Is Income Inequality That Big of a Deal?

Ever since the CBO report came out on income distribution, the Left has once again bemoaned about income inequality.  Paul Krugman even came out with a piece very recently entitled "Oligarchy, American Style."  I'm going to forget that the report is misleading in the sense that it collected data up until 2007.  The reason for my accusation is because if the CBO bothered to look at the IRS data for 2008 and 2009, they would have found that the income for the 1% fell to 1997 levels (see Tax Foundation study for further info on tax burdens).

This led me to an important question: should we be worried about income inequality?  Just a few thoughts on the matter......

• Looking at income as an economic indicator for one's economic well-being is inaccurate as it is arbitrary.  Why?  Income is a relative measurement.  When the dollar is devalued or inflation increases, income doesn't mean as much.  Would you be more impressed with someone who makes $500K now or fifty years ago?  On the other end, when technology improves what we consume, we are able to consume more quantitatively and qualitatively, thereby increasing our purchase power.  As such, when having this discussion, we should look at consumption, not at income.  And when we do, it's amazing because consumption-based poverty is much lower than income-based poverty.
• Division of labor comes into mind during this discussion.  We all have different skills, levels of intelligence, motivations, and job preferences.  Some of us choose jobs that we like, but don't pay as much (e.g., social worker).  Other jobs earn a lot of money, and people are in that profession for that reason.  Do we think that a janitor should be paid as much as a doctor?  I certainly hope not!  Doctors are skilled workers that are in high demand.  If we hypothetically made everyone's wage equal, regardless of profession, doctors would hardly see the incentive to pay all those years of medical school just to get paid the same amount as a janitor.
• Income inequality is not an inherently bad thing.  You have cases such as Bernie Madoff and Enron.  They ruined the lives of many with their avarice.  And while these cases are unfortunate, they are by far much more infrequent than cases of people climbing to the top with innovation.  Take Steve Jobs as an example.  He spent 60-80 hours a week in the office to bring us wonderful Mac products.  Do we hate him for that?  A huge majority of us would answer in the negative.  He worked hard to bring many people Mac products, which have changed the lives of many.  Since he worked hard, he earned the money he made.  It's not so much where there is inequality, but how it is brought about.  
• This is why income inequality is not so much of a moral issue as is the topic of economic sufficiency, which is a point that philosopher Harry Frankfurt brings up.  "Do we have enough?" That should be the question, not "why does the millionaire have so much, and I have nothing [in comparison]?"  I'm not trying to belittle those who have genuinely suffered through this recession, or say that the unemployed need to "toughen up" or "grin and bear it."  What I can say is that many in America have lost perspective.  Rather than look at what we have and be grateful, we look at what we don't have in hopes to "keep up with the Joneses."
• We live in a materialistic society that over-emphasizes the individual to the point where many feel that the continual acquisition of more material goods will satiate their happiness.  I have bad news for you: money doesn't buy happiness.  Money is a means to an end.  I would be worried more about what makes me happy than if I have more money than my neighbor, especially if he is part of the 1%.      
• And if you need to put yourself into perspective, even the poorest American still has more money than three-quarters of the rest of the world.
• During the period of the CBO study, 57.5% in the lowest quintile jumped at least one quintile, and of those in the 1% during 1999, only 44.6% were still there in 2007.  So let's be thankful that there is economic mobility in America.

Postscript: This is not to say that those in Occupy Wall Street protests have a reason to be angry.  They do.  There is a political system that has failed them while it commits idiocies such as bailing out the banking industry.  If a bank such as Citibank is failing, it should be allowed to fail.  It shouldn't be bailed out because Big Government came to the rescue.  As Ronald Reagan once said, "Government is not the solution to our problem.  Government is our problem."  You want to create more economic prosperity so we can get our economy back on track?  Remove the red tape that inhibits small business from hiring.  Stop pouring money into energy plants like Beacon Power that file bankruptcy.  Enough with the bailouts already!  If you lift the restraints that constrain the markets, there won't be a need to occupy Wall Street anymore.  


8-9-2017 Addendum: A recent study from the National Bureau of Economic Research shows that while income inequality has risen over the past few decades, consumption inequality has stayed relatively stagnant. 

Seven Billion and Counting

The United Nations announced today that the world population has reached seven billion.  In a neo-Malthusian fashion, the UN proclaimed worries about enough food and resources to provide a decent lifestyle for all, especially when their projections predict that global population will eventually reach ten billion.  Are we to be scared about overpopulation?

In the short-term, I'm more preoccupied not with a lack of resources, but that a primary issue with developing countries developing is the lack of infrastructure that is to insure that people require that which they need.  

For more developed areas such as Europe, their issue is not overpopulation, but underpopulation.  Nations such as France and Italy are well below the replacement fertility rate of 2.1.  If Europe does not implement policy to encourage increasing birth rates, it will mimic Japan's demographic demise.  And the United States is slightly below the replacement rate, so even American policymakers might want to start considering slight encouragement in the direction of birth encouragement, or at least make its immigration policy a bit more lax.

Western nations have fertility rate issues now because lowered infant mortality and increased reproductive rights (e.g., increased access to contraceptives), which is why their demographic issues are more urgent than that of the rest of the world.  Developing nations such as China and India have a little more time before they come upon this trend.

Although the sense of urgency varies from nation to nation, one thing for sure is that the real, long-term scare is in the declining fertility rate, not in overpopulation.    

Let's Say Global Warming Is Real....

I'm going to take my typical skepticism one step further. I am going to be skeptical of my skepticism, and do so specifically with regard to global warming. What I am going to do in this blog entry is throw out any skepticism about global warming I might have and accept the postulation that man-made global warming is a real, legitimate threat.  

A short synopsis of the issue is as such: humans have emitted an unprecedented amount of carbon and is being expelled into the atmosphere. The issue is that the atmosphere is unable to dispel of it as quickly as a gas such as methane. As a result, it gets trapped in the atmosphere for a considerable amount of time, thereby causing the earth to get warmer. If global warming is not addressed, we will have cataclysmic climate changes that will cause the sea levels to rise and all sorts of natural disasters that will wipe out thousands upon thousands of people.

Clearly, Mother Nature going ballistic is not desirable. So how do we avoid this climate catastrophe?   Reduce carbon emissions by 80% before 2050.

One obvious solution to this would to cut back on consumption. Currently, there are three main providers of energy, and all of these produce greenhouse gases. Petroleum is at 36%, natural gas is at 24%, and coal is at about 20%, which cumulatively provide about 83% of America's energy. Even if you cut back on some of the production of fossil fuels and implement cap-and-trade en masse to discourage carbon consumption, which is a bad idea to begin with, it will be insufficient. Also, consider the fact that world consumption of energy is projected to only go up.

Are you really going to tell Americans to drastically consumption up to the point where it's more than half? Good luck with that! Even though America produces about 20% of the carbon, it'll be a hard time to make the "less consumption" pitch to other nations without running into the free rider problem, especially when developing nations such as China, India, and Brazil are only looking to further increase their economic wealth, which means increased consumption.   

Although consumption cutbacks might have to be in order, this problem will not truly be solved until we tap into an alternative energy source. Usage of renewable energy sources is not that plentiful, only totaling up to 8%.  Wind and solar power currently make up less than 1%, and will not be making a huge contribution to aggregate energy demands because of inefficiencies. Biofuels make up 23% of the renewable energy because of our heavy corn subsidies to Big Agriculture. Even hydroelectric power has its natural limitations, being that you only have a limited amount of bodies of water where building a dam would be conducive.

I'm sure we will be seeing these alternative energy options increase in terms of contribution percentage as time passes. To say that they will be able to sustain long-term energy consumption for America, as well as the rest of the world, is highly improbable. There is only one remaining alternative to this problem, which is going to have to merit a future blog entry from me, and that is nuclear power.

Why the Sino-American Trade Deficit Is a Red Herring

When the balance of trade is such that net imports exceed net exports, it is considered a trade deficit.  Using the trade deficit as an economic indicator, politicians look at it and automatically assume that the country is incurring a net loss.  This phenomenon has recently garnered attention amongst American politicians regarding China.  Members of Congress see a trade deficit, and they want to blame China. The most recent form of such animosity is the Emergency China Trade Act, which essentially is a punitive piece of legislation for China’s inability to appreciate its currency quickly enough.  In spite of there being legitimate criticism regarding “currency manipulation,” the real reason for Congress passing the bill is to give into the populist gripe of “our jobs were sent overseas!”  With no economic recovery in sight, it is understandable from a political standpoint why Congress would want to blame China.  Objurgating China takes the pressure off of the United States Congress for a lack of job creation and economic recovery.                

Much of Congress’ decisions are made based on their misunderstanding of trade deficits.  More than a century ago, Frédéric Bastiat already showed how a “trade deficit” can turn profit.  Milton Friedman also points out that American dollars come back to the United States, typically in the form of foreign control of assets.  This assertion is confirmed by government statistics.  In 2010, other nations spent $59 billion a month on U.S. Treasury Bonds.  Furthermore, foreign direct investment in America averaged to $19 billion a month.  These investments de facto offset any trade imbalances one sees, as was reported back in 2010.  Rather than trade deficits causing economic disfunction, they are a sign of positive economic health.  Looking at BEA records that date back to 1980, each time that trade deficits were agglomerated, GDP growth was higher when trade deficits were increasing than when the deficits were contracting (3.6% and 1.0% respectively).

  

In addition to the fact that deficits are not as harmful as one would think, America has been running trade deficits long since before the Great Recession.  U.S. Census data shows that trade deficits have been accrued nonstop since 1976, and trade deficits have been a part of American economic history since before China’s economic reform in the late 1970s.  Every year for which the U.S. Census Bureau can account, there has been a trade deficit with China. Trade deficit with China is historically nothing new.  However, using trade deficits as a scapegoat is a very politically expedient move.  

Furthermore, America is a nation obsessed with consumption.  Microcosmically, American citizens have a poor propensity to save.  From 1982 until the Great Recession, the personal savings rate was only two percent of personal disposable income (DPI).  Even with the recession, the personal savings rate only reached 5.9%.  Consumer credit is currently at $2,444.9 billion, which would average to $11,064.94 per citizen.  The macrocosm of the United States federal government is not any less flattering. With gross GDP considered, public debt is 92.3% of the GDP.

Recent congressional dealings with the debt ceiling were a reminder about debts in general.  Running up a deficit is not inherently a bad idea.  If one is able to pay their debts, running up deficits are advantageous in the short-run.  However, if there is no solid plan to pay those debts, the result is much like the current economic malaise.  

In summation, putting the spotlight on the trade deficit with China is unwarranted.  Trade deficits are nothing to fear when foreign direct investment is taken into consideration; trade deficits actually signal good economic health.  Congress’ misperception of trade deficits is resulting in poor economic policy.  Rather than displaying malevolence towards one of their largest trading partners that is a rising power, perhaps the United States should focus on its domestic policy to mitigate the truly problematic deficits.

Parsha Bereshit: Resolving the Dichotomy Between Science and Religion

July 21, 1925.  William Jennings Bryant and Clarence Darrow finish duking it out in court.  John T. Raulston ruled that John Scopes had violated Tennessee’s Butler Act, which prohibited school teachers to deny the Biblical account of creation.  Although Scopes ultimately got off on a technicality, this case became the genesis for the dichotomy of science and religion in American politics.  

It’s not just a matter of the increased number of Supreme Court cases regarding religion and politics that came subsequently.  It's a matter of divisive polemics.  On the one end, you have scientists who think religious people are ignoramuses obsessed with denialism and cognitive dissonance.  The other end consists of the Religious Right, who would have you believe that anyone who professes evolution as fact is a hell-bound heathen.  

What ever happened to the middle?  Is there a middle?  And if so, can one still be a "good Jew" while adhering to scientific data and standards?   

The short answer is that the line of questioning is faulty.  It presents a false dilemma in which either one has to choose between science and religion.  This is an assumption that many Americans make because that is what the cultural landscape of America has been for almost a century.  

There are so many Jewish Nobel Prize winners, 27 for chemistry, 46 for physics, 53 for medicine, you would hardly think Judaism has an aversion to the sciences, and that would be correct.  What’s more is that this is not a modern Jewish phenomenon.  For centuries, Jewish thought has viewed science and religion as two opposite poles, but rather as a duality.  

First, I would like to point out some general points regarding Judaism and science:

1. Science explains the “how,” religion the “why.”  Each field has its function in life.  The Torah does not explain phenomena such as mitosis or gravity, just as science does not explain purpose, meaning, or how we should conduct our lives like the Torah does.
2. In the introduction of his philosophical magnum opus, Guide for the Perplexed, Maimonides states that one needs to understand the natural sciences and mathematics to understand the Torah.   He goes even as far to say that an individual that has studied these fields is to be even more revered than a man steeped in Talmud.   
3. Judaism has a blessing for when you meet a Torah scholar, as well as when you meet a secular scholar of comparable knowledge in his respective field (e.g., a scientist).
4. Later in the Guide for the Perplexed (II, xxv), Maimonides says that when a verse’s plain meaning is impossible (such as that of the corporeality of G-d or that the world was created in six literal days), we must read the verse figuratively.

How can we apply these general concepts to the Creation account in the Torah?

1. Again, Maimonides tells us that if something cannot be accepted with its plain meaning, we must read the verse or passage allegorically.  That means that we can read the passage of “the world was created in six days” not in six literal days.  After all, the sun was not created until Day Four.  Who knows how long the first three days really were?    
2. The first point can be countered by the fact that a vast majority of classical rabbis believed that the six days were literally six 24-hour periods.  How do we get around that?  In his book “The Science of G-d,” Gerald Schroeder uses the theory of relativity to explain how six days of creation are equivalent to the fifteen billion years of scientific evolution. 
3. Science and religion tell us the same story.  They are just giving two different narratives.  Narrative #1: The universe was in a very hot, dense state, and eventually expanded rapidly.  The expansion caused the universe to cool, and it still is in a presently expanding state.  Narrative #2: After having created the universe in Genesis 1:1, G-d said "let there be light, and there was."  Both explanations entail a sudden burst of light, and both explanations conclude that the universe indeed had a beginning.  Both narratives are in concert with reality.  (In a sense, it should be easier to accept the Torah’s account because we now know that there was a beginning to the universe.  Up until the Big Bang Theory, it was widely accepted in the scientific community that the universe is “eternally old.”)  
4. Torah does not provide with the scientific details as to how creation happened. To paraphrase R. Samson Hirsch, it would not matter if evolution were accepted as valid scientific truth because it does not negate the Creation account.  All understanding how we came into being would merely give us a reason to be even more reverent towards Hashem because we better understand His works.  

Torah does not negate science, and science does not negate Torah.  Science explains how the universe functions.  Torah gives use meaning and purpose in a monotheistic context.  Rather than have the two at odds with one another, what should be done is use both Jewish texts and scientific texts to better ascertain the truth.

A $20 Minimum Wage?!

There has been much hype about the Occupy Wall Street movement lately.  Although their frustration with the lack of economic growth, not to mention the collusion between Big Government and Big Business, is valid, frustration is insufficient in terms of implementing change.  You need sound policy to back it up.  Naïveté exists amongst these protesters, and an "unofficial" list of demands exemplified it.  The first demand was to "restore the living wage," which entails raising the minimum wage to $20.  But why stop at $20?  Why not make it an even $100?  The short response to this is that such an increase, whether to $20 or $100, would backfire.

And now, the longer answer.

One of the main issues is that minimum wage increases unemployment.  In simple economic terms, the minimum wage is a price floor imposed on the labor market.  If minimum wage were below the equilibrium point, minimum wage would have no effect.  However, Leftist think tanks such as Economic Policy Institute admit that their wages would have been higher without the price floor, which is another way of saying that the price floor is above the equilibrium point.  When a price floor is above the equilibrium point, it creates a surplus [of labor], which in this case, means that minimum creates unemployment.  This effect is more pronounced because low-skilled labor is more elastic than skilled labor.  Studies such as those from the National Center for Policy Analysis, Employment Policy Institute, and the United States Congress back up the economics.  

Let's say that just about every study done on minimum wage is wrong, the laws of economics are wrong with regards to price ceilings, and minimum wage actually doesn't increase unemployment.  You still have the other issue of minimum wage increasing the cost of production.  Producers need to compensate for the loss in increased wages.  They will do so by making the product more expensive, which translates into less consumption.

This especially hurts small businesses.  Mom and Pop shops don't have the same advantage of economies of scale that a company such as Wal-Mart has.  Especially with this recession, driving up production costs gets so ridiculous that the typical consumer will not want to shop at the Mom and Pop shop, even though the service is more personable.  Minimum wage laws have thus adversely contributed to the closing of small businesses, especially during this recession.  The same principle applies to non-profit organizations who cannot afford the current minimum wage.  And even for large companies such as Wal-Mart, this incentivizes them to have human labor replaced by machines (e.g., automated checkouts).

Rather than helping those in need, minimum wage laws are hurting them (also see economist Greg Mankiw's thoughts), which obviously is the opposite of what was intended.  This is pronounced on the global level, in which the United States has been racking up trade deficits for quite some years.  In terms of foreign competition, the United States is at a disadvantage because China can charge whatever they want for labor, whereas the United States has to pay a minimum amount.  The issues with this (i.e., increased labor costs and less workers) are more noticeable because you have to compete even harder to import quality products.

Although the minimum wage is not the sole culprit to current economic problems, it should be evident that minimum wage laws hurts those who it was intended to assist, is detrimental to labor markets by increasing unemployment, and impedes on America's ability to compete in the global market.

Political Digest for Week of October 2nd

Considering the fact that it's still High Holiday season, I don't have enough time to sit down and do in-depth analysis.  However, I wanted to post at least one blog entry, so I'll just do a brief digest with some pieces that I found this week that were of intrigue.

• Cato Institute Associate Director Daniel Ikenson reviews how the China currency bill currently in Congress won't create jobs, and how it will backfire by actually destroying jobs.
• I don't think this is really news, but Obama has increased debt by more than all the other presidents combined.  I'll concede that the figure is misleading because it does not adjust for inflation.  However, as Heritage Foundation points out, the federal debt as a percentage of GDP under Obama has not been this high since WWII (also see Politifact analysis for further detail).
• Sarah Palin will not be seeking the presidential nomination this election cycle.  I have three words for that: what a relief!
• The Wall Street Journal reports that approximately half of Americans receive some sort of government benefits.  The upward trend is not exactly comforting for those of us who prefer freedom to "social 'justice.'"  
• According to the Carnegie Endowment's Senior Associate Moisés Naím, China has the real potential to have its economic progress to be derailed, which would be worse than anything that is going to be going on in Greece right now.  Original article in El País is here.     
• A bit of political satire from Reason Magazine about the "Occupy Wall Street" movement.