly.  Wealth is created from the minds of human beings, and there are human minds that create far more wealth than others, and are able to keep some of that wealth for themselves as a reward.  I say "some" because even the richest people tend to keep only a small percentage of the wealth they create.  Sum up the benefits we all get from our iPods and iPhones and iPads, and the total number dwarfs what Apple shareholders have made from these devices.

Anyway, the actual point of this post was to revisit the notion that there are different inflation rates for the rich and poor (via Carpe Diem) that may be skewing income inequality numbers

Using scanner data on household consumption of non-durable goods between 1994 and 2005, we document that the relative prices of low-quality products that are consumed disproportionately by low-income households were falling over this period. This implies that non-durable inflation for the 10th percentile of the income distribution has only been 4.3 percent between 1994 and 2005 (0.4 percent per annum), while the non-durable inflation for the 90th percentile has been 11.9 percent (1.0 percent annually), and 13.4 percent (1.2 percent annually) for the richest 5 percent of households in the sample (see chart above)."...

"A large literature has focused on the rising inequality observed in official statistics, but have mostly abstracted from the fact that these official measures are based on a single price index for a representative consumer. This assumption is not crucial in a world with a stationary relative price distribution or where an identical basket of goods is consumed by different income groups. However, using household data on non-durable consumption, we document that the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period.

This fact implies that measured against the prices of products that poorer consumers actually buy, their "real" incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994"“2005 is the result of using the same price index for non-durable goods across different income groups. Moreover, given that the increase in price dispersion does not seem to be specific to our sample or time period, the overstatement in the increases in inequality from official measures can be even more significant, changing our view of how progress has been distributed in recent decades substantially."

The price of a night at the Four Seasons has gone up more than the price of a shirt at Wal-Mart.

Income inequality was the topic de jour during much of the election.   The left argued that median wages had stagnated, and tried very hard to date this stagnation from 1980 so that it could be blamed on Ronald Reagan.   Others have argued that the the whole median family wage stagnation thing was overblown, as 1) families had changed alot over 30 years;  2) Compensation had changed (such that wages were less of total compensation with the rise in value of health care plans); and 3) individuals matter, not quartiles, and individuals were doing well and still had mobility between income bands.

My sense is that the income inequality numbers have always been fraught with problems.  For example, rich people have huge incentives to manage the income numbers on their tax returns, so trying to draw conclusions about top earners from their tax returns is a bit dangerous.  Just the shift from C to S corps and LLC's over the last 30 years has fundamentally shifted what income high net worth entrepreneurs show on their tax returns.

All that being said, I think it is clear the income gap has grown, and it really started growing in this country around 1970.  Whether this matters is a different story - its clear from comparing to European countries that while our gap has spread vs. their income gaps, its almost 100% because our rich are richer than their rich.  Our lowest quintile is pretty comparable (here).  If that is the case, its an interesting question to see if this bothers folks.

Anyway, I think there still is work to be done to fully explain and rationalize these income inequality numbers.  But I still find it hard to believe they are not somehow related to immigration.  After all, dropping 20 million new immigrants, many of them quite poor, into the bottom quintile of US workers over the last 20 years certainly tends to pull down medians.  Just compare these two charts, with income inequality on the top and the percentage of residents in any given year that are foreign-born (legal or illegal immigrants).  I fitted the two charts together manually to get the time scales to line up, I don't have time to replot them together as I should.  Click to enlarge.

Its hard to see, by the way, how the top chart really reflects a trend starting with Reagan (as much as the left so desperately wants it to be true).  Something happened around 1970 to reverse the curve.  I have offered one possible cause.  I do so reluctantly, because I don't want to be misunderstood -- I am a big supporter of open immigration and would hate to give the anti-immigration folks any ammunition.

Anyway, you are welcome to discuss.  It is something I am thinking about but don't have an answer for.

Postscript: This is the chart comparing the top and bottom US deciles to countries in Europe on an absolute dollar basis. The conclusion I draw is that our poorest are in about the same shape as the poorest in Europe, but our rich are richer than in Europe.  Given this, does our income inequality still worry you?

The reason the analysis is done this funny way is that what one usually sees is some country like Chad with the poor at 80% of the median income.  But 80% of almost nothing is still almost nothing.  So this chart converts everyone to apples and apples - almost.  I still think it underestimates how well off the US poor are, maybe some sort of exchange rate vs. PPP problem.

I am seeing an increasing number of articles of late about differential inflation rates, and how changes in income inequality may be overstated by using a single inflation rate for rich and poor.  The argument goes that lower income folks who spend a relatively high share of income on goods that Wal-Mart and China have made cheap are experiencing a lower inflation rate than wealthier folks who have seen huge price increases at their favorite Four Seasons resort.  Mark Perry has two interesting articles along these lines.

Tyler Cowen links to Lane Kenworthy Saying:

]Poverty comparisons across affluent nations typically use a "relative"
measure of poverty. For each country the poverty line "” the amount of
income below which a household is defined as poor "” is set at 50%
(sometimes 60%) of that country's median income. In a country with a
high median, such as the United States, the poverty line thus will be
comparatively high, making a high poverty rate more likely...

There is actually at least one study out there by a left-leaning think tank that sort of addresses this (though not exactly).  The study first shows US and European income of the bottom 10 percentile vs. the median income of that country.  Not surprisingly, since US median income is so high, the bottom 10 percentile have a low share.  BUT, they then do the numbers a second, time, showing the bottom 10 percentile income in each country all compared to US median income, ie all with the same denominator,  here, the US poor do at least as well as most European countries.  The comparison shows clearly that while the US has more income inequality, it is not because our poor are poorer but because our rich and middle class are richer.   Here is that second study:

The Heritage Foundation has an interesting study out on the population that lives below the poverty line.  While we typically get lots of headlines like "A million more people in poverty,"  the real headline should be "Poverty ain't what it used to be."  Create a mental image for yourself about poverty then read the first part of the article.

I won't repeat the studies points -- you can read them at the link or you have probably seen the study already linked around the blogosphere (e.g. Captains Quarters, Cato-at-Liberty, Reason, Maggie's Farm).  Reading the descriptions, its clear that most of our visual images and assumptions about US "poverty" don't line up well with this list.   This is by design.  Progressives who want more transfer payments and more government interventionism work hard to create a stark mental image of poverty through anecdotes, and then try to apply that mental image to a much larger population based on a very different definition of poverty than in this mental image. 

However, this approach may be set to backfire.  By defining poverty broadly to try to pump up the numbers, they are at risk of people losing sympathy for the poor.  I can see the progressive reaction now -- they are going to say (correctly) that buried in these numbers are a hard core of people who are really destitute.  And they are correct.  But they only have themselves to blame for burying these folks in a larger group whose lives don't match our mental picture of poverty.  And the poverty numbers aren't the only place where this approach is taken. 

I am sure you have heard the commercials that say something like one in six kids in America are hungry.  It's a crock.  There are at most perhaps 2-3 million people in this country who are really destitute.  The Census department found that only 6% of the people below the poverty line, about 2 million people, reported they sometimes did not have enough food to eat.  Sure, that sucks.  Which is why I volunteer with my kids at the local food bank.  But it's way, way short of the numbers activists try to use to justify huge new government programs and transfers.

Other thoughts

One issue not discussed, but covered in other studies, is the transience of people in the bottom quintile of income.  Most of us imagine the same people in poverty survey after survey, and again that is probably true for the hard core of 2-3 million.  But many of the rest move out of poverty over time.  In particular, we have had a huge influx of immigrants (legal and illegal) over the last several decades.  These folks are all counted in the poverty numbers.  Many immigrants arrive below the poverty line, and then work their way out of it. 

In a related post, Brad DeLong looks at what life was like even for the well off in 1900, and one can easily come to the conclusion that being poor today might be better than well off in 1900.  I made a similar point in this post, when I compared the life of the very rich in 1850 to the middle class today.  All of this is empirical proof that wealth is not zero-sum, as assumed by progressives, but is created and expends.  My post of the zero-sum wealth fallacy is here.

I've made the point for a long time that our poor are better off than the middle class in most countries of the world.  This living space comparison is an example - our poor typically have more living space in their homes than the middle class in Europe, or the well-to-do in many other countries.  But there is always that issue of income inequality that is raised, to which I typically answer "so what?"  If the poor are better off in the US, does it matter if the rich are really, really better off?  Note sometime the language that is always used in income inequality discussions.  You will hear folks talking about the "share of total income" as if income is a spring bubbling up in the desert, spewing a fixed amount of wealth, and the rich are the piggy folks up front getting more than their fair share of this limited resource. 

Leftish studies love to show how the US economic model is so much more heartless than those wonderful Europeans.   Below is a typical chart they use, and it will bring us full circle to our original point about measuring poverty.

Wow, those heartless damn Americans!  Letting those children suffer.  But wait, we talked earlier about definitions of poverty - how do they define poverty here?  It turns out that poverty is defined as income 50% or less of the median income in that country.  Yes, you heard that right -- the standard for poverty changes country to country.  So the US has the worst results here because in large part, since it has the highest median income of any country in this survey, it has been given the highest poverty line.  Of COURSE we will have higher poverty numbers if you give us a higher poverty bar.  The honest way to do this study would be to set an absolute poverty line and apply it to each country on a purchasing power parity basis.  But of course, the progressives would not like the results of such an honest study.

BUT, someone in this study made a mistake -- they should lose their socialist decoder card for this.  Because in a fit of honesty, they actually restated one of their charts on a relatively fair basis.  Here is the original income equality chart:

You get the point, the US sucks as always -- our poor are the poorest.  But are they?  Again, the standard in each line is the median income of that country, so it is a changing standard in each case.  But what if we restated it all to a common dollar amount.  This is where the progressives fell into a fit of honesty.  They restated this chart so that every bar is a percentage of the US median income.

Now we see the real story - except for Norway and Switzerland, our poorest folks are about on par with those in other western countries, and this is WITHOUT the crushing burden of welfare state regulation and taxation.  Further, the poor in the US are much more mobile than those in other country -- the ranks of our poor will have turned over much more than any of these other countries in 10 years.  Finally, my bet is that if you did this chart without recent immigrants, the US poor would best most every country in Europe in terms of income -- US has a lot of immigration and it is disproportionately poor vs. immigration into other European countries (note that most poverty numbers include illegal immigrants, but most official immigration numbers do not include illegal immigrants).

So, if our poor are doing just as well, then I leave it as an exercise to give any rational reason why the fact that our rich are doing much better matters one damn bit.