Russell Roberts's Blog, page 1482

Do Only the Rich Get Richer?

Some comments on this post – comments involving income differences ("inequalities") – prompt me to reprise this post from 2004.

NPR's Marketplace yesterday ran a story on the widening income gap between Hispanics and whites in the United States. (I unsuccessfully tried to find a specific link to this story on Marketplace's website.) One of the persons interviewed remarked that it's a classic case of "the rich getting richer and the poor getting poorer" (or words very, very close to that effect).

This is an old and familiar saw – but one that doesn't cut it.

Review the history of Americans who've become rich as entrepreneurs. A large percentage – my guess is a great majority of them – began life in modest circumstances.

Perhaps the most famous fabulously rich American of all time is John D. Rockefeller, founder of Standard Oil. He hailed from a poor, hard-scrabble farm in upstate New York, then moved with his family as a young boy to Ohio. He began his career at the age of 16 in Cleveland as a bookkeeper. He was quite the opposite of wealthy.

Or Andrew Carnegie. The son of a Scottish weaver, he immigrated to America, with nearly nothing, at the age of 13. Almost immediately he began his career – as a bobbin boy in a cotton mill. No riches here that launched Carnegie.

Or Aaron Montgomery Ward. He began his career working in a barrel factory at the age of 14; later he advanced to laboring in a brick yard. Even later, he earned his living as a traveling salesman. No riches here that launched Montgomery Ward.

Going back a few generations, consider John Jacob Astor. (See also here.) He was born in Germany, the son of a butcher, and worked in his brother's factory making musical instruments. He did not amass any fortune until he came to the U.S. and started his fur-trading business.

Likewise for Cornelius Vanderbilt, descended from Dutch indentured servants and a man who quit school at the age of 11 to work on ferries. His family was of only modest means.

Or Gustavus Swift. He was the son of a farmer; he began his career as a butcher's apprentice.

J.P. Morgan is something of an exception to the above cast of entrepreneurs. His father was a partner in a London investment firm.

More recently, Steve Jobs hails from a modest background. (Bill Gates is more like Morgan on this front; his father is a partner is the well-known law firm of Preston Gates & Ellis.)

I could go on, listing famous rich business people. I'm quite certain – without having yet done a detailed study – that the history of these people thoroughly disproves the tired adage that "the rich get richer and the poor get poorer."

Others can be added to the above list.  Henry Ford (born on a farm); Richard Sears (son of a blacksmith); F.W. Woolworth (born on a potato farm); RCA's David Sarnoff (born to poor Jewish parents in Minsk); IBM's Thomas Watson (son of a small rural merchant).  As I said, I could go on and on.

Our next rap video—please help

John Papola and I are hard at work on the sequel to Fear the Boom and Bust. Keynes and Hayek return to debate whether government stimulus programs can pull an economy out of a downturn. The lyrics are almost done and we are starting to sketch out the visual narrative. We're still short about $50,000 in order to cover the production and editing work. Please donate here. It's tax-deductible and secure.

On Fletcher and the False Assumption of U.S. Manufacturing Decline

Here's a letter to the Huffington Post:

Ian Fletcher's column on U.S. manufacturing is a stew of misunderstandings, non sequiturs, half-truths, and false presumptions ("Manufacturing in Decline; Establishment in Denial," Feb. 1).  For example, about the fact that U.S. manufacturing output remains the highest among all countries in the world today, Mr. Fletcher – after expressing surprise that anyone bothers even to mention this fact – dismissively says "This statistic proves nothing about improvement or decline."

America's continuing high manufacturing output deserves to be mentioned simply because so very many people today – such as prominent anti-trade pundit Harold Meyerson – ceaselessly and ominously repeat the falsehood that American manufacturing is in decline.

As for the "statistic prov[ing] nothing about improvement or decline," a scholar so well versed with the data as is Mr. Fletcher surely must know that, measured in inflation-adjusted dollars, U.S. manufacturing output in 2009 was about ten percent higher than it was in 2000, 47 percent higher than in 1990, 83 percent higher than in 1980, and 120 percent higher than in 1970.

Sincerely,

Donald J. Boudreaux

Don't miss this new report on the current state of manufacturing in America.  (HT Craig Kohtz)

For the record, there would be nothing inherently wrong with, or worrisome about, the U.S. economy if U.S. manufacturing output were declining by whatever metric you choose to measure it.

Rich Poor Americans

Any number of lessons – some correct, many incorrect – might be drawn from my favorite passage in this past Sunday's New York Times Book Review; it's from Catherine Rampell's review of Branko Milanovic's The Haves and the Have-Nots:

The typical person in the top 5 percent of the Indian population, for example, makes the same as or less than the typical person in the bottom 5 percent of the American population. That's right: America's poorest are, on average, richer than India's richest — extravagant Mumbai mansions notwithstanding.

Incandescent Arrogance

Here's a letter to the Wall Street Journal:

Peter Miller of the National Resources Defense Council defends compact fluorescent light bulbs against incandescent bulbs in part by insinuating that compact fluorescents are the better option for individual households and businesses (Letters, Feb. 1).  He grounds this case on the fact that there are "years of evidence from around the world confirming the large electric-bill savings utility customers get from more efficient lighting."

Far from justifying the ban (to start in 2014) on sales in the U.S. of incandescent bulbs, the evidence Mr. Miller offers strongly suggests that the ban will harm utility customers: if, in the absence of the ban, consumers would continue to buy incandescent bulbs despite the higher cost of using such bulbs, then consumers clearly judge the quality of incandescent bulbs to be so much higher than that of compact fluorescents as to be worth paying higher prices for incandescent lighting.

Banning incandescent bulbs for this reason makes no more sense than would, say, banning the sale of Chateau Latour and other premium wines because evidence shows that households save money by buying only Riunite.

Sincerely,

Donald J. Boudreaux

Not-So-Sweet Sugar 'Program'

Here's a letter, sent last week, to the New York Times:

American Sugar Alliance economist Jack Roney asserts that "Sugar policy operates at no cost to taxpayers" (Letters, Jan. 23).  This assertion is true only if taxpayers never use sugar or sugar substitutes: sugar tariffs force Americans to pay an extra $2.5 billion annually for cane sugar, plus more for sugar substitutes, such as corn syrup, whose prices are driven up by the artificially high demand that sugar tariffs create for these substitutes.

Mr. Roney is correct that the higher prices caused by these tariffs don't appear in Uncle Sam's budget.  But so what?  It's as ludicrous to imply that these tariffs are costless as it would be to imply that a government policy forcing persons whose home addresses end in an odd number to write checks for $10 to their neighbors directly across the street is costless.  In both cases, the benefits that government commandeers for some are paid for by others.

Sincerely,

Donald J. Boudreaux

Carpe Diem's Mark Perry finds that the cost to U.S. consumers of Uncle Sam's sugar 'program' are even higher than I report above

Corruption and Fraud in Science

In this week's EconTalk, I talk with Brian Deer, the journalist who discovered that a study alleging a link between the MMR vaccine and autism was not only a fraud, but a corrupt fraud. Deer tells a riveting story–enjoy.

Is this case the tip of the iceberg or a rare event? I don't know, but it's amazing to me that the original study with 12 observations was published in the first place.

Trade is Mutually Advantageous – and Its Advantages, for All Parties, are Measured in Imports

Dan Ikenson and Scott Lincicome urge that the case for free trade be made on its strongest grounds – and not on grounds that implicitly concede the 'us-vs.-them' assumption of protectionists.  Here are key paragraphs:

The case for free trade is much broader than the one that trumpets only export potential. And it is more elegant. The most principled case is a moral one: voluntary economic exchange is inherently fair, benefits both parties, and allocates scarce resources more efficiently than a system under which government dictates or limits choices. Moreover, government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers are the triumph of coercion and politics over free choice and economics. Trade barriers are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.

Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. Policymakers on the right should support free trade because it is consistent with their principled opposition to higher taxes on American businesses and consumers and to big government telling people how and where they should spend their money. A vote for free trade is a vote to cut taxes and to get government out of the business of picking winners and losers in the market. Policymakers on the left should support free trade because it is consistent with their opposition to corporate welfare and regressive taxation.

Beyond the moral case for free trade, when people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control their decisions. Widening the circle of people with whom we transact brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

When goods, services, and capital flow freely across U.S. borders, Americans can take full advantage of the opportunities of the international marketplace. They can buy the best or least expensive goods and services the world has to offer, they can sell to the most promising markets, they can choose among the best investment opportunities, and they can tap into the worldwide pool of labor and capital. Study after study has shown that countries that are more open to the global economy grow faster and achieve higher incomes than those that are relatively closed.

(HT Andy Roth)

QWOP Complexity

My 13-year-old son, Thomas, plays a video game called QWOP (which Thomas pronounces "Que-opp").  Thomas reports that this game is the most challenging video game that he plays.

The game requires the player to control the muscle movements of an Olympic-style sprinter so that the sprinter dashes down the track.  The goal of the game (if I gather correctly) is to get the sprinter down the track in the shortest time possible.  The better the player is able to make the movements of the cyber-sprinter look as much as possible like the movements of a real sprinter, the more success the player will have at QWOP.

Thomas tells me that the player controls the cyber-sprinter's movements by manipulating four keys on the keyboard: q, w, o, & p.  (Thus the name of the game.)

Thomas, alas, can hardly get the cyber-sprinter to put one foot in front of the other for a single time, much less in coordinated succession for a successful sprint to the finish line.  I tried it a couple of times, with even less success.

QWOP should teach us a valuable lesson about the economy and efforts to control it.

Observing a real-world sprinter run a race gives us the impression that it's easy to do.  (Not so much to achieve the speed of world-class sprinters, but just to run.)  We all run – or have run, more or less, at some point in our lives.  We're experienced at that endeavor!

And, if asked, we could describe what the runner does.  "Well, first he raises his right leg, then pushes forward with his left foot behind him to give him sufficient momentum to move his entire body off of the ground – and moving forward – for a split second.  Then the sprinter repeats the process, but this time pushing off with his right foot behind him….."

Seems pretty simple.

But try to control the movements of the cyber-sprinter in QWOP.  It's incredibly difficult!  He falls on his face, moves spastically, and goes nowhere fast.

In fact, a sprinter's movements are an indescribably complex pattern of muscle contractions and expansions.  And while a skilled QWOP player (I assume) can master the relatively simple keyboard movements required to get the relatively simple cyber-sprinter down the track in some fashion that visually resembles the movements of a real-world sprinter, it's hubris to suppose that any third person could control a wired-up but unconscious real-world sprinter and, by using some piece of technology, manipulate that sprinter's muscles in ways that would get him down the track successfully.

If we want to watch a foot race, we let each individual runner run on his or her own.

We should be on guard against such hubris when we imagine ourselves – or some geniuses whom we admire – 'running' the economy or any significant portion of it.  What meets the eye in any marketplace – meets the eyes even of experts – is only a tiny tip of an immense iceberg of complex feedback loops, unique and often fleeting bits of knowledge, and countless adjustments of coutless people, none of whom could describe in detail exactly what they're doing any more than even a world-class sprinter could describe in detail all that he does with his muscles when he sprints.

Even the best models of an economy or of an industry capture, at most, only this tiny tip of this immense iceberg of feeback loops, knowledge, and adjustments.  Anyone who mistakes mastery of even the most useful economic model or theory for mastery of all that that model or theory aims to represent is foolish beyond words.  "Smart," perhaps, but no wiser than dryer lint.

Back in 1998 I wrote a column with a similar theme.

Demythologizing Democracy

Here's a letter to the Cleveland Plain Dealer:

James Banner objects to a proposed constitutional amendment that would allow any legislation enacted by Uncle Sam to be "dis-enacted" by a vote of 2/3ds or more of state legislatures ("An amendment rooted in past failures," Jan. 30).  Mr. Banner argues that this amendment would give "a minority of Americans another means of preventing the majority from governing."

The case isn't so clear.  Suppose that each of the 535 members of Congress is elected to office by a razor-thin majority of a mere 51 percent of the votes in his or her district or state.  49 percent of American voters would then be represented on Capitol Hill by persons they voted against.  Now suppose that this Congress enacts a statute by the barest majority: 51 'yea' votes in the Senate and 218 'yea' votes in the House.  The result is a statute that is enacted with the favorable votes of the preferred representatives of only a tad more than 25 percent of Americans.  In this case, a sizable majority (nearly 75 percent) of us are forced to follow rules imposed by a minority of us.

The proposed amendment might or might not be a bad idea.  But one cannot make a sensible assessment of it by naively presuming that all, or even most, legislation approved by Congress – even if signed by the President – invariably reflects the wishes of a majority of Americans.

Sincerely,

Donald J. Boudreaux

Of course, there are many, many other reasons for rejecting the conclusion that legislation duly enacted by sitting legislatures reflects the 'will' of the majority – much less the 'will' of The People.