Coyote Blog

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.

The average federal worker now makes over twice the wages and benefits of the average private worker. 

Maybe they have some sort of incentive plan, receiving a percentage of the value they have personally destroyed.  Because sure as hell none of them are producing anything.  If the Democrats want to fight income inequality and take on excessive compensation that is set without oversight, I might suggest beginning with the federal government. 

Postscript: TJIC has pointed out that he and I, though we tend to agree, often express ourselves differently.  Here is my prediction of TJIC's response to this article:  "We going to need a lot more rope."  How's that, Travis?

Note: Lots of updates at the bottom

We have all heard that the US is backward vs. our much more enlightened bretheren in Europe on income inequality.  The general argument is that US is somehow a worse place because out income inequality is higher than in most European countries.

My reaction has always been, so what?  Why should I care about how well I am doing vs. the richest folks.  Shouldn't I care more how I am doing on an absolute scale?  And in fact, on an absolute scale, our poor are doing better than everyone else's poor, and better than many nation's middle classes.  I thought this analysis of poverty was interesting:  It is the number of people (per million) in a county living on less than $11 per day  (lower number and rank is better)

Per Capita Population Under $11 per Day

So, nations of Europe, how is that welfare state working out for you?  Socialist paradise Norway is 20 times worse!  How long will your poor be happy being told that, well, yes, the poor in the US are better off than you are, but you should feel better, because our rich in Europe are doing much worse than the rich in the US.

PS- Stats from NationMaster.com, a database of country by country statistics of all sorts.  Cool site, which also has a state by state counterpart.

Update:  Now that I have had time to poke around, I cannot find this data in the sources quoted, so it must be considered potentially suspect.  The sources quoted actually try to make the point that US lags Europe in fighting poverty, so the conclusion of the chart above is not even consistent with the sources.  (my guess is the data comes from the Luxemburg Income Study). However, it is interesting that this source material makes the same mistake I am trying to correct for here:  That is, it defines poverty as a percentage of the median income in the particular country, rather than an absolute value, such that a country can have poor who are better off but still fail on the metric.  You can see that here, where US has high poverty as on a "percent of median income" definition, but since we have the highest incomes in the world, it effectively gives the US the highest poverty bar to clear.

Here is what I am looking for:  Ideally, I would like to find a comparison of the median income say of the bottom quintile of each country, compared in absolute dollars on a PPP basis across countries.  I would like to see the number both before and after government transfer payments.  Europe, in their welfare economies, do better on poverty metrics when government transfer payments are included (and I am almost sure the chart above is before government transfer payments).  However, I would argue that for the long term health of the economy, you would like to see how the poor are doing before these payments.  Ultimately, and I will borrow a bit of environmentalist language here, this is going to be the most sustainable economy, where the poor gain wealth on their own, not from the welfare system.  In fact, the welfare state, and this was my original point, actually suppresses self-earned income of much of the poor by eliminating the incentive to work.  That is why I still think the chart at the top may be correct.

Update #2:  One other difference between the US and European nations is that we are much more open on immigration (yes, it may be illegal, but we pretty much still allow it).  These immigrants, legal or not, are counted in our economic and poverty stats.  If we assume there are about 15 million mostly poor illegal immigrants, plus millions of other quasi-legal immigrants, plus millions more who got amnesty in the 1980's, these immigrants add at least a fast five percentage points to any poverty metric the US is measured on. 

I have been surfing tonight, and it seems there are a ton of studies showing that US poverty is growing for some reason.  Duh.  Tens of millions of absolutely poor people, mainly from south of the border, have come to the US over the last several decades.  It is no secret all these immigrants are poor -- that is why they are coming here, to find something better for themselves.  Of course we have had a surge in poverty - we have been importing it like crazy!  I happen to be pro-immigration, but I am fed up with these studies that try to pin the blame on growing poverty in the US on government transfer payment policy.  It's the immigration, stupid!  Several studies particularly lament the fact that childhood poverty is rising in the US.  Can anyone think of a way this might be correlated to tens of millions of strongly Catholic Mexican immigrants, each and every one committed to large families?

Consider this situation:  You are a member of a four-person rock band.  Each member of the band has contributed somewhat equally over time, and band revenues have always been split evenly, 25% to each member, though its total earnings on an absolute basis have been small  However, the band has suddenly become the next U2.  It is likely the band will make tens of millions of dollars over the coming years.  Just as this is happening, the other three band members come to you and threaten to make you Pete Best.  They will allow you to stay with the band, but only if you accept a reduction in your share of the earnings to 10%.  You perceive this move as unfair given your equal contribution to the band to date.  However, even 10% of the band's new fortunes would be a LOT of money (and fame) and you honestly believe that even a 10% share is better than you could do with any other band or occupation.  What do you do -- take 10% or quit?  (assume you want to be famous and you have no legal recourse against the other members)

In an analytical vacuum, one might predict that any rational person would take the deal -- while it is less than might be hoped, it is certainly a better deal than one could get any place else.  A pure profit maximizing decision would be to stay with the band (and watch you back at night for more knives).

However, numerous studies and surveys have shown that in fact, a  large number of people would choose to give up the money rather than feel cheated.  Just look at the number of professional football players who have held out for a whole season to try to get a better contract.  In every case, the present value of the salary lost for that season is far greater than any increase in salary in the future from taking the tough stand.  But these players would rather be paid nothing than feel underpaid.

TJIC had a pointer to an interesting article on game theory.  In it, the author talks about this behavior in the context of a game that divides up pies, and summarizes:

Apparently, making money is not the players' only concern; participants have a sense of pride and care about how they are treated by others, economists have concluded. Thus, offers perceived to be "unfair" are rejected out of a desire for revenge.

In fact, revenge and/or envy has been tested in a number of games, where scientists gave players trailing in the game the ability to spend money solely to take away money from the leading players  (e.g. you can spend your last $10 to make $10 of your opponents money disappear).  There is something in human behavior that wants to bring down the winners, even when doing so makes one worse off himself.  (Question to Red Sox fans:  would you accept a lifetime bad of the Sox from the World Series if you were guaranteed the Yankees would never make the World Series either?)

I guess I don't really have a problem with such behavior in consensual transactions (though I personally work pretty hard to purge my ego from business decisions).  My problem comes when people motivated in this way vote in our society that has proven to have inadequate protections of the minority, at least when we refer to the minority of rich and successful. 

In Closing of the American Mind,  Allan Bloom tells the story of a question he used to ask his classes vis a vis income inequality.  He would ask something like "Would you vote for a law that reduced income inequality but at the same time reduced total wealth, such that the poor might get a larger slice of a smaller pie, and might even be worse off on an absolute basis afterwards."  Apparently, he would get solid majorities for "yes" and in fact I have been in classes where this same question was asked and at least 40% said "yes."  This is a situation a bit similar to the one above, but without it being personal.  In other words, no one has explicitly hosed you, they have just done better.

I hope you can see the parallel.  Large numbers of people are willing to pay (or equivalently make less money) to reduce the earnings of people who are wealthy and/or successful. They are even  more willing to do so if they think that they have been treated unfairly.  Which is why you see so many politicians and media outlets working so hard right now to convince the middle class that current income distribution patterns are somehow "unfair."  Politicians are pandering to this base human emotion, the desire to spitefully bring someone else down (in the case of income equality laws, someone the person has likely never even met or transacted with) even if it makes oneself worse off.   

I can understand why Pete Best might harbor a grudge against the Beatles.  But why do so many Americans harbor a grudge against people they have never met, just because they make more money?

I have tried many times to combat the absurdity of zero-sum economic thinking.  Unfortunately, Democrats seem to be testing income-inequality messages as their lead horse to ride in the upcoming elections, so we are going to hear a lot more of it.  It bothers me even more when smart liberals like Kevin Drum buy into the zero sum thinking.  To his credit, he doesn't totally buy into this mess from Paul Krugman:

The concern [is] that, through mechanisms we're not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes. The worry is about the distribution of growth, but the suspicion is that the distribution is being warped by the sheer level of inequality.

But then he goes onto say nearly the same thing:

I'm not sure this gets the mechanism quite right, though.  There are two basic ways that unequal growth can happen:

1. The rich suck up vast amounts of income growth, and this leaves very little money for the middle class. Thus, wages for the middle class are stagnant or, at best, rising slowly.

2. Middle class wages are kept stagnant, and this frees up vast amounts of money from economic growth. The money has to go somewhere, and it goes to the rich.

Now, obviously, it doesn't have to be one or the other. It could be both. But I suspect there's a lot more analytic power in #2 than in #1.

And finally, this stupendously ridiculous statement:

After all, the income from economic growth has to go somewhere, and if it's not going to the middle class it's going to end up going to the rich. Where else can it go?

What's bizarre about all of these statements is it treats wealth, and in this case specifically income growth, like a phenomena that is independent of individuals and their actions.  They treat income growth like it is a natural spring bubbling up from the ground, and a few piggy people have staked out places by the well and take all the water before the rest of us can get any.

Wealth and income growth comes from individual action.  Most rich people are getting more rich because they are intelligently investing and taking risks with their capital, applying the output of their mind to create new wealth.  There is no (none, zero, 0) economic correlation that says that if the rich get really rich, then there is less left over for the poor. 

Here is his solution:

Now, there's certainly no reason to reduce marginal tax rates on the hyper rich in an effort to make inequality even worse than it otherwise would be. But as unjustified as this is, tax cuts aren't the main issue. Median wages are. Focus government policy like a laser on improving the wages of the middle class, and reductions in income inequality will follow.

And how the hell does he suggest the government do that?  Seriously.  Can anyone tell me one single thing the government can do to improve middle class wages that does not involve tax policy?  Well, we can back into his solution from this paragraph where he lists things the government can do that are bad for the middle class:

Appoint members to the Federal Reserve who are obsessed with inflation and act to cool down the economy at the least sign that average hourly wages are rising. Make it harder to form unions in new industries, thus reducing the bargaining power of the working class. Support free trade agreements that put downward wage pressure on low-income workers. Support tax and deregulation policies that make middle class jobs less secure.

So presumably, his solution to increasing middle class wages is: 1) allow inflation to run at a higher rate 2) encourage unionization  3) adopt protectionist measures for uncompetitive industries and stifle free trade  4) increase regulation on businesses and reverse deregulation in industries (presumably like airlines and telecoms).

I'm no Julian Simon, but if we could structure a bet as to whether these policies would help real middle class wages, I would sure take the opposite side from Mr. Drum.

Here is my theory for what is going on, if you even accept that middle class income stagnation is real and not a symptom of our difficulty measuring the benefit of improving products and technologies.  I think much like technological advances from time to time in the past have caused restructurings in the labor market for blue collar workers, we are going through the same thing, really for the first time, with white collar middle class workers.  Technology and globalization offer all sorts of opportunities for companies, and the result is a real restructuring of how many types of white collar workers are used.  Until this restructuring is complete, wages may stagnate, since any wage pressure will just lead to companies implementing changes from their backlog of streamlining opportunities.

At some point we will work through this, and wages will rise again.  If anything, I think the government does damage by slowing this process down.  Note that nearly every one of Drum's suggestions would slow or stop this restructuring.  This is one of the ironies of progressives -- despite their name, what they don't like about capitalism is the change.   They want safety and predictability from the inherently unpredictable.  So protectionism slows global outsourcing, and also reduces the pressure for cost improvement.  Regulation tends to lock in current practices and make changes harder.  Ditto strong unions.

One of the reasons I like some of what Bill Clinton did was that in the early 90's, he faced tremendous pressure to take many of these same steps, trying to halt the economic restructuring that was occurring due to competition from Asia.  He didn't have the government step in, though, and he supported free trade, and the country thrived.  His fellow Democrats (including his wife) should learn from that.

update:  A real economist (unlike me and probably Paul Krugman) discusses inequality and unionization

update #2:  More real economists, this time the awsome guys at Cafe Hayek, pile on.

Several people say that I have missed the point in my post here - that the issue is
with mobility, particularly in multiple generations.   They argue that
the rich of the next generation are likely to be the kids of the rich
of this generation, that success now depends on education and
connections that only the wealthiest can buy for their kids.   

A couple of thoughts on this.  First, the Times's own data (plus
many other studies) doesn't bear this out, particularly with new
immigrants.  Thomas Sowell addresses this in more depth here and here,
and suggests that the explanation may lie more in values and
aspirations than in purchased stuff.  Marginal Revolution, for example,
had this thoroughly depressing story featuring a study by Harvard economist Roland Fryer on the social pressures in many African-American and Hispanic neighborhoods to under-perform in school.

My other thought on this is that to the extent social mobility is
slowing in this country, our public education system is a major
culprit.  Forget for a moment about quality issues.  Schools have
increasingly emphasized self-esteem over achievement and competition.
Standards are lowered, and the value of exceeding standards or
improving performance is downplayed.  Without other influences,
students will walk out of public schools with a value system vis a vis
achievement and competition and performance that leaves them totally
unprepared for the real world.  I am reminded of one of Bill Gates' pieces of advice to graduates: 

Rule 8: Your school may have done away with winners and losers, but life HAS
NOT. In some schools they have abolished failing grades and they'll give you as
MANY TIMES as you want to get the right answer. This doesn't bear the slightest
resemblance to ANYTHING in real life.

Kids with parents who have achieved in some way in the world are likely
to overcome this by the example and exhortations of their parents.  But
what happens to kids without this example?  Or kids (lacking voucher
programs) who can't afford to escape the public school system cult of
mediocrity for high-achievement private schools or home schooling?

Ironically, the very people who bemoan income inequality and lack of
mobility are the very same people who have gutted the public education
system.  These are the people who deal with inequality by flattening
down the peaks, which is exactly what they have done in schools,
eliminating valedictorians and substituting social promotions.