Thursday, June 05, 2014

Why income inequality is really very good for us indeed

Written by Tim Worstall

It's much the thing to be talking about these days. How income inequality is rising, wealth inequality is going ballistic and it's all a jolly bad thing. However, let us ponder this point of wisdom from Don Boudreaux:

Would you prefer to live in a society in which people compete for high status by earning lots of money through the creation, production, and sale of better mousetraps, or in a society in which people compete for high status by being indifferent to money but focused intently on conquering foreign territories or accumulating terrifying amounts of political power?

Assume, as we must, that human beings are status seeking animals. Most certainly for the male of the species this has always been true: higher status males have more children which is the point and aim of the entire game. And in various different societies status has been gained in many different ways.

As best we know, from the study of the remnant hunter gatherer groups, for most of our existence status has been gained by being a good hunter: both of prey and of other adult males. Yes, as far as we can tell, in socieities like that of the Yamomani murderers have more children than non-murderers. And in some such societies we've recorded murder as cause of death for as much as 40% of the male population.

We've also assigned status to people in other ways over the millenia of recorded history. Who was your Mum (and presumably there being a connection between that and who was your father) has often been popular. We've never quite done it but plenty of other places (the Fascists and communists come to mind) assigned status according to ideological purity: the Soviets even to the second or third generations.

We in Britain have seen religious fanaticism used as a mark of status: difficult to understand the Commonwealth without that. The feudal period nominally ran on bloodlines but in reality on the male skill at crushing the skulls of the enemy.

And class and status have never, in Britian, been entirely about money. Even today they're not. But given the alternative sets of status markers that have been used over the centuries, aristocracy, theocracy, race (useful in discussing the Saxons, Danes and Celts) wouldn't we all start to prefer that they were?

That one can gain status by having proven that you are producing something that a lot of others would like to have? For that's what this capitalism lark is at root about. You can only accumulate if you're performing a community service. Which sounds like a pretty good method of assigning social status to us.

Of course, we might always hope that humans will stop seeking status. But then at that point we'd not be describing the actions of the same species that we're currently studying, would we?



Do Patients Have a “Right to Try” New Medicines Before the FDA Approves Them?

Earlier this month, Colorado governor John Hickenlooper signed the nation’s first “right to try” law. The law allows a patient suffering from a disease, for which no medicine has been approved by the Food and Drug Administration (FDA), to try an experimental new medicine before the agency approves it. The law allows, but does not force, drug-makers to provide their experimental drugs to patients. Other states, such as Louisiana and Missouri, are set to follow.

These patients are in dire straits. They suffer from diseases for which there is no other known treatment, and they have short life expectancies. Most of us cannot imagine being in their position: In their search for a cure, they are willing to take far greater risks than most would accept.

Although the FDA has an exemption for “compassionate use,” that exemption requires jumping through too many bureaucratic hoops to be useful. So, scholars at the Goldwater Institute developed the idea of state “right to try” laws that would enable residents to use experimental new drugs without agency approval.

My first reaction when learning about the Goldwater Institute’s successes in moving this legislation through state legislatures was that the FDA would surely assert pre-emption based on the Constitution’s Supremacy Clause. The Goldwater Institute is the home of impressive legal thinking and activism, so they have surely developed a legal strategy, if they need one.

However, maybe the federal government will not react. After all, Colorado allows not only the medicinal use of marijuana, but also the purchase and possession of small amounts of marijuana for so-called “recreational” use. The Obama Justice Department does not litigate against state laws liberalizing marijuana use.

It would reflect a very perverse sense of justice for the U.S. government to act against a state law allowing desperately ill patients to try promising, experimental new medicines, while allowing Colorado’s marijuana market to thrive unmolested.



Thomas Piketty wants to keep billions of people poor to stop a few from becoming rich

French economist Thomas Piketty’s Capital in the Twenty-First Century is an almost 700-page book written by an academic economist, filled with historical statistics and theoretical discussions of “Cobb-Douglas production functions.”

And yet, it somehow was the #1 bestselling book on Amazon. What the heck is going on here?

The answer is the conclusion Piketty draws: He wants the governments of the world to coordinate their efforts, sharing financial information among themselves so that no human being on Earth can hide from confiscatory taxes on both wealth and income. It is because today’s self-described “progressives” share Piketty’s hatred for economic inequality that they celebrate his book. Indeed, even his fans admit that Piketty’s analysis suffers from fundamental problems—I’ll document just a few in this review.

But none of that matters, because the memo has gone out: The progressive interventionists are going to focus hard on “inequality,” and Piketty’s book serves as a useful rallying banner for their agenda.

Destructive Envy

The most obvious problem with Piketty’s book is that he wants to make workers poorer, just so long as it will hurt rich capitalists even more. No economist denies that as the stockpile of “capital”—which Piketty broadly defines to include real estate and all forms of non-human wealth—expands, that the absolute wages of the workers will rise. After all, if workers have more tools, machines, and equipment augmenting their labor, they are going to be more physically productive per hour, and hence will be paid more.

Yet the continual increase in the workers’ standard of living is not enough to placate Piketty and his fans. Indeed, Nobel laureate Robert Solow admits that capital accumulation will make the workers better off in absolute terms, but worries that they might be worse off relative to the capitalists.

If Piketty and Solow saw a vision of the future that looked like The Jetsons, they wouldn’t marvel at the unbelievable convenience and luxury that the family enjoys, all provided by George’s two hours of labor per week. No, instead of thanking capitalism for providing flying cars to the average family, instead Piketty and Solow would be complaining about how unfair it was that a short bald guy got to own Spacely Sprockets all by himself.

Blunders, Both Serious and Petty

According to Paul Krugman, those who oppose Piketty’s call for confiscating the wealth of the super-rich can only resort to name-calling. Yet Krugman is as reliable on this topic as he is on VA health care. Piketty’s book is riddled with so many errors that it was difficult for me to choose which ones to highlight in this review.

For starters, a bombshell report just came out in the FT, where Chris Giles alleged that Piketty’s historical data series on wealth concentration are filled with inaccuracies that upset his whole case. We’ll have to wait for the dust to settle on this particular charge. Yet there are a host of other problems.

This is a book about the rate of return capital generates for its owners—the famous “r” that Piketty claims will persistently exceed “g,” the growth in total output. You would think, then, that Piketty would understand the basics of how modern economic theory explains the determination of interest rates and the earnings of capitalists, and that in his 3-page description of a famous professional debate on the issue, that Piketty would manage to tell his readers the debate’s central issue.

Alas, Piketty’s book is bereft of even the simplest understanding of these issues, as both his ideological foes and friends agree.

Because Piketty doesn’t know what drives interest rates, and because he switches from viewing “capital” as a collection of physical things versus a sum of money (even Piketty’s fan Brad DeLong admits both points), Piketty and his readers will end up drawing the wrong conclusions from history.

For example, Mother Jones loved this chart showing income inequality soaring in the late 1920s and in the mid-2000s: Look everyone, if we let the 1% earn too much, it sets the world up for a giant financial crash! But actually what happened is that loose monetary policy drove down interest rates, thereby fueling asset price booms, which showed up as huge income (in the form of capital gains) accruing disproportionately in the hands of the wealthy. It’s not surprising that these Fed-fueled asset bubbles eventually collapsed, leading to the Great Depression and Great Recession. To prevent a repeat, the government doesn’t need to confiscate property from the super-rich; instead the Fed needs to stop inflating asset bubbles.

Another devastating flaw is that Piketty has misread the empirical literature. Piketty needs a certain parameter—“the elasticity of substitution” between capital and labor—to be greater than one, in order to predict that the capitalists will earn a larger and larger proportion of annual income. Yet as Piketty’s fan Larry Summers points out, Piketty ignored depreciation. Once you correct for this simple mistake, Piketty’s whole case goes out the window: Piketty’s framework predicts that workers will see their incomes rise both in absolute terms and relative to the income of the capitalists.

Putting aside these theoretical issues, Piketty is praised chiefly for his historical work. Beyond the bombshell FT allegations mentioned above, we have more mundane (and boneheaded) mistakes: Piketty can’t even correctly tell his readers the presidential administrations during which tax rates were raised or the minimum wage was hiked.

Further, these two mistakes very coincidentally serve Piketty’s political narrative.


After all of the above, you might be tempted to excuse Piketty’s numerous, fatal errors because after all, his goal is to help poor people. Yet as I document elsewhere, the book is filled with shocking quotations making it perfectly clear that Piketty’s proposed taxes are not designed to raise revenue, but instead are designed to prevent people from creating large wealth and incomes in the first place.

I must admit, I learned a lot from reading Piketty’s book. Specifically, I learned how many self-styled progressives today are willing to sacrifice the standard of living of billions of poor people, in order to prevent a few people from becoming really rich.



Guilty of giving

The 2002 McCain-Feingold Campaign Finance Act, which dictates what and when one may speak about candidates for office, ought to have been struck down by the Supreme Court the moment the first suit about its constitutionality was filed. Instead, the Court has simply crippled it with the Citizens United v. FEC case.

Dinesh D'Souza, a prominent conservative writer and filmmaker, and unabashed critic of Obama and his policies, was charged with violating the Federal Election Commission's rules on donor limits.

Paul Bond, in his Hollywood Reporter article of May 20th, "Dinesh D'Souza Pleads Guilty to Making Illegal Campaign Contribution," wrote:

In exchange for D'Souza's plea, prosecutors are expected to drop the more serious charge of making false statements to the Federal Election Commission, a crime that carries a maximum sentence of five years in prison.

D'Souza was indicted in January for asking some friends to donate money to the campaign of Wendy Long, a Republican who ran unsuccessfully against Democratic incumbent Sen. Kirsten Gillibrand in New York in 2012, and allegedly promising to reimburse them for their donations.

Bond noted:

From the beginning, attorney Benjamin Brafman characterized his client's alleged transgression as "an act of misguided friendship," and he and others have said federal authorities were engaging in payback for D'Souza's movie 2016: Obama's America, a hit documentary that portrayed President Barack Obama in a negative light. "

It's a remarkably selective prosecution, considering Obama raised millions of dollars under similar circumstances and donors merely faced civil fines while D'Souza is charged with felony violation of federal law," Sen. Ted Cruz of Texas told The Hollywood Reporter in February.

If D'Souza had not pleaded guilty, a trial would have been necessary, and on the "illegal" contribution charge alone, if found guilty, he could have been sentenced to a maximum of two years in prison.



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