A Stitch in Haste

Referring my readers to Supreme Court cases, law review articles or Congressional Research Service reports may be a futile attempt at "tough love." But referring them to economics articles? That's just plain blogospheric masochism.

Having said that:

It is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural — the mean annual income of persons born in a given country, regardless of where that person now resides.

If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare.
...
The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world.

That is from the abstract of an exciting new paper from the Center for Global Development. The authors are attempting to craft a new metric, "income per natural," that would adjust traditional measures of income and welfare, most notable GDP per capita, to reflect migration trends.

For purposes of U.S. economic policy, such a statistic would be most useful. For critics of U.S. economic policy, especially the Paul Krugman - Robert Frank - Frank Pasquale wing of the radical malcontent left, it would be most damning.

The latest leftist fashion is not to criticize American economic conditions generally (since they can't — recessions and bubbles notwithstanding, the American economy is still a strong cornerstone of the global economic engine and America is still the foremost land of opportunity in the world). They instead now prefer to obsess about some vague gobbledygook "problem" usually referred to as "rising income inequality."

Haters of American capitalism cannot legitimately say, for example, that "the rich get richer while the poor get poorer." It's simply not true. They cannot say that federal income taxes aren't obscenely progressive — they are. They cannot say that recent tax cuts mostly benefited the rich — they did not. They cannot say that working-class Americans are facing stagnant wages — when benefits are included, blue collar workers are making more than ever. Every absolute metric of American economic conditions, over any substantial period of time, shows that, overall and on average, American capitalism works for workers.

So the new tactic of those who are running out of ways to complain about American capitalism is to lament, not the fiction of falling welfare, but the semi-fiction of "rising inequality." The poor may be getting richer, they admit, but not as fast as the rich. The gains from economic growth are "disproportionately" going to the best off among us.

This is, of course, utter nonsense.

Just about any measure of income inequality must be based on percentiles — "top 1%, "top 20%, "bottom 20%," etc. But the problem with time series analyses of income percentiles is that those percentiles are not static. The people in the "top 1%" today were not, as a rule, the "top 1%" in the past and will not be the "top 1%" in the future — the demographic is fleeting and comprised at any one moment largely of people enjoying one-time windfalls: celebrities, athletes, lottery winners, people who retire and sell their businesses, farms or property. The longer the time horizon, the greater the "churn" among the hyper-rich. Consider: how many truly enduring (i.e., multi-generational) "mega-rich families" are there in America? Extreme wealth dissipates amazingly quickly here — far faster than in, e.g., Europe or Latin America.

Far more important than the churn at the top is the churn at the bottom. A significant — perhaps the largest — component of the "bottom 20%" of American households are immigrant households. Tired-poor-huddled, etc. But today's immigrant households are not tomorrow's immigrant households: even in post-Ellis-Island America, immigrants move up the economic ladder with an astonishing and magnificent alacrity. Immigrant poverty almost never passes from one generation to the next. Today's immigrant poor are tomorrow's working class and next week's middle class.

In conclusion, since we do not have a caste system in America, what is the use of comparing the "top x%" with the "bottom x%" over time when those percentiles are simply not the same people from one period to the next? Using time series percentiles as indicia of "growing income inequality" is a willful deceit by academics who know exactly what kind of analytical fraud they are peddling. To them, lying in defense of progressivism is no vice.

Meanwhile, this new "income per natural" metric — if it can be adequately measured — would go a long way to debunking the "poor stay poor" myth proffered by the leftist pseudo-intelligentsia, by carving out the immigration component of the "bottom x%" and making time series data more reflective of reality. Bottom line: The fact that the world's poorest people are still desperate to come here skewers the limousine-hating antipathy of limousine liberals. The more and better data we have to show this, the better.

(Via Will Wilkinson.)

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Meanwhile, to the extent that there actually is a "permanent underclass" in America — particularly inner city, minority, single-parent households — one should ask whose policies brought into being the conditions that make such an underclass possible. Hint: Not any libertarian's or laissez-faire capitalist's. More on that in a future podcast — if I ever get around to editing and posting it (it's already recorded).

The Urban Institute recently published a report called "Poverty Facts, 2004."

In 2004, 36.6 million people — or 12.6 percent of the U.S. population — were poor. The "poverty gap" — the amount of additional income required to remove all Americans from poverty — was $105.6 billion. Poverty rates were highest for African Americans, Hispanics, women, and persons under 25. Without government benefits, 61 million people would be poor. Social Security and other social insurance programs remove 21 million people from poverty. Means tested programs remove 3 million people from poverty. If food and housing assistance were counted as income for poverty purposes, an additional 7.6 million people would be counted as not poor.

The report packages government data on American poverty in a variety of ways, all pegged to the official federal poverty level thresholds and most of which are unbiased and informative. But I do have some hasty stitches:

--I found it annoying at best, and evasive at worst, that nowhere in the 15-page report could they be bothered to disclose what the federal poverty level actually is; the best they do is bury a hyperlink to the Census Bureau in a footnote near the end of the report.

In fact, the federal poverty level in 2004 (the year studied) was $9,827 for a single adult under 65, $12,334 for a childless non-elderly couple and $19,307 for a family of four.

Now is also as good a time as any to note that the "poverty level" is an essentially arbitrary number

originally derived in 1963-1964, using U.S. Department of Agriculture food budgets designed for families under economic stress [and] data about what portion of their income families spent on food[.]

The poverty level is also not adjusted for geography (so, for instance, heating costs in the North and air conditioning costs in the Southwest are not factored in). Also ignored are housing cost differentials between urban, suburban and rural settings. It's strictly a food-oriented construct — and therefore of very limited usefulness.

--In any case, as low as $9,827 undeniably is, it is still orders of magnitude better than "$1 to $2 dollars a day." As unfortunate — or even tragic — as poverty is, one simply cannot escape the truth that "American poverty" is — thanks to capitalism — very, very, very different from "global poverty."

--The report breaks down poverty in several ways, one of which is by age: 12.9 million people under 18 were in households beneath their federal poverty threshold — 17.5% of the under-18 population. While fully acknowledging the almost instinctive revulsion that all civilized people, especially libertarians, feel toward anything that could possibly be corrupted into "eugenics," one cannot help but wonder whether the focus of anti-poverty efforts should shift toward the simple notion of persuading poor people not to have poor babies.

--One way the report does not at all break down the numbers is by immigration status (i.e., citizens versus legal immigrants versus illegal aliens). Does the Urban Institute think such a partition is irrelevant? I don't.

--The report commits one egregious sin: misstating the anti-poverty impact of Social Security —

Social insurance, including Social Security and other programs available to persons regardless of income remove 21 million people from poverty.

The term "social insurance" is meaningless gobbledygook. An entitlement is either welfare ("anti-poverty") or it isn't. Social Security isn't. It is an intergenerational transfer from the young to the old, pure and simple.

Moreover, the "21 million" figure is overstated for the pesky reason that Social Security itself contributes to poverty. By seizing one-eighth of the working poor's paychecks — week-in, week-out — over their entire working careers in exchange for low (or zero or even negative) rate of return income streams, Social Security is an anchor around the neck, making it difficult for the working poor to tread water, let alone swim away from the undertow of poverty.

Data on American poverty are always useful — including for those who would use the poor as pawns to further their own agendas. Keeping the data objective and well-presented therefore becomes all the more important.

The New York Times pulled a rather "artistic" stunt in continuing to "paint" malevolence toward the successful as concern over the fiction of "rising income equality" —

Sotheby's estimates it will raise a record $375 million to $477 million. Christie's hopes for $280 million to $390 million, also a record. Both hope to sell paintings at prices once reserved for large corporate jets or small islands: Sotheby's expects to get $70 million for a triptych by Francis Bacon, almost $20 million more than the record for the artist set last year.

Reassuring as it may be to see a least some consumer spending booming, the art world's ever rising valuations are a symptom of a growing imbalance in the American economy: the unprecedented concentration of the spoils of growth at the very top.

How typical of the Times editorial board to confuse business with war ("spoils"?) and to reframe all human transactions as antagonistic "us versus them" confrontations.

In any case, rising revenues can, and likely are, more explained by increased volumes than by increased prices; one triptych does not a market trend make. (Indeed a different "Times" article about the Bacon triptych suggests, contra the New York Times, that the two great auction houses are not doing all that well right now. Go figure.

(Incidentally, the Bacon triptych is currently owned by a Swiss, not an American. How it therefore has anything to do with "rising income inequality in America" remains, like so much contemporary art, a matter of abstract interpretation — i.e., pompous gobbledygook.)

Meanwhile, the fact that there is an increase in art auctioning could just as easily suggest that times are tough for the hyper-wealthy: why sell art unless you need the money? Unlike a truly productive industry, an auction market for pre-existing goods is a zero-sum game: for every buyer eager to spend money, there must be a seller eager to receive money. This would suggest, if anything, distress within the collector class. (Recall that auctioned masterwork art is, to be blunt, "used" art. Would a boom in the used car market necessarily signal good times in Detroit?)

And besides, this is all presumptive speculation anyway. How do we know that all this art isn't being bought and sold by museums and other institutions? Or perhaps in some instances a wealthy collector dies, and the estate is being sold to disperse the wealth among the heirs. (As I've previously noted, haters of American mega-prosperity generally refuse to acknowledge the fleeting nature of American entrepreneurial wealth across generations. Unlike Europe and Latin America, there are in fact astonishingly few multi-generational American business dynasties (unlike political dynasties, which are all too ubiquitous in America).

In any case, the leftist malcontents who continue to bemoan "rising income inequality" continue to ignore that income itself is rising across all demographics (just at an unequal rate), and that the U.S. does not have a caste system: the people in the top 1% of incomes today are not necessarily those in the top 1% yesterday or tomorrow. This phenomenon — call it "turnover" or "churn" or whatever you like — is even more pronounced at the other end of the distribution: the "bottom 20%" of households by income are largely immigrants — who promptly make their way upward and out of the bottom 20%, replaced by new immigrants more than eager to be "victimized" by rising income equality.

It's quite simple really: The best way to care about the poor in America is by not caring about the rich in America.