Detailed Abstractions

Call the it the little hypothesis which thinks is can, or at least, the little hypothesis which because people thinks it should, must be.

From Mother Jones discussing income inequality between the rich and the poor, decides that those, in this case Matt Yglesias noting that when America sees economic growth, all income groups fair better, are completely wrong [emphasis added] (here):

This is a surprisingly hardy myth, and I’d like to help it die the grisly death it deserves and I’d like to help it die the grisly death it deserves. Here’s a chart showing real per capita GDP growth in the United States over the past century. I’ve helpfully added a straight red line for the period from 1950 to the present day:

US Per Capita Increase in GDP

The past 30 years simply haven’t been a low-growth period. In fact, economic growth has been about the same as it was in the 30 years before that. Our problem isn’t growth, our problem is that the returns to growth have increasingly been skewed in favor of the very rich.

& that’s it.  The article continues about how modern liberalism needs to fix this, yet they offer no proof that it’s actually happening other than a single statement.  In fact, the only thing in the article which might be used as evidence for something, the graph is about GDP trends, per capita.

So if you, like me, have been staying up late nights wondering just how much fame you might get in by answering the unsolvable question: how has the US economy fared over the past 100 years, I must say I’m sorry.  We lost.  MotherJones has beat us to it.  So if asked in the future, you can now safely say, the US economy has increased over the past 100 years.

If however you were searching for actual evidence to their assertion about income inequality, none is found, none is offered.

Which by itself might seem trivial, if you skip the tens of thousands of people who read MotherJones daily.  But even worse, respected economist Robert Shiller when discussing books pushes the MotherJone’s version of things too (article here):

….the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places.

He even mentions the idea of having the government setup a “choice architectural” because of evidence demonstrating too many irrational decisions made on behalf individuals.  Which of course assumes the government and smart economists could ever replace the collective knowledge of the market, even with irrational actors, with their own ideas or some perfect formula.

But I digress.  The main issue is  they give no reason to believe their assertion is true, yet act like it.  Even with easily found research, with real numbers and everything, from a very reputable source, which as you likely guessed by now,  states otherwise (here via NBER):

Changes in labor’s share of income play no role in rising inequality of labor income: by one measure, labor’s income share was almost the same in 2007 as in 1950.

They go on to discuss reasons inequality exists and discuss things like life expectancy, the difference between the rich and the super rich (say high level executives versus CEOs), but of course when one is looking, it’s not hard to find other evidence MotherJone’s is wrong & they have a nice little graph too (here via Wiki):

US Income by Given Percentile from 1947 to 2007

Doesn’t seem all that “increasingly skewed” to me, but I have been told I see things differently before…

& certainly some may see this distribution as unfair even if it hasn’t been increasingly skewed recently, but they will fail in their attempts to solve this problem for the same reason Mr. Shiller’s belief in the idea of a “choice architecture” will fail.  They simply don’t have the knowledge required, regardless of intellect or brilliance, to supplant an answer supplied by countless independent actions taken freely (mostly) by countless individuals.  It’s simple arrogance.

As Hayek stated so brilliantly:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

Over @ Concuring Opinions, Nate Oman has an interesting post about the defenses of a free market (whole thing here):

Broadly speaking, I think that there are three families of arguments that can be made in defense of markets. Most commonly within the legal academy markets are defended on the basis of efficiency….

The second defense of markets is libertarian. This looks a lot of like the efficiency argument but is actually quite different, notwithstanding the fact that libertarians frequently confuse the two. In the libertarian argument what matters is not welfare but freedom. Freedom is taken as a good in and of itself, even if choices might result in reductions of welfare for the chooser….

The third argument is a defense of markets as markets.

Both the efficiency and the libertarian defenses of markets are reductionist in the sense that they see the good of markets in a unitary way. Markets are good because — properly constructed — they move resources around to maximize welfare….

Markets are good because they provide cooperation in the face of disagreement over the definition of the good and “social stability.”…

It’s a very decent article, though as a non-card carrying libertarian, I need to disagree with some of his minor points.  Namely, that libertarians are by group interested in freedom alone.  In fact, libertarians, just like other demographic groups get to the same answers through different paths and all three paths are prevalent in the current party.

For some libertarians, it is an…. intellectual/efficiency argument alone.  They believe markets aren’t necessarily moral or perfect at rationing, but they firmly believe that a free market leads to the best possible solution for the most people.

For me, I take the freedom approach.  To maximize individual welfare means one must maximize individual choices.  This might seem as too moralistic or philosophical for some as to be practical or useful, but it seems logical that reducing one mans’ freedom is antithetical to maximizing welfare.

& to be thoroughish, lots of libertarians are just tired of all the other parties and joined that cool one with that goofy, “Who is Ron Paul” stuff.  In reality, like most organizations, libertarians are not absolutists either way using a combination of thoughts to form their basis for their beliefs, but I digress.

The author continues about the third way:

On this view, traders are not cowardly, greedy, souless parasites (see, e.g., Shylock) constantly tempting the virtuous away from the path of justice with filthy lucre. Rather, commerce encourages courage, honesty, and fidelity. It encourages cooperation rather than predation. It allows people with widely disparate views of the ultimate ends and purposes of life to peacefully cooperate with one another. Commerce rewards the frugal and the farsighted, while punishing the wastrel and the spendthrift…..

But he tells us….

The third, pluralist view of the good of markets gets scant attention…

While this maybe a true statement, but the reality is that all three defenses coexist to form both a cohesive political and philosophical framework (though I do have issues with libertarians on foreign policy).

If we can start with the idea that maximizing welfare includes maximizing freedom, efficiency, freedom, & moral markets work together.

When starting with the paramount of freedom in economics, one also gets into the land of (un)intended consequences and perverted incentives.  Hayek talked about this a great deal – the fact that due to the shear size and complexity of the market, any attempted centralized interference will change incentives and unlikely for the better.  Unlikely, because the “status quo” we all question exists through millions and millions of individual transactions.

For lack of a better term, a collective wisdom emerges, order out of chaos.  An answer, that we might not like, but something for which a centralized system is (highly) unlikely to do better than free individuals.  The result is the most efficient use of resources we can hope to achieve while maintaining the most individual freedoms we can.

What about the morals? Well….it’s not as if we don’t have recent examples to help us out.  Leaving out the current mess of a tax code, take the recent financial crisis.

Predatory lenders?  Sure.  Fraudulent and speculative borrowers? Sure.  The reason why it worked so well?  Government incentives pushed quasi-government agencies to purchase loans without much oversight.

Why no oversight?  No skin in the game.  They couldn’t fail.  The market believed it & they believed it.  & in the end, the government proved them right.  Do the wrong thing, over and over and over and over again until it finally collapses and someone else ends up paying the bill….

So while the author is probably correct that we don’t use a moral market argument much, especially in an atmosphere of language such as “fat-cats”, he’s incorrect that this moral option is a “third” argument.  It is indeed part and parcel of the framework that markets are more efficient, better at maximizing freedom, and yes, even better at incenting moral behavior as well.

More on market morals here

Over at the Huffington Post, Keli Goff wrote an interesting, yet disturbingly short sighted piece about particular health care costs which exist in large part due to personal private choices.

She begins the piece titled Mad at Greedy Insurers for This Health Care Mess? Then Why Aren’t You Mad at Your Greedy Neighbors discussing the government’s bail out of private businesses:

Raise your hand if you are still filled with anger when you hear the name AIG and picture the more than $100 million of your tax dollars that were delegated–without your consent–for employee bonuses there.

Now raise your hand if you were angry when you learned that Citigroup (which has received so much bailout money that American taxpayers have been dubbed “its major stockholder”) was planning to spend $50 million of your money on a luxury jet….

Even though the numbers she sights are a far cry from the actual tax dollars given to private business, she uses the anger over the bail outs to compare with the lack of anger of health care costs related to personal choice:

…There is something inherently distasteful about being expected to foot the tax bill for someone else’s personal choices–particularly bad ones–and not being given any choice of your own in the matter. Which is why I am so surprised that there has been so little anger expressed by leaders on either side of the health care debate when it comes to the issue of personal choice and responsibility in health care…

…According to the Centers for Disease Control, “obesity costs our nation as much as $147 billion per year in direct health care costs and lost productivity.” And according to the nation’s oldest anti-smoking organization smoking costs taxpayers a whopping $300 billion dollars annually, or 1,000 times the amount of the AIG bonuses….

Utilizing this ratio of anger levels contrasted with actual dollars, she follows through by discussing the trait both costs have in common, personal responsibility:

…Some health care reform advocates will argue these costs would be lower if there were government subsidized health care, but my question is why should the government, specifically taxpayers, subsidize health care costs for conditions that are not only preventable but essentially chosen by the patient? With all of the anger surrounding the health care debate, at town halls, in the House and Senate, where is the anger about personal responsibility?…

Like many before her, she perfectly frames the clear distinction between individual actions which don’t harm others and societal responsibility.  She uses our innate disgust of having to foot the bill for the negative consequences of others and sees the fundamental issue of both problems.

If only she had stopped there.  If only she understood clearly that when I hurt myself, I should be the only one liable for the resolution, we’d be in total agreement.  Instead, she illogically assumes that individual responsibility is shared among all citizens:

…To be clear, personal responsibility is not only up to consumers.  Mayor Bloomberg’s success in curbing smoking in New York is due to a multi-pronged strategy of aggressively fining bars and restaurants that allow patrons to flout the anti-smoking ban and raising the cost of cigarettes, in essence targeting the dealer as much as the addict….

Not only is responsibility shared in her view, but government force is also the solution.  Therefore since targeting these “bad smoking” behaviors has coincided with a decrease in the number of smokers , why not continue these policies to control other “bad” behaviors?

…A similar strategy should be undertaken federally against fatty foods and drinks (including many of the ones I love).  But as long as groups like the AFL-CIO oppose efforts to hold Americans financially accountable for their personal health choices, so that the system can afford to treat those who do not choose to be sick…

Thinking more critically though, this turns out to be very short sighted thinking devoid of any historical context and antithetical to fundamental human behavior.  Indeed, I think most people agree with her that when people make bad decisions that affect only themselves, they should be solely responsible for the consequences.

Where she fails is in properly analyzing government as the solution.  If one fully analyzes her solution, the lack of follow through in her thinking becomes easily spotted.

First, we know that human behaviors are heavily influenced by incentives.  It’s natural and obvious; we do things that benefit us.  For those willing to see reality for what it is, examples are all around us.  We can see it in the use of commission programs for corporate sales force.  We see it in TV commercials and marketing campaigns.  We even see it in the tax code.   Through denial or lack of contemplation though, some fail to see that this same fundamental human behavior also affects our decisions as they relate to health care.

In fact, one of the reasons for rising health care costs and bad personal choices is individual consumers have been moved further and further away from the actual cost.   In the US, part of rise in health care costs can be attributed to  government incentives which pushed health care plans away from individuals and towards employers.  For the same reason, others countries with socialized medicine also see rapidly rising costs of health care.

Second, we also know that historically, when governments are given the power continue to assume more and more control over individual lives, it ends in tyranny.  As we allow government to assume more responsibility for individual actions, we necessitate their ability to control those actions.

Assuming we still believe in a free society, one of the prices we pay is having the responsibility for the negative consequences brought about by our choices.

For instance, if you smoke – society doesn’t owe you CHEMO.  If I you eat 30K calories a day – society doesn’t owe you gastric bypass surgery.  If you drink a bottle of whiskey a day – society doesn’t owe you a liver.

However, by not of following the logic of her solutions and ignoring historical contexts, she can safely and happily assume government control is the answer:

…So the next time you are reminded of how angry you are at AIG or any other institution that was “bailed out” with your money, just remember that AIG may have mugged you once, but McDonald’s and your neighbor keeping them in business (and whoever invented the doughnut, bacon cheeseburger), will be sucking your wallet dry for decades to come….

Which only leaves us in the end with nothing more than a false dichotomy as if we only have two choices:  either we pay for it or we control it.

Really, due to faulty logic, she has unwittingly made a very cogent argument against government provided health care.  IE – we don’t need to control that behavior if we are not paying for it.

But I don’t know if she understands that by continuing to promote societal responsibility for individual choices, she is also logically promoting less freedom and more government intrusion.  I don’t know if she even believes in the value and morality of freedom.  I also don’t know that she doesn’t fully understands all of this, but due to value differences only, still believes government control to be the answer to health care problems.  And I really don’t know which is worse – being wrong based upon ignorance or understanding the full ramifications of increased government control, but not caring.

The truly concerning part should be that it doesn’t matter which is worse as the results are always the same.   For as long as we have enough people with these types of beliefs, we will continue to lose more and more individual freedoms.

As Hayek stated:

“We must show that liberty is not merely one particular value but that it is the source and condition of most moral values. What a free society offers to the individual is much more than what he would be able to do if only he were free.”