Thursday, October 14, 2010

The Wrong Way To Think About Inequality

In the last month, a new paper from Michael Norton and Dan Ariely has drawn some attention to the issue of wealth inequality in America. The paper, called "Building a Better America -- One Wealth Quintile at a Time," finds that Americans underestimate the inequality of America's wealth distribution and express a preference for a more equal distribution. Indeed, while the top quintile of Americans hold about 84% of national balance sheet wealth, survey respondents believe the figure is just 59% and would prefer a figure of 32%. The authors use the paper to argue for more redistributive policies -- or rather, for the insertion of these public preferences into policy debates.

The paper has been widely discussed in the blogosphere (for example by Matt Yglesias on the left and Reihan Salam on the right.) I am unimpressed with the paper for a few reasons, and generally think we should be cautious about the idea that America needs sharply more wealth redistribution (especially to the radical degree that would be implied in the paper.) I do think that there are valid reasons to be concerned about distribution of resources, or to favor more egalitarian policies, but that they are not implied by this paper.

I have three key objections to the paper. First, in asking respondents to develop ideal wealth distributions, the authors told survey respondents to imagine they would be "randomly assigned" to one of the wealth quintiles -- implying that effort plays no role whatsoever in wealth accumulation. Second, there is little reason to believe that the public is good at evaluating ideal distributions of wealth -- as demonstrated by the impossibility of the preferred wealth distribution found in the paper. Third, the paper focuses on wealth distribution, when income distribution is a better metric for inequality.

The first objection undermines the authors' finding that Americans would prefer a highly equal distribution of wealth, where the top quintile's wealth holdings (32%) would outstrip the bottom quintile's (11%) by less than three-to-one. (In fact, the bottom two quintiles in America hold approximately zero net wealth.) In forming this ideal distribution, respondents were told they would be "randomly assigned to a place in the distribution... from the very richest to the very poorest."

Essentially, they were being told to discount the possibility that they would work to improve their lot in the distribution, if they so chose. They also were not advised that the economic policies required to achieve such an equal wealth distribution would shrink the economy overall. This question framing may have helped point respondents to endorse a wealth distribution that could not be produced by a set of policies observed in any country with a high degree of human development.

This leads to by second objection. I noted that respondents expressed a preference for a wealth distribution with 11% of wealth in the hands of the bottom quintile. In a section of the paper called "Americans Prefer Sweden," the authors note that over 90% of respondents prefer a wealth distribution modeled on Sweden's, including 11% of wealth for the bottom 20% of people, to that of the United States.

Except that Sweden's bottom quintile doesn't actually hold anywhere close to 11% of that country's wealth. If you notice footnote 2 of the paper, you'll see this comment: "We used Sweden's income rather than wealth distribution because it provided a clearer contrast to the equal and United States wealth distributions; while more equal than the United States' wealth distribution, Sweden's wealth distribution is still extremely top heavy."

That is, the authors took a completely different measure of inequality and presented it as a chart of wealth distribution by quintile -- the chart does not represent a wealth distribution actually observed in a country. In fact, it is unlikely that any advanced country has a wealth distribution with anywhere close to 11% of wealth held by the bottom quintile.

There is a reason that the bottom two quintiles of households have essentially no net worth, in countries all around the world: people with low incomes tend to consume their incomes rather than saving them. They do this partly because saving is a luxury relative to their consumption options, and partly because they expect higher incomes in later years and are smoothing consumption over their lifetimes. This is true even in countries with significantly lower income inequality than the United States, such as Germany.

Unlike income distributions, the World Bank doesn't produce international comparisons of wealth allocation. But the paper that Norton and Ariely cite for wealth distribution statistics has figures for a number of countries. Of the figures it contains, the highest wealth share for a bottom quintile in an advanced country is 2.1 percent, in Japan -- a far cry from 11 percent. (China's bottom quintile holds 2.8 percent of that country's wealth.)

Other advanced countries closely track the minus 0.1 percent figure in the United States, which means that bottom-quintile households have slightly more debt than assets: minus 0.2 percent in Germany, 0 percent in Australia. (There is something screwy with the figures for Denmark and Sweden, which show the least-wealthy household quintiles having sharply negative net wealth; that seems unlikely, and the source data are in a language I don't speak.)

A drop in income inequality would largely serve to increase consumption by poor households (a perfectly reasonable policy goal), not to increase their wealth. No plausible set of tax-and-transfer policies could produce the wealth distribution advocated in this paper. The only way you could get the bottom quintile's wealth share into double digits would be to force these households to save large shares of their income that they would prefer to consume.

For example, if we achieved Sweden's income distribution (the most equal among the world's advanced countries) we would also need to have equal saving rates in each quintile in order for the bottom quintile to hold 11 percent of wealth. This would not be desirable: low-income households get more utility from saving less and consuming more.

So, what should we make of the fact that 92 percent of study participants thought a wealth distribution with 11 percent in the hands of the bottom quintile looked better than the actual wealth distribution in the United States? I'd say the key takeaway is that members of the public are not good at looking at pie charts of wealth distribution and deciding which represents a good society. It's a bit like asking people what's the best mix of materials to use when making a jumbo jet -- how on earth should they know?

Finally, I think this study would have been a lot more interesting if it had asked about income distributions rather than wealth distributions. Net worth misses a lot of important but off-balance sheet assets and liabilities that we hold. One is human capital -- a recent graduate of medical school is likely to have a negative net worth but is not "poor" by any reasonable definition. Another important asset is the expectation of receiving future government benefits, including Social Security and Medicare. If these factors are included, America's wealth distribution becomes significantly less skewed.

And except for very rich people, the income statement is a far better predictor of living standard than the balance sheet. Think about a middle-class family of four with annual expenses of about $60,000 after taxes. In determining whether the family could meet those costs, would you first ask about family assets or family income? Over the next year, most people will rely much more on human capital than on balance sheet wealth to support themselves, which makes balance sheet measures a weak indicator of need.

There is an important discussion to be had about income inequality and the desirable level of progressivity in government policies. But this paper, which points toward an outcome that could only be achieved with extremely undesirable policies, does little to inform that debate.



ObamaCare blowback

By Jeff Jacoby

"WE HAVE to pass the bill so that you can find out what is in it", House Speaker Nancy Pelosi said last spring about her party’s 2,000-page health care overhaul. What she didn’t realize was that the more Americans find out about ObamaCare, the more they turn against it. Virtually from the day it was signed, a majority of Americans have favored repealing the massive law.

According to two polls released this past week — one a national survey by Rasmussen, the other a poll of key congressional districts for The Hill — they still do. So naturally congressional incumbents are touting their opposition to the health care law.

Representative Jason Altmire of Pennsylvania has a TV spot in which a woman says approvingly: “You saw him when he voted against health care.’’ Virginia congressman Glenn Nye plays up the way he “took on Congress . . . voting against the health care bill because it cost too much.’’ South Dakota’s Stephanie Herseth Sandlin makes the same point in a humorous commercial starring her 22-month-old toddler, Zachary. Ads with similar messages have been aired by US Representatives Frank Kratovil of Maryland, Walt Minnick of Idaho, and Bobby Bright of Alabama. Plenty of Republicans are playing up their vote against the unpopular law — but these are all Democrats who voted no.

It wasn’t supposed to be like this. “When people better understand the Affordable Care Act, they’ll understand, I think, that this isn’t something being done to them but is something that’s really going to be valuable to them,’’ President Obama insisted last month. “The debate in Washington is over.’’

The debate is anything but over. As health insurers are forced to raise premiums in order to cover the cost of the new benefits required under ObamaCare, Americans are finding out just how “affordable’’ the Affordable Care Act really is. In recent weeks, Aetna, Regence Blue Cross Blue Shield, and other carriers have announced rate increases, attributing at least part of the higher charges to the richer benefits mandated by the new law — such as the elimination of lifetime coverage limits, “free’’ immunization for children, and the elimination of co-pays for mammograms and other preventive care. Presidents can promise to bend the cost curve, but the laws of supply and demand do not bow to presidential promises: More health care coverage costs more money — money that sooner or later comes out of consumers’ pockets.

Insurers are not responding to the new law and its expensive new mandates solely by raising premiums. Some are dropping out of insurance markets altogether.

Late last month, Harvard Pilgrim Health Care announced that it will stop providing Medicare Advantage insurance policies at the end of the year, forcing 22,000 senior citizens in New England to find some other way to pay for health benefits those policies covered. Harvard Pilgrim’s hand was forced, a company spokesman said, by the “cuts in Medicare . . . being used to fund national health care reform.’’

Another insurer pulling the plug is the Principal Financial Group, an Iowa-based company that currently insures 840,000 customers. “The company’s decision reflected its assessment of its ability to compete in the environment created by the new law,’’ reported the New York Times. “More insurers are likely to follow Principal’s lead.’’

Principal is a relatively small insurer, but even insurance giants are walking away from some segments of the business. UnitedHealth, Wellpoint, and Humana will no longer write individual child-only insurance policies, thanks to the new law’s requirement that such plans must also cover children who are seriously ill. Insurance companies are not charitable foundations; they cannot stay in business by insuring the health of people who are at a 100 percent risk of getting sick. As The Washington Post explained, “the pool of children insured by child-only plans would rapidly skew toward those with expensive medical bills, either bankrupting the plans or forcing insurers to make up their losses by substantially increasing premiums for all customers.’’

Meanwhile, 30 major corporations are still able to offer low-cost health insurance to their employees only because they have received one-year waivers of the new rules from the Department of Health and Human Services. What happens when those waivers expire is anybody’s guess. But this much is clear: If the law with its expensive mandates remains on the books, millions of Americans are going to lose the health care plans they have now — plans the president repeatedly promised they could keep. Which is why just about the only Democrats campaigning on ObamaCare today are the ones who voted against it.



There's a Reason Why They Call Him "Dick"

Ann Coulter

If the Bush administration ever treated terrorism suspects the way Connecticut Attorney General Richard Blumenthal treats law-abiding citizens and small businesses, even conservatives would have blanched.

This activist, interventionist Democrat -- like his identical, slightly less oily twin, Eliot Spitzer -- decided at age 5 he was going to be a U.S. senator and then the first Jewish president. And he doesn't care how many lives he has to destroy to get there.

Currently, Blumenthal is running for the U.S. Senate against Linda McMahon in Connecticut. He must be stopped.

Among Blumenthal's taxpayer-funded citizen-persecution projects was the one he waged against Gina Kolb, owner of Computer Plus Center in East Hartford. After selling $17.2 million worth of computers and servers to the state in 2001, Kolb found herself being sued by Blumenthal for $1.75 million for allegedly overcharging the state $500,000.

Publicity-whore Blumenthal sent out an accusatory press release about Kolb, saying: "No supplier should be permitted to shortchange or overcharge the state without severe consequences." Soon thereafter, Kolb was arrested at her home on seven first-degree larceny charges, courtesy of Connecticut's crazily hyperactive attorney general.

A court dismissed all charges against Kolb and her company in 2008. But not before this female businesswoman had her company completely shattered by the pathologically ambitious attorney general.

I'm sorry, I know you need to be on television every single day, Dick, but that's not enough of a reason to destroy innocent citizens' lives, much less use taxpayer money to do so.

Kolb was far from the only innocent citizen persecuted by Blumenthal. The reason we know her story is that, instead of moving as far away from Connecticut as she could, Kolb turned around and sued the state for violating her constitutional rights.

The jury agreed, awarding her $18 million for Blumenthal's "pattern of conduct" that destroyed Kolb's business and impugned her integrity.




Barack Obama and the Chamber of Secrets: "So, who’s left to demonize? The Girl Scouts? Rotary Clubs maybe? We’re running out of devils to distract us. Then again, the Obama administration’s preposterous attack on the U.S. Chamber of Commerce does nothing to help Democrats and everything to reinforce the moderate voter’s perception that the president’s party has gone bonkers.”

Distributism: More than a middle way: "Distributism is often misconstrued as a ‘third way’ between capitalism and socialism, taking the best of both but modulating their excesses. This is incorrect. As Medaille shows, distributism is not so much — indeed not at all — a ‘third way’ between different approaches but a different road entirely. This is in part because capitalism and socialism are not themselves separate ways. Marx and Hayek both contended, for example, that should their views be adopted, the state would wither away. Instead, under either communist regimes or capitalist economics, the growth of the state has increased, and with it has come increased reliance on centralized power and a crushing debt burden.”

Obama admin. expected to appeal “don’t ask, don’t tell” ruling: "The Obama administration is expected to appeal as soon as Wednesday a federal judge’s ruling that halted the Defense Department from enforcing its policy that bars openly gay people from military service, according to senior administration officials familiar with the government’s plans. … sources familiar with the government’s plans expect a motion for an emergency stay to halt the injunction to be filed first with [U.S. District Court Judge Virginia] Philips as a matter of procedure. If she rejects it, as expected, the request for an emergency stay would accompany the formal appeal to the Ninth Circuit Court.”


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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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