Category Archives: income distribution-wealth-poverty

Who needs the HEEs?

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A reader pointed me to this from Charles Murray.

I’ve written a thought experiment for ongoing work. What happens if everyone with IQs below 110 disappears? Civilization collapses. If everyone with IQs of 110+ disappears except some engineers? Some deterioration here and there, but civilization continues.

There is a lot of cultural knowledge stored in the minds of farmers, construction workers, and others who work with things. There is also some cultural knowledge that is stored in the minds of the highly-educated elites. Murray suggests, perhaps correctly, that the cultural knowledge of the HEEs is in some sense less valuable than that of those who work with things. Why do HEEs take such a large share of income? Some possibilities.

1. The marginal revolution, which solved the diamonds-water paradox, solves this one.

2. The HEEs control the allocation of resources. For example, in a recent stimulus proposal,

Under the GOP plan, businesses could receive a second PPP loan, and schools and colleges would be granted more than $100 billion in aid, while $31 billion would go toward vaccine development and distribution.

These “needy” educational institutions are still throwing lots of money at “diversity, equity, and inclusion.” One local school district paid Ibrahim X. Kendi $20,000 to give a talk. Another advertised for an “anti-racism” consultant to be paid by big bucks. And to my knowledge, the elite colleges have not let go of a single administrator.

If we had only a profit-seeking sector, a lot of HEEs might not have such high-paying jobs.

What is the GDP of Jeff Bezos?

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1. A comment on a recent post led me to an article by Mark Muro and others.

Biden’s winning base in 477 counties encompasses fully 70% of America’s economic activity, while Trump’s losing base of 2,497 counties represents just 29% of the economy.

Suppose that each candidate had 50 votes. But the 50 voters for Biden produced $70 of output and the 50 voters for Trump produced $30 of output. The per capita output of Biden voters is much higher.

I am not sure how the Commerce Department computes GDP at a county level. Does Seattle produce a lot of output based on the sales revenue of Microsoft and Amazon? If Amazon moved its headquarters out of Seattle, would Seattle’s GDP suddenly plummet? If Jeff Bezos moved to a rural Texas county, would that county’s GDP soar?

The Commerce data show that a lot of GDP is created in the District of Columbia and Fairfax County, Virginia. Do we believe that a lot of “production” is coming from the government workers in this area?

I find it credible that, on average, Biden voters have significantly higher incomes than Trump voters. And if you assume that people’s incomes are highly correlated with the value of what they produce, then it becomes likely that, on average, Biden voters produce output that is more highly valued in today’s economy.

But I think that it is unfortunate that we report a statistic like GDP as if it has a precision of several significant figures, and that we try to decompose trends in its second difference (to get the alleged change in trend productivity growth) or to decompose the location of production down to the county level. The concept of GDP is too crude to support such fine-grained breakdowns.

2. A reader sent me a link to a paper by Gavin Wright that argues that the de-industrialization of the South broke up a biracial political coalition that was dedicated to trade protection of the Southern textile industry. I am not sure about the political analysis, but there is a somewhat valid economic point that taking away trade protection from that industry caused widespread damage to people who had worked in that industry.

But consider the counterfactual: what if we had continued with restrictions on textile imports? Would jobs have been saved, or would automation have been accelerated? Would households have maintained a high level of demand for Southern textiles, or would they have substituted away to other types of clothing or other forms of consumption? How much would income growth been retarded in textile-exporting countries, and what would have been the consequences?

Wonk, not woke

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Glenn Hubbard writes,

Two areas of emphasis should guide the policy discussion over preparation: skill development and redevelopment using community colleges, and enhanced training and skill development within firms. Public-policy changes can advance both.

Hubbard believes that a central policy challenge is to permit the creative part of creative destruction while mitigating the effects of destruction. His essay includes a reasonable set of proposals aimed at these goals.

Positional goods and inequality

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A commenter refers to John Nye’s 2002 essay. Nye writes that as economic growth improves food choices for everyone,

For those who only care about getting a good meal, this is a blessing not a tragedy. But those with expectations of going to the great restaurants as their incomes rise will be frustrated by the fact that the best remain agonizingly out of reach unless they grow rich much faster than the average. So only the wealthiest of the wealthy can have these goods and must pay a growing premium to do so.

Nye’s point is that the price of positional goods will go up faster than people’s incomes. Think of Harvard as a positional good. The commenter’s claim is that the key positional goods are indicators of cultural supremacy. This would imply that the conflict between old-fashioned liberal values and the new social justice values is over positional goods and thus will be very intense.

Income, wealth, and redistribution

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1. Russ Roberts writes,

Is $100 billion all that stands between ending homelessness and giving everyone in America clean water? If that’s true, what a brutal indictment of our government’s ability to solve problems. In 2019, according to the Congressional Budget Office, the federal government spent $4.4 trillion. If only taxes had been set high enough to raise $4.5 trillion! Then we could have cured homelessness and provided everyone with clean water.

He is reacting to a tweet from Bernie Sanders saying that if we taxed $100 billion from Bill Gates we could do all these wonderful things. Roberts is saying that it is not the lack of $100 billion that keeps the government from ending homelessness and giving everyone in America safe drinking water. Apparently, government is unable to assign a high priority to solving those problems and/or the problems are too complex to be solved by throwing money at them.

The Roberts essay deals with a whole list of economic and philosophical concerns related to the issue of wealth taxation. But I think that the challenge is to change the frame of the debate from the intention heuristic to consequentialism.

The intention heuristic says that the intention of wealth taxation is to increase the fairness of society, and that settles the matter. Lately, I have come to think that arguing against the intention heuristic is like arguing against a brick wall.

2. In a debate with Donald Boudreaux, Branko Milanovic writes,

The figure below shows the share of the middle four deciles in total market income. (Market income includes all labor and property incomes, plus income from own businesses.) . . . it is 3 percentage points lower than in 1990.

The figure shows the share dropping from 32 percent in 1990 to 29 percent in 2020. Milanovic cleverly plots it on an axis where the minimum is 28 and the maximum is 36, which makes it look like a dramatic decline. If the range went from 0 to 100, the drop would barely show up.

Genes and traits

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K. Paige Harden writes,

Overall, twin research suggests that, in your alternative life, you might not have gotten divorced, you might have made more money, you might be more extraverted or organized—but you are unlikely to be substantially different in your cognitive ability, education, or mental disease.

Pointer from Tyler Cowen. Note that the paper is not freely accessible. Another excerpt:

Within European-ancestry samples, however, some polygenic scores now rival the predictive power of traditional variables used in social science research. This was powerfully demonstrated by a GWAS of educational attainment (defined as years of schooling) conducted among 1.1 million people. In an independent sample of European-ancestry participants from the National Longitudinal Study of Adolescent Health (Add Health), a polygenic score of education-associated genetic variants was as strongly associated with educational attainment as family income

Possibly related: Andrew Sullivan on Freddy deBoer’s new book.

Milanovic on capitalism and its effects

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Fascinating conversation between Russ Roberts and Branko Milanovic. Milanovic on assortive mating:

I looked at the cohorts of young, first, American males, men between the ages of 20 and 35 in 1970. And I looked at people who were in the top wage group. They were as likely to marry another woman from a top wage group as to marry somebody from the bottom. So the ratio is one to one.

Well, nowadays, for males, it’s three to one. So, they are three times as likely to marry a woman who is also from the same top income group as a woman who is from the bottom. But, for women, it’s even more dramatic. The change is five to one. It used to be one to one and it’s now five to one.

On who attends top universities:

percentage of people who go to the top schools and where the parents come from, of course, you have–I think actually I mentioned that in my book; that’s not my own number; I actually took it from somebody else–is the ratio is 60 to 1 between the top 1% and the middle class.

But some of the more interesting discussion comes later in the podcast. Especially around minute 80 when they talk about how when many things can be outsourced the role of the family changes, and this reduces family formation.

The Heckman interview

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I assume you have seen the interview of James Heckman by Gonzalo Schwarz. You can tell that Heckman is not a fan of Piketty and Saez.

In truth, the evidence based on the IRS data is deeply flawed and has been incorrectly analyzed. Take “The Opportunity Atlas” promoted by the New York Times. It claims that “zip code is destiny.” Careful statistical analysis of the data shows otherwise. The same can be said of the academics who write about the growth of the Top 1%.

Heckman is known for his studies of education. A lot of support for the Null Hypothesis, with the exception of pre-school for impoverished children. But this may be his bottom line:

The main barriers to developing effective policies for income and social mobility is fear of honest engagement in the changes in the American family and the consequences it has wrought. . .Dysfunctional families produce dysfunctional children. Schools can only partially compensate for the damage done to the children by dysfunctional families.

A book review

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AEI’s Michael Strain weighed into the debate over whether living standards stagnated in recent decades with The American Dream is Not Dead, which I reviewed. In the end, I wrote

In the 1950s, the ideal for young Americans was to marry, have children, and move to a house in the suburbs. Today, marriage rates are low, fewer children grow up with married parents, and many young people are urban renters.

The decline of the Fifties Dream raises questions that go beyond Strain’s statistical analysis. Has the Fifties Dream lost its appeal? Or has it become harder to obtain, and if so, what are the cultural or economic impediments that are standing in the way?

A coder and some barbers

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Russ Roberts talks with Ed Leamer about inequality, among other things. It’s a great conversation. One of my favorite parts is when they mull on a possible scenario in which 1 person is a coder and 99 people are barbers. It simply is not possible to re-train the barbers to be productive as coders. Supply and demand being what they are, the coder makes a lot more money than the barbers.

Another determinant of inequality is that the barber’s capital equipment–the electric shaver and the chair–can only serve one customer at a time. The coder’s capital equipment–the server and the Internet connection–can reach the whole world. I think in the talk they use the metaphor of the forklift vs. the microphone.

Highly recommended, although not on the topics that I thought earned Leamer the Nobel Prize.