Source: The success sequence: Conservatives think they have a formula for raising people out of poverty.
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What is the success sequence?
08 Jan 2016 Leave a comment
in economics of education, labour economics, labour supply, occupational choice, politics - USA, poverty and inequality, welfare reform Tags: child poverty, family poverty, high school dropouts, marriage and divorce, single parents, success sequence
Adam Smith versus Jamie Whyte or is there poverty on the Starship Enterprise?
07 Jan 2016 2 Comments
in Adam Smith, applied welfare economics, politics - New Zealand, poverty and inequality, Rawls and Nozick Tags: child poverty, family poverty, star trek
Jamie Whyte today wrote an excellent op-ed on the meaninglessness of current measures of poverty. His point was that defining poverty as 60% of the median income means the poor will always be with us. This relative definition of poverty misleads us as to the level of hardship and deprivation in society as Jamie Whyte says today:
There is no poverty in New Zealand. Misery, depravity, hopelessness, yes; but no poverty.
The poorest in New Zealand are the unemployed. They receive free medical care, free education for their children and enough cash to pay for basic food, clothing and (subsidised) housing. Most have televisions, refrigerators and ovens. Many even own cars. That isn’t poverty.
I agree that this definition of poverty in relative income terms is misleading and reflects a political agenda. When I was young, the poor were thin, now they are fat.
Poverty rates have not changed despite a greater abundance of food. Indeed, child poverty rates have increased since I was young despite this relative opulence of food.
Over the Christmas break I read Simon Chapple and Jonathan Boston’s Child Poverty in New Zealand. They included a discussion of what was poverty drawing on the relative concept of poverty of Adam Smith. Smith spoke about wrote about the differences in poverty between countries and across time:
A linen shirt … is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen.
But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.
In any society, a certain level of material well-being is necessary to not be in poverty. Smith also talked about how poverty lines differ between countries starting with the discussion about shoes:
The poorest creditable person of either sex would be ashamed to appear in publick without them. In Scotland, custom has rendered them a necessary of life to the lowest order of men; but not to the same order of women, who may, without any discredit, walk about bare-footed. In France, they are necessaries neither necessaries neither to men nor to women; the lowest rank of both sexes appear there publickly, without any discredit, sometimes in wooden shoes, and sometimes bare-footed.
Under necessaries, I comprehend, not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people.
All other things I shall call luxuries; without meaning by this appellation, to throw the smallest degree of reproach upon the temperate use of them. Beer and ale, for example, in Great Britain, and wine, even in the wine countries, I call luxuries. A man of any rank may, without any reproach, abstain totally from tasting such liquors. Nature does not render them necessary for the support of life; and custom nowhere renders it indecent to live without them.
Much of the Wealth of Nations was about the natural progress of opulence under a capitalist system. There is nothing wrong with inequality as John Rawls has explained.
The fact that citizens have different talents can be used to make everyone better off. In a society governed by the difference principle, those better endowed with talents are welcome to use their gifts to make themselves better off, so long as they also contribute to the good of those less well endowed.
With his emphasis on fair distribution of income, Rawls’ initial appeal was to the Left, but left-wing thinkers started to dislike his acceptance of capitalism and tolerance of large discrepancies in income.
Will the poor always be with us? I once had an argument with a colleague at work about whether there was poverty on the Starship Enterprise.
Star Trek was supposed to be a society that had abolished money and a post-scarcity economy because everything was available through a replicator. To quote Captain Picard:
A lot has changed in three hundred years. People are no longer obsessed with the accumulation of ‘things’. We have eliminated hunger, want, the need for possessions.
The economics of the future is somewhat different. You see, money doesn’t exist in the 24th century… The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of Humanity.
The Ferengi and their 285 rules of acquisition were a satire on capitalism. The Ferengi was originally meant to replace the Klingons as the Federation’s arch-rival but they were too comical.
Gene Roddenberry’s love story with socialism was a class-ridden society. In Star Trek, higher ranked officers had larger cabins, and most of all they always beamed back from the planet.
An old mate reminded me years ago that anyone who beamed down with Captain Kirk dressed in those red security officer tops were expendables. They were lucky to last 60 seconds in most episodes I watched.
Death and accommodation were class based on Star Trek but it was a supremely opulent society for everyone. That is the point to remember.
Standards are living are much better today than before for everyone despite inequalities that are quite acceptable under the difference principle of John Rawls.
Current definitions of poverty do not take into account the natural progress of opulence. In the 1970s, US Department of Energy started collecting its Household Energy Consumption Survey. This survey is one of the few accurate measures of growing affluence among the poor in America.
Not only does this survey ask about household appliances, it asked about on income. The survey is conducted every 4 years or so since the 1970s. Because of that, it is able to track the diffusion of appliances to households of varying incomes across America.
Yesterday’s luxuries at today’s necessities in poor households with a rapid diffusion of everything from air-conditioners to digital appliances. Many poor households in the USA have more space than middle-class households in Western Europe. Food is also much cheaper in the USA than in Europe.
https://twitter.com/VisualEcon/status/644080191841640448
This growing affluence of poorer Americans is despite higher measured family poverty in America according to the relative poverty measure based on the median income. That makes no sense.
@GarethMorgannz the universal basic income is inferior to the minimum family tax credit
20 Dec 2015 4 Comments
in labour economics, labour supply, politics - New Zealand, poverty and inequality, public economics, welfare reform Tags: Aaron Director, Director's Law, Gareth Morgan, negative income tax, social insurance, universal basic income, welfare state
Gareth Morgan’s universal basic income appears to make everybody better off except those for whom the modern welfare state was established to protect. Examples of these from his online calculator are single mothers and retirees.
Source: The Big Kahuna – Tax and Welfare.
To stay even just with single mothers blows a good $10 billion hole in the budget deficit according to the online calculator provided by Gareth Morgan. Retirees are still worse off.
Source: The Big Kahuna – Tax and Welfare.
Central to the package is a comprehensive capital gains tax despite evidence growing with each day that the optimal tax rates on income from capital and on capital gains are zero.
A universal basic income for New Zealand is a long trip to where we are now. There is already a guaranteed minimum family income in New Zealand.
The minimum family tax credit makes sure that a family’s annual income (net income after tax has been deducted) doesn’t fall below $23,036 a year ($443 per week). To qualify, you must work for a salary or wage for at least 30 hours each week as a couple, or 20 hours each week as a single parent, and receive a family tax credit.
The Treasury modelled a Guaranteed Minimum income at the request of the Welfare Working Group in 2010. A guaranteed minimum income of $300 per week – the mean benefit income among those on benefits – would cost $44.5 billion or $52.6 billion if we extended it to super annuitants as a replacement for NZ Superannuation or old age pension. The former could be covered by a flat personal income tax rate of 45.4%; the latter, 48.6%. Full fiscal neutrality would require tax rates of 50.6% and 54.4%.
The universal basic income seems to be a big day out for Director’s Law of Public Expenditure. Director’s Law is public expenditure is used primary for the benefit of the middle class, and is financed with taxes which are borne in considerable part by the poor and the rich.
The universal basic income and a comprehensive capital gains tax seems to cause a lot of economic upheaval but still struggles to make the worse off groups in society even break-even on this throwing of all the cards in the air. Brian Easton put it well the other day when he said:
Many advocates put the UMI forward without doing the sums. Those who do, find that the required tax rates are horrendous or the minimum income is so low that it is not a viable means of eliminating poverty. Among the latter are New Zealanders Douglas, Gareth Morgan and Keith Rankin.
Roland Fryer on Education, Inequality, & Incentives
19 Dec 2015 1 Comment
in applied price theory, discrimination, economics of education, gender, human capital, labour economics, labour supply, politics - New Zealand, politics - USA, poverty and inequality Tags: charter schools, racial discrimination, Roland Fryer
US maternal employment rates by number and age of children
18 Dec 2015 Leave a comment
in discrimination, gender, labour economics, labour supply, politics - USA, poverty and inequality, welfare reform Tags: economics of fertility, female labour force participation, maternal labour force participation, single mothers
Old age poverty rates in the G7, Australia, New Zealand and Korea
17 Dec 2015 Leave a comment
in labour economics, politics - Australia, politics - New Zealand, politics - USA, poverty and inequality, public economics Tags: old age poverty, old-age pension, social insurance, welfare state
@jacindaardern the role of drug addiction in poverty and unemployment
16 Dec 2015 Leave a comment
in applied price theory, labour economics, labour supply, politics - New Zealand, poverty and inequality, unemployment
Jacinda Adern does have a point that the Prime Minister overplayed the role of drug dependency in child poverty, but he is not completely off the mark. A whole bunch of self-destructive behaviours play a role in family poverty.
Source: Minister of Social Development Cabinet Paper on Pre-employment Drug Testing Requirements.
Too many children have irresponsible parents. Caplan along with Charles Murray point out that a number of pathologies are particularly prevalent among poor:
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alcoholism: Alcohol costs money, interferes with your ability to work, and leads to expensive reckless behaviour.
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drug addiction: Like alcohol, but more expensive, and likely to eventually lead to legal troubles you’re too poor to buy your way out of.
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single parenthood: Raising a child takes a lot of effort and a lot of money. One poor person rarely has enough resources to comfortably provide this combination of effort and money.
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unprotected sex: Unprotected sex quickly leads to single parenthood. See above.
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dropping out of high school: High school drop-outs earn much lower wages than graduates. Kids from rich families may be able to afford this sacrifice, but kids from poor families can’t.
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being single: Getting married lets couples avoid a lot of wasteful duplication of household expenses. These savings may not mean much to the rich, but they make a huge difference for the poor.
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non-remunerative crime: Drunk driving and bar fights don’t pay. In fact, they have high expected medical and legal expenses. The rich might be able to afford these costs. The poor can’t.
Caplan is disputing that healthy adults who are poor are victims. That is central to the poverty is not a choice movement: the poor are victims.
The New Zealand experience with work testing of beneficiaries for drugs is most of them quickly stopped using dope. Many jobs have tests for drug-taking.
Why do @fightfor15 @LivingWageNZ @LivingWageUK aim so low?
16 Dec 2015 1 Comment
in applied price theory, labour economics, Marxist economics, minimum wage, politics - New Zealand, politics - USA, poverty and inequality Tags: expressive voting, Leftover Left, living wage
Choices that lead to poverty @GarethMorgannz @povertymonitor
15 Dec 2015 2 Comments
in applied welfare economics, labour economics, labour supply, politics - New Zealand, politics - USA, poverty and inequality, welfare reforms
The best evidence that poverty can be a choice is the success of the 1996 US welfare reforms and other carrot and stick approaches to poverty reduction. Poverty in the USA dropped dramatically in the mid-1990s after being stable for decades.
The stick is the most important part of poverty reduction programs that have succeeded. The poverty is not a choice movement deny to themselves the most successful child poverty reduction tool of modern times.
The success of the 1996 US federal welfare reforms were not discussed in an experts report on solutions to child poverty published a few years ago by the Children’s Commissioner. It should have been.
After decades of no progress against child poverty, five-year time limits on federal welfare assistance along with mandatory work requirements encouraged a large number of single mothers to find work. Many of these single mothers who joined the workforce in the USA were high school dropouts with small children.
Proposal to make child-care tax credit refundable would boost employment of working mothers bit.ly/1i1Xzcq https://t.co/2xlQQtPRJs—
The Hamilton Project (@hamiltonproj) October 29, 2015
Child poverty fell dramatically among minorities after the 1996 US federal welfare reforms. Everybody was surprised by the massive increases in the employment of single mothers and the reductions in child poverty. Nobody expected young mothers with small children to have so much control over their destiny.
That ability of single mothers to find a job as a condition of welfare benefits after the 1996 US federal welfare reform contradicts the belief that poverty is not a choice.
Child poverty is concentrated among single mothers and in particular single mothers on a welfare benefit. The subsequent declines in welfare participation rates and gains in employment were largest among the single mothers previously thought to be most disadvantaged: young (ages 18-29), mothers with children aged under seven, high school drop-outs, and black and Hispanic mothers.
When welfare benefits are linked to work requirements, the 1996 US federal welfare reforms showed that a surprisingly large number of single mothers can find and keep a job. Employment are never married mothers increased by 50% after these US reforms; employment of single mothers with less than a high school education increased by two-thirds; employment of single mothers aged of 18 to 24 approximately doubled.
Brian Caplan has been among those to link self-destructive behaviours to many of those in poverty. He argues there are a number of reasonable steps that healthy adults can take to avoid poverty for them and their children:
- Work full-time, even if the best job you can get isn’t fun.
- Spend your money on food and shelter before getting cigarettes and cable TV.
- Use contraception if you can’t afford a child.
Caplan specifically includes among the undeserving poor the children of poor or irresponsible parents.
Caplan along with Charles Murray point out that a number of pathologies are particularly prevalent among poor:
- alcoholism: Alcohol costs money, interferes with your ability to work, and leads to expensive reckless behaviour.
- drug addiction: Like alcohol, but more expensive, and likely to eventually lead to legal troubles you’re too poor to buy your way out of.
- single parenthood: Raising a child takes a lot of effort and a lot of money. One poor person rarely has enough resources to comfortably provide this combination of effort and money.
- unprotected sex: Unprotected sex quickly leads to single parenthood. See above.
- dropping out of high school: High school drop-outs earn much lower wages than graduates. Kids from rich families may be able to afford this sacrifice, but kids from poor families can’t.
- being single: Getting married lets couples avoid a lot of wasteful duplication of household expenses. These savings may not mean much to the rich, but they make a huge difference for the poor.
- non-remunerative crime: Drunk driving and bar fights don’t pay. In fact, they have high expected medical and legal expenses. The rich might be able to afford these costs. The poor can’t.
Caplan is disputing that healthy adults who are poor are victims. That is central to the poverty is not a choice movement: the poor are victims. Many are not, especially the healthy adults.
Policy debates about how to reduce poverty must break out of poverty is not a choice mentality because as Caplan says:
Being poor is a reason to save money, work hard, and control your impulses.
The choices people can make to avoid poverty are finish high school, seek a full-time job, delay children until you marry, and avoid crime. Working against this is as women’s labour market opportunities improved, their interest in low-status men has declined. As Charles Murray explains, working class males have become less industrious:
In 2003-5, men who were not employed spent less time on job search, education, and training, and doing useful things around the house than they had in 1985. They spent less time on civic and religious activities. They didn’t even spend their leisure time on active pastimes such as exercise, sports, hobbies, or reading…
How did they spend that extra leisure time? Sleeping and watching television. The increase in television viewing was especially large – from 27.7 hours per week in 1985 to 36.7 hours in 2003-5…
The demand to date and marry such men has declined because raising children as a solo mission has become more viable for mothers.
Saying poverty is not a choice undermines important messages about help but hassle that must be woven into the heart of the incentive structures of social insurance and the welfare state.
Statistical illusions about U.S. poverty @JulieAnneGenter @povertymonitor
15 Dec 2015 Leave a comment
in applied welfare economics, politics - USA, poverty and inequality
Nearly one in six New Zealand children live in workless households
04 Dec 2015 Leave a comment
in labour supply, politics - New Zealand, poverty and inequality, welfare reform
Fact checking @Bernie Sanders latest presidential debate
27 Nov 2015 Leave a comment
in applied price theory, applied welfare economics, economic growth, labour economics, politics - USA, poverty and inequality, welfare reform Tags: 2016 presidential election, Leftover Left, Twitter left
@economicpolicy gathers more evidence of a waning gender pay gap @joshbivens_DC @eliselgould
22 Nov 2015 Leave a comment
in applied price theory, discrimination, economic history, gender, human capital, labour economics, labour supply, minimum wage, occupational choice, poverty and inequality Tags: asymmetric marriage premium, Claudia Goldin, compensating differentials, economics of fertility, gender wage gap, marriage and divorce, power couples
As part of a large paper calling for massive government intervention, the Economic Policy Institute, impeccably left-wing, massed a considerable amount of evidence about the withering away of the gender wage gap and anomalies in what is left of that gap. None of these anomalies bolster the case for more regulation of the labour market.
The first of their charts showed the large reduction in the gender wage gap in the USA. Women’s wages have been increasing consistently over the last 40 years or so. The second of their tweeted charts shows that women of all races consistently outperformed men in wages growth, often by a large margin.
Their most interesting chart is about how the gender gap is not only highest among top earners, their pay gap has not fallen at all in the last 40 years. If anything, that gender wage gap is rising at the top end of the labour market albeit slowly. Progress in closing the gender gap been pretty consistent at the lower pay levels. That progress is certainly better than no progress at all.
The Economic Policy Institute didn’t enquire in any detail into why women with the most options in the labour market had made the least progress in closing the gender wage gap.
None of their solutions such as more collective-bargaining and a higher minimum wage will help the top end of the job market.
There is an anomaly in the Economic Policy Institute’s reasoning. The women who would suffer least from a purported inequality of bargaining power inherent in the capitalist system and have plenty of human capital have had least success in closing the gender pay gap. These women can shop around for better job offers and start their own businesses. Many do because they are professionals where self-employment and professional partnerships are common.
The better discussions of the gender wage gap emphasise choice. Women choosing at the top end of the labour market to balance career and family and choosing the occupation and education where the net advantages of doing that are the greatest. As the Economic Policy Institute itself notes:
In 2014, the gap was smallest at the 10th percentile, where women earned 90.9 percent of men’s wages. The minimum wage is partially responsible for this greater equality among the lowest earners, as it results in greater wage uniformity at the bottom of the distribution.
The gap is highest at the top of the distribution, with 95th percentile women earning 78.6 percent as much as their male counterparts. Economist Claudia Goldin (2014) postulates that the gap is larger for women in high-wage professions because they are penalized for not working long, inflexible hours that often come with many professional jobs, due in large part to the arrival of children and long-standing social expectations about the division of household labour between men and women.
What the Economic Policy Institute does not explain is why these long-standing social expectations about the division of household labour should be strongest among well-paid women with plenty of options.
Among these options of high-powered women in well-paid jobs is the ability to buy every labour-saving appliance, hire a nanny and ample childcare and acquire everything else on the list of demands of the Economic Policy Institute on closing the gender pay gap. Something doesn’t add up?
Of course, the Economic Policy Institute discusses the unadjusted gender wage rather than the adjusted gender wage. When you study the gender wage gap after making adjustments for demographic and other obvious factors, it is clear that this pay gap is driven by the choices women make between career and family.
Claudia Goldin did a great study of Harvard MBAs using online surveys of their careers. This is the very group that according to the Economic Policy Institute have made the least progress in bringing down patriarchy in the labour market. Specifically, the overturning of traditional expectations about the marital division of labour in childcare and parenthood.
https://twitter.com/alyssalynn7/status/669219008747610113
Goldin found that three proximate factors accounted for the large and rising gender gap in earnings among MBA graduates as their careers unfold:
- differences in training prior to MBA graduation,
- differences in career interruptions, and
- differences in weekly hours.
The greater career discontinuity and shorter work hours for female MBAs are largely associated with motherhood. There are some careers that severely penalise any time at all out of the workforce or working less than punishingly long and rigid hours.
A 2014 Harvard Business School study found that 28 percent of recent female alumni took off more than six months to care for children; only 2 percent of men did.
Claudia Goldin found one counterfactual that cancels out the gender wage gap amongst MBA professionals: hubby earns less! Female MBAs who have a partner who earn less than them earn as much as the average MBA professional on an hourly basis but work a few less hours per week.
The gender wage gap is persisted in high-paying jobs because career women have so many options. Studies of top earning professionals show that they make quite deliberate choices between family and career. The better explanation of why so many women are in a particular occupation is job sorting: that particular job has flexible hours and the skills do not depreciate as fast for workers who take time off, working part-time or returning from time out of the workforce.
Low job turnover workers will be employed by firms that invest more in training and job specific human capital:
- Higher job turnover workers, such as women with children, will tend to move into jobs that have less investment in specialised human capital, and where their human capital depreciates at a slower pace.
- Women, including low paid women, select careers in jobs that match best in terms of work life balance and allows them to enter and leave the workforce with minimum penalty and loss of skills through depreciation and obsolescence.
This is the choice hypothesis of the gender wage gap. Women choose to educate for occupations where human capital depreciates at a slower pace.
The gender wage gap for professionals can be explained by the marriage market combined with assortative mating:
- Graduates are likely to marry each other and form power couples; and
- There tends to be an age gap between men and women in long-term relationships and marriages of two years.
This two-year age gap means that the husband has two additional years of work experience and career advancement. This is likely to translate into higher pay and more immediate promotional prospects.
An interesting and informed look at the pay gap between men and women economist.com/blogs/freeexch… https://t.co/0nxtC9ILWo—
Charles Read (@EconCharlesRead) November 06, 2015
Maximising household income would imply that the member of the household with a higher income, and greater immediate promotional prospects stay in the workforce. This is entirely consistent with the choice hypothesis and equalising differentials as the explanation for the gender wage gap. As Solomon Polachek explains:
At least in the past, getting married and having children meant one thing for men and another thing for women. Because women typically bear the brunt of child-rearing, married men with children work more over their lives than married women. This division of labour is exacerbated by the extent to which married women are, on average, younger and less educated than their husbands.
This pattern of earnings behaviour and human capital and career investment will persist until women start pairing off with men who are the same age or younger than them. That is, more women will have to start marrying down in both income and social maturity.
Utopia, you are standing in it! 
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