Federal health-care subsidies may be too high or too low for more than 1 million Americans

See Click here to read the Washington Post article by Amy Goldstein and Sandhya Somashekhar. Excerpts: 

"The government may be paying incorrect subsidies to more than 1 million Americans for their health plans in the new federal insurance marketplace and has been unable so far to fix the errors,"

"potentially hundreds of thousands of people are receiving bigger subsidies than they deserve."

[they were] "Americans who listed incomes on their insurance applications that differ significantly — either too low or too high — from those on file with the Internal Revenue Service, documents show."

[they have been] "asked to upload or mail in pay stubs or other proof of their income. Only a fraction have done so,"

"behind the scenes, important aspects of the Web site remain defective — or simply unfinished."

"the Obama ... promised ... last year that a thorough income-verification system would be in place."

"flaws in HealthCare.gov blocked many naturalized citizens or permanent legal residents, requiring them to submit immigration documents that are, like the income information, caught in a backlog."

"difficulty in straightening out discrepancies affects an especially large number of consumers. Of the roughly 8 million Americans who signed up for coverage this year under the health-care law, about 5.5 million are in the federal insurance exchange. And according to the internal documents, more than half of them — about 3 million people — have an application containing at least one kind of inconsistency."

"But because of the trouble verifying incomes, the government has not lowered or raised anyone’s subsidies."

"people out there who have made unintentional errors, and in a few years will be subject to massive tax bills,"

Imagine that the world's superpower reduces the size of government by a quarter over the next 30 years, even as its population grows by 50%.

See In Search of Gladstonian Republicans: The liberalism of Britain's great 19th-century prime minister is a model for the next conservative revolution in today's WSJ, by John Micklethwait And Adrian Wooldridge. Messrs. Micklethwait and Wooldridge, respectively the editor in chief and management editor of the Economist, are the authors of "The Fourth Revolution: The Global Race to Reinvent the State." just out from Penguin Press. Excerpts: 

"Imagine that the world's superpower reduces the size of government by a quarter over the next 30 years, even as its population grows by 50%. Imagine further that the superpower performs this miracle while dramatically increasing both the quality of public services and the nation's diplomatic clout."

"Impossible? That is exactly what Britain, then the world's superpower and pioneer of the new economy, did in the 19th century. Gross revenue from taxation fell from just under £80 million in 1816 to well under £60 million in 1846, even as the population surged and the government helped build schools, hospitals, sewers and the world's first police force. The Victorians paid for these useful new services by getting rid of what they called "Old Corruption" (and we would call cronyism) and by exploiting the new technology of the day, like the railway."

"And they kept on cutting government for decades."

"He paid for his passion for social reform by a ruthless campaign against waste."

"this was real liberalism—the classical small-government creed of Adam Smith and John Stuart Mill (and for that matter Milton Friedman and Margaret Thatcher ). The Victorians believed in a "night-watchman state"—one that left citizens as free as possible to pursue their own ends, provided that they did no harm to anyone else."

"But Gladstonian liberalism provides a remarkable template for the next conservative revolution.

First, rip out cronyism. Between 1815 and 1870 British Liberals replaced a government based on patronage, sweeping aside the special privileges for the East India Company, West Indian sugar makers and British landowners. Today the American right's dirty secret is its love of big government, especially tax breaks for business (including sugar). The U.S. tax code has $1.6 trillion of exemptions, most of which go to the well-off."

"Having helped dismantle Britain's protectionist Corn Laws in the 1840s, he would be astonished that America still doles out $30 billion a year in agriculture subsidies and employs 100,000 people in the Agriculture Department. 

Second, concentrate the state on what it needs to do. Why does the federal government own 900,000 buildings and 260 million acres of land? Why does it continue to run utilities? Why are so many American airports still in public hands? Gladstone would concentrate money on the poor, targeting the welfare state for the rich. More money goes to the top 5% in mortgage-interest deduction than to the bottom 50% in social housing. He would set about reforming entitlements to make sure that they are fundable, for example raising the retirement age to 70 in line with life expectancy (as other countries like Sweden have done)."

"Third, simplify government, particularly the numbers. In the early 19th century, British government accounts were incomprehensible, deliberately so. The aristocrats who ran the country wanted to conceal the fact that most government spending went to support their relations in the form of sinecures, church livings, pensions and ceremonial jobs. Gladstone insisted on standing before Parliament and explaining the budget in detail:"

"America's current budget is so full of perks for vested interests that only lobbyists and their lawyers can understand it."

"Fourth, take the state seriously. This is the tea party's great shortcoming. The Victorians believed in "reform" as well as "retrenchment." It was precisely because they wanted the state to be as small as possible that they put so much effort into making it work as well as possible. They introduced competitive exams for civil servants, rewarding the good ones with money and honors while sacking the bad ones."

"The best way for the U.S. to avoid disasters like the current one in the Department of Veterans Affairs is to do a better job of hiring—and firing. 

Fifth, put yourself on the side of business creation. Visit Silicon Valley, and you'll find that Republicans are regarded as being out of touch, not least because of their approach to immigration."

"great legal reforms that allowed anybody to form a limited-liability company. American conservatives should fight to make it easier to take companies public too, partly because that spreads popular capitalism. Finally, make the state humble and dowdy. Gladstone, who even told his government to use cheaper writing paper, would have been horrified by the motorcades that sweep through Washington. He preferred to walk."

Poor countries have narrowed the gap on life expectancy and infant mortality

From Cafe Hayek. It is their "Quotation of the Day…"

"is from page 37 of Indur Goklany’s 2002 article “Economic Growth and Human Well-Being,” which is chapter 2 in Sustainable Development: Promoting progress or perpetuating poverty? (Julian Morris, ed. [2002]) (footnotes excluded):

However, measurements that describe human well-being more directly than income do not show quite the same pattern [of growing income inequality between people in rich countries and people in poor countries].  Yes, gaps in life expectancy and infant mortality between the more and less developed countries are substantial.  However, these gaps have narrowed by 55% since the Second World War.  The gap in life expectancy was 25.4 years in the 1950-1955 period but fell to 10.9 years in the 1995-2000 period, while the gap in infant mortality fell from 121 to 53 deaths per 1,000 live births.  In addition … food supplies per capita have increased.  Hunger is less prevalent that it was 30 years ago and the number of people suffering from chronic undernourishment has declined in both absolute and relative terms.  Thus, while income inequalities have widened, in the aspects of human well-being that are truly crucial – life expectancy, infant mortality, hunger – the world is far more equal."

Mark Perry On CEO Pay

Click here to read the whole post

"We can get a more accurate and complete picture of CEO compensation in the US by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations,” including the occupational category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400. The CEOs of the 200-350 S&P500 firms reported recently represent only one out of about every 1,000 firms in the country (or 1/10 of 1%) that have a CEO at the head. The larger sample of almost a quarter-million CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”

For the larger sample of CEOs reported by the BLS, their average pay of $178,400 last year was an increase of only 0.88% from the average CEO pay of $176,840 in 2012. In contrast, the BLS reports that the average pay of all workers increased by 1.42% last year to $46,440 from $45,790 in 2012. That’s right, the average worker last year saw an increase in their pay that was more than 60% greater than the increase in pay for the average US CEO. And the “CEO-to-worker pay ratio” for the average CEO compared to the average worker is only about 5X, nowhere close to the pay ratio of 331X reported by the AFL-CIO using the 350 highest-paid CEOs in the country."

The Denial of Middle-Class Prosperity

Government data show that average disposable income has increased across all income groups since 1979.

Click here to read the WSJ article by Neil Gilbert. Dr. Gilbert, a professor of social welfare at the University of California, Berkeley, is a fellow of the American Academy of Social Welfare and Social Work. Excerpts:

"Members of America's middle class are better off than they were 30 years ago, and they live much more comfortably than counterparts in other countries.

The problem with the research showing middle-class stagnation is that it looks at market incomes, which exclude taxes, government transfers and adjustments for household size."

"The Congressional Budget Office's 2011 report on income inequality trends offers a more precise accounting, dispelling the notion that the past three decades have been characterized by the rich getting richer at the expense of the poor while the middle class stays about the same. The CBO adjusts market income by subtracting taxes and adding the cash value of social benefits. When households are then divided into five equal income groups, the data reveal that average disposable household income has increased across all groups since 1979. The average household income grew by 40% for the middle quintile and increased by 49% for the bottom quintile.

The CBO data also show, however, that the top quintile did much better than everyone else. From 1979 to 2010, the average after-tax income of the top 1% increased by 201%, to $1,013,100 from $337,700. The top 1% also took home almost 13% of all after-tax income in 2010. (Many of these families, though, are not ultrarich, as the starting pretax income for the 1% in 2011 was $388,905.)

Yet even here there's more to the story. Between 1979-2011, young workers entered the labor force as older employees retired. A 25-year-old who began working in 1979 may have started in the bottom quintile, but the worker very likely reached a higher income bracket by age 53 in 2007. So not only did entry-level incomes rise, but many who started at the bottom also climbed toward the top. Between 1996-2005, for example, the Treasury Department estimates that about half of the taxpayers in the bottom 20% moved into a higher income bracket.

And how has the middle class fared amid the changing mobility? One might judge not well when compared with the top 1%. But consider everyone else on the planet: The American middle class boasts the fourth-highest disposable household income in the world. The U.S. finishes behind only Luxembourg (a country of 500,000 people), oil-rich Norway, and Switzerland, which stayed out of both World Wars and imposes the strictest immigration laws on the continent.

The average U.S. family has 38% more disposable income than a family in Italy, 25% more than a family in France and 20% more than a household in Germany, when adjusted for purchasing power, according to the Organization for Economic Cooperation and Development." 

"the image of a static 1 and 99 percent is largely incorrect"

So said Mark R. Rank in The NY Times in April. Click here to read the article. Mark R. Rank is a professor of social welfare at Washington University and the co-author of  Chasing the American Dream: Understanding What Shapes Our Fortunes. Excerpts:

"It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution."

"Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years."

"54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60)."

"between 1999 and 2007, half of those who earned over $1 million a year did so just once during this period, while only 6 percent reported millionaire status across all nine years."

"the top 400 taxpayers between 1992 and 2009. While 73 percent of people who made the list did so once during this period, only 2 percent of them were on the list for 10 or more years."

"Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. It suggests that the United States is indeed a land of opportunity, that the American dream is still possible — but that it is also a land of widespread poverty. And rather than being a place of static, income-based social tiers, America is a place where a large majority of people will experience either wealth or poverty — or both — during their lifetimes."

The World's Resources Aren't Running Out

Ecologists worry that the world's resources come in fixed amounts that will run out, but we have broken through such limits again and again

Click here to read this WSJ article by Matt Ridley. Excerpts:

""We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund). 

But here's a peculiar feature of human history: We burst through such limits again and again. After all, as a Saudi oil minister once said, the Stone Age didn't end for lack of stone. Ecologists call this "niche construction"—that people (and indeed some other animals) can create new opportunities for themselves by making their habitats more productive in some way. Agriculture is the classic example of niche construction: We stopped relying on nature's bounty and substituted an artificial and much larger bounty.

Economists call the same phenomenon innovation. What frustrates them about ecologists is the latter's tendency to think in terms of static limits. Ecologists can't seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.

That frustration is heartily reciprocated. Ecologists think that economists espouse a sort of superstitious magic called "markets" or "prices" to avoid confronting the reality of limits to growth. The easiest way to raise a cheer in a conference of ecologists is to make a rude joke about economists."

"the Intergovernmental Panel on Climate Change's recent forecast that temperatures would rise by 3.7 to 4.8 degrees Celsius compared with preindustrial levels by 2100 was based on several assumptions: little technological change, an end to the 50-year fall in population growth rates, a tripling (only) of per capita income and not much improvement in the energy efficiency of the economy."

"Most economists expect a five- or tenfold increase in income, huge changes in technology and an end to population growth by 2100: not so many more people needing much less carbon."

"the amount of land required to grow a given quantity of food has fallen by 65% over the past 50 years, world-wide. Ecologists object that these innovations rely on nonrenewable resources, such as oil and gas, or renewable ones that are being used up faster than they are replenished,"

"the ecologist Carl Safina estimates that if everybody had the living standards of Americans, we would need 2.5 Earths"

"E.O. Wilson, one of ecology's patriarchs, reckoned that only if we all turned vegetarian could the world's farms grow enough food to support 10 billion people."

"large parts of the world, especially in Africa, have yet to gain access to fertilizer and modern farming techniques, there is no reason to think that the global land requirements for a given amount of food will cease shrinking any time soon."

"even with generous assumptions about population growth and growing affluence leading to greater demand for meat and other luxuries, and with ungenerous assumptions about future global yield improvements, we will need less farmland in 2050 than we needed in 2000."

"Estimates made in the 1960s and 1970s of water demand by the year 2000 proved grossly overestimated: The world used half as much water as experts had projected 30 years before. 

The reason was greater economy in the use of water by new irrigation techniques."

"The best-selling book "Limits to Growth," published in 1972 by the Club of Rome (an influential global think tank), argued that we would have bumped our heads against all sorts of ceilings by now, running short of various metals, fuels, minerals and space. Why did it not happen? In a word, technology: better mining techniques, more frugal use of materials, and if scarcity causes price increases, substitution by cheaper material. We use 100 times thinner gold plating on computer connectors than we did 40 years ago. The steel content of cars and buildings keeps on falling."

"The economist and metals dealer Tim Worstall gives the example of tellurium, a key ingredient of some kinds of solar panels. Tellurium is one of the rarest elements in the Earth's crust—one atom per billion. Will it soon run out? Mr. Worstall estimates that there are 120 million tons of it, or a million years' supply altogether. It is sufficiently concentrated in the residues from refining copper ores,"

"Or take phosphorus, an element vital to agricultural fertility. The richest phosphate mines, such as on the island of Nauru in the South Pacific, are all but exhausted. Does that mean the world is running out? No: There are extensive lower grade deposits, and if we get desperate, all the phosphorus atoms put into the ground over past centuries still exist,"

"In 1972, the ecologist Paul Ehrlich of Stanford University came up with a simple formula called IPAT, which stated that the impact of humankind was equal to population multiplied by affluence multiplied again by technology."

"greater affluence and new technology have led to less human impact on the planet, not more. Richer people with new technologies tend not to collect firewood and bushmeat from natural forests; instead, they use electricity and farmed chicken—both of which need much less land. In 2006, Mr. Ausubel calculated that no country with a GDP per head greater than $4,600 has a falling stock of forest (in density as well as in acreage). 

Haiti is 98% deforested and literally brown on satellite images, compared with its green, well-forested neighbor, the Dominican Republic. The difference stems from Haiti's poverty, which causes it to rely on charcoal for domestic and industrial energy, whereas the Dominican Republic is wealthy enough to use fossil fuels,"

"Water returns to the environment through sewage and can be reused. Phosphorus gets recycled through compost. Tellurium is in solar panels, which can be recycled. As the economist Thomas Sowell wrote in his 1980 book "Knowledge and Decisions," "Although we speak loosely of 'production,' man neither creates nor destroys matter, but only transforms it.""

"A widely used measure of "ecological footprint" simply assumes that 54% of the acreage we need should be devoted to "carbon uptake." 

But what if tree planting wasn't the only way to soak up carbon dioxide? Or if trees grew faster when irrigated and fertilized so you needed fewer of them? Or if we cut emissions, as the U.S. has recently done by substituting gas for coal in electricity generation? Or if we tolerated some increase in emissions (which are measurably increasing crop yields, by the way)?" 

"ecologists have been using "human appropriation of net primary production"—that is, the percentage of the world's green vegetation eaten or prevented from growing by us and our domestic animals—as an indicator of ecological limits to growth. Some ecologists had begun to argue that we were using half or more of all the greenery on the planet.

This is wrong, says Dr. Haberl, for several reasons. First, the amount appropriated is still fairly low: About 14.2% is eaten by us and our animals, and an additional 9.6% is prevented from growing by goats and buildings, according to his estimates. Second, most economic growth happens without any greater use of biomass. Indeed, human appropriation usually declines as a country industrializes and the harvest grows—as a result of agricultural intensification rather than through plowing more land.

Finally, human activities actually increase the production of green vegetation in natural ecosystems. Fertilizer taken up by crops is carried into forests and rivers by wild birds and animals, where it boosts yields of wild vegetation too (sometimes too much, causing algal blooms in water). In places like the Nile delta, wild ecosystems are more productive than they would be without human intervention,"

Donald J. Boudreaux On Piketty

See Pikettymania.  Excerpts:

"Start with Piketty's pithy refrain: r > g , where r is the rate of return on capital and g is the rate of economic growth. Piketty insists that the rate of return on capital will, year in and year out, exceed the rate of economic growth. The result is that (unless government intervenes) those who own capital will steadily grow richer than those who own only their own labor.

How, though, do the returns on capital grow so regularly and rapidly? You'd think the book would explain this central proposition. Yet Piketty offers no such explanation beyond saying that capital grows “by itself.”

"The entire tenor of Piketty's volume suggests that he thinks capital reproduces itself, both from the perspective of its individual owners and from the perspective of society at large.

The creativity and fortitude of entrepreneurs, the skillful risk-taking by investors and the insight and effort of managers are all strangely absent throughout Piketty's performance. These very fonts of modern prosperity are at best assumed to play uninterestingly routine and unseen roles backstage. Onstage, capital — the stuff that is in fact created and skillfully steered by flesh-and-blood entrepreneurs, investors and managers — appears to grow spontaneously, without human involvement."

New Costs From Health Law Snarl Union Contract Talks

Workers and Employers Tussle Over Who Should Pay for New Costs Tied to Affordable Care Act

Click here to read the WSJ. Excerpts:

"Unions and employers are tussling over who will pick up the tab for new mandates, such as coverage for dependent children to age 26, as well as future costs, such as a tax on premium health plans starting in 2018. The question is poised to become a significant point of tension as tens of thousands of labor contracts covering millions of workers expire in the next several years, with ACA-related cost increases ranging from 5% to 12.5% in current talks."

"Labor experts on both sides say the law doesn't take into account that health benefits have been negotiated by employers and unions over decades, and that rewriting plans to meet new requirements can affect wages and other labor terms."

"...unions have unsuccessfully tried to win concessions from the Obama administration on some issues now involved in the labor talks."

"higher costs of new mandates, especially the requirement that health plans expand coverage for dependents."

"Uncertainty about future costs is also hampering negotiations. One of the biggest looming unknowns is the so-called Cadillac tax on high-cost health plans scheduled to take effect in 2018. The provision imposes a 40% tax on the annual cost of health care above $10,200 for individual coverage and $27,500 for family coverage.

The regional transit system in Philadelphia, Septa, estimates the tax will boost its health-care costs by $15 million a year, or 12.5% of the $120 million it currently spends each year on health coverage."

"Union officials say the law penalizes so-called union-sponsored multi-employer health plans, which are jointly run by unions and primarily small employers,"

"People in those plans aren't eligible for the subsidies toward the cost of premiums that the law offers some people buying coverage on their own. And many multi-employer plans also must pay a $63 tax this year per covered individual to help subsidize plans sold through the new insurance exchanges. Unions and large employers had campaigned against the fee, which drops to $44 in 2015. Under regulations released in March, some labor unions and businesses will get a break, but union officials have said the vast majority of its plans don't fit the definition required to qualify."

"Another provision of the law that eliminates caps on annual and lifetime health-care costs has forced multi-employer plans to purchase their own insurance to prevent potential runaway costs from bankrupting plans."

"these provisions have increased construction-industry health plans' costs by 5% to 10%, and already resulted in lower wages for some laborers."

"In other cases, the law has resulted in some workers losing coverage from multi-employer plans. Last year, the United Food and Commercial Workers agreed to eliminate existing coverage for thousands of newer part-time workers at New England supermarkets, in order to preserve benefits for full-time workers."

"the union has agreed to several supermarket contracts that eliminate health coverage for certain members' spouses who have coverage available elsewhere."

Deirdre McCloskey Versus Thomas Piketty

See Has Thomas Piketty met his match? Well, I think I might have met his match. She's called Deirdre McCloskey. By Evan Davis of the BBC. Excerpt: 

"McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.

Professor McCloskey has a point, of course. Think of the Bill Gates and Steve Jobs, big wealth accumulators in recent times. It wasn’t the magic of compound interest on capital that made them rich; it was intellectual property. They created billions of dollars of business from virtually nothing at all. If you measure the profits as a return on the small amount of initial capital invested, then it looks huge; but capital was no more important an ingredient of the original Apple or Microsoft than cookies or cucumbers.

And to me, this is one big distinction at the heart of the wealth equality debate: whether capital — past accumulation of savings — gets to devour the future, or whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all?

The answer to that question determines what should be done about inequality. Piketty wants a progressive tax on wealth to prevent high returns entrenching the power of the richest. McCloskey, needless to say, is not keen on redistribution. Taking from today’s rich may give you a one-off uplift in the incomes of the poor of, say 30 per cent, she says; but that is nothing to the uplift from innovation and growth, which can double incomes every generation.

So much for the central disagreement between them. Here’s my problem. Many people with strong views on inequality consciously or unconsciously think of this as a binary choice: profits go to either a deserving or undeserving rich, depending on your view. It’s all about capital, or all about wealth creation. But I struggle to see it that clearly. I’d like to know how much of the return on capital that so concerns Piketty is actually income earned from entrepreneurial wealth creation. I’d also like to know how important that income is to innovation.

Piketty is well aware of this vulnerability in his argument. ‘The return on capital often inextricably combines elements of true entrepreneurial labour, pure luck and outright theft,’ he says. But it doesn’t seem to bother him very much. He points out that Liliane Bettencourt, heiress of L’Oréal, who ‘has never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates’. And he has his doubts about whether Bill Gates’s fortune is a good example of true entrepreneurship or monopoly profit anyway.

Like Piketty, Deirdre McCloskey in principle recognises there may be an opposite view to her own. But in practice, she hurridly dispenses with it. ‘You have to ask what the source of the inequality is. If the source is stealing from poor people, I’m against it. But if the source is, you got there first with an innovation that everyone wants to buy, so you get paid some crazy sum, you ought to be paid so much, don’t you think?’

For McCloskey, entrepreneurial wealth creation is not only the star of the show, but the only member of the cast. She barely recognises the idea that business could legally make profits without at the same time creating value. Fussing about inequality is unnecessary when there is growth and innovation to promote. She is always happy to give a brief history lesson to support her point: ‘Inequality rose in the early 19th century in Britain and the United States. Then it fell. Then it rose. Now we’re talking about the early 20th century. By the early 1920s, inequality was the same as it is now. Then in the 1930s it reversed, and it went down, to the 1970s. Then it started going up. In none of these cases did it change enough that equality was the issue that faced the working class.’ It is innovation and growth that matters.

She is admirably pure in her view, but is it as black and white as she portrays it?

Bill Gates or Liliane Bettencourt? They co-exist, of course, and have both had a pretty good time of it in recent decades. The question is which one better characterises the very rich. And also which risk you would rather take: taxing the Bills at the risk of deterring them from creating Microsofts? Or not taxing the Lilianes, at the risk of letting them become ever wealthier and more powerful while sitting at home doing nothing?"

Do Increases In The Minimum Wage Stimulate The Economy?

Interesting post from Thomas A. Firey of Cato. 

"Supporters of this election cycle’s call to raise the minimum wage have had little success so far. The country’s long-struggling economy has made federal lawmakers hesitant to increase the cost of entry-level jobs, and they’re sensibly ignoring the false claim that “there’s no solid evidence that a higher minimum wage costs jobs.”

To combat this, minwage supporters are trying a new argument: raising the federal minimum wage, they say, will boost the economy.

Harold Meyerson, for one, floats this idea in his latest Washington Post column:

By putting more money into the pockets of the working poor—a group that necessarily spends nearly all its income on such locally provided basics as rent, food, transport and child care—an adequate minimum wage increases a community’s level of sales and thereby creates more jobs.

This idea raises the question, did previous federal minimum wage increases boost the economy? Below is a list of all federal increases since the modern Fair Labor Standards Act (FLSA) minimum wage law was adopted in 1977, along with notes on what subsequently happened to the economy:

Legislation   date	Phase-in   dates	Economy
1977   Amendments	1/1/1978	Economy   enters recession, 1/1980
	1/1/1979
	1/1/1980
1989   Amendments	4/1/1990	Economy   enters recession, 7/1990
	4/1/1991
1996   Amendments	10/1/1996	U.S. Real   GDP grows 4.5% in 1997, 4.4% in 1998, and 4.8% in 1999
	9/1/1997
2007   Amendments	7/24/2007	Economy   enters recession, 12/2007
	7/24/2008
	7/24/2009

Going back further, the economy also entered recessions during the phase-ins of the two previous minimum wage increases, under the 1966 and 1974 FLSA Amendments. So, during five of the last six federal minimum wage increases, the nation fell into recession.

Now, perhaps the minwage increases did stimulate the economy in each of those years, but the stimulus was not enough to overcome the problems that brought on the recessions. Heck, perhaps the ‘96–’97 increase was the chief cause of the economic boom of the late 1990s.
But probably not.

It seems far more likely that mandating a small wage increase for a small group of workers who work a small number of hours will not have much stimulatory effect on the economy. It may not even be enough to counterbalance the negative economic effects of would-be workers who can’t find—or lose—their jobs because of the mandated increase."

What do the Piketty data problems really mean?

Great post from Tyler Cowen.

"In some ways the new FT criticisms may not matter much, although I think not in a way which is reassuring for Piketty.  There were already several major problems with Piketty’s analysis and also empirics, including what Alex has called the asset price problem.  He wrote:

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis.

Adjusting for that factor seems to make the main results go away, and that is a purely empirical problem which has not been answered, at least not yet.

Another pre-existing empirical problem is that 19th century data seem to indicate that a “Piketty world,” even if we take it on its own terms, far from being a disaster, would likely be accompanied by rising real wages and declining consumption inequality, albeit rising wealth inequality.

That hasn’t been answered either, although a few people have suggested (without serious back-up) that if wealth inequality is going up that has to lead to political problems, or problems of some kind or another, and thus it can’t be something we can approve of or accept with equanimity, because inequality is really really bad, and therefore Piketty is somehow right anyway.  That’s a weak response to begin with and furthermore it doesn’t fit the available data.

Empirically, inheritances aren’t nearly as important as Piketty seems to suggest.
On Twitter Clive Crook wrote of the:

…distance between treacherous data and super-bold conclusions an issue at the outset. This underlines the point.

Now, when you cut through the small stuff, the new empirical problem seems to be that UK revisions, combined with a population-weighted series for Europe, contradicts Piketty’s claim of rising wealth inequality for Europe.   I would call that a serious problem.  I am not impressed by the “downplaying” responses which focus on coding errors, Swedish data points, and the other small stuff.  Let’s face up to the real (new) problem, namely that robustness suddenly seems much weaker.  You can’t argue that population-weighting is “the right way to do it,” but it is an entirely plausible way to estimate the wealth inequality trend.  If Piketty’s results don’t survive population weighting (and what are apparently the superior UK numbers), that suggests the overall rise in European wealth inequality is not very robust to how the pie is carved up and also that it is not backed by dominant, “rule the roost” sorts of forces.

It should be noted that Piketty’s response to the new criticisms was quite weak.  Maybe he’s not to be blamed for what was surely a rapid and caught-off-guard response, and perhaps there is more to come, but it doesn’t reassure me either.  He also should have run it by a PR person first (for instance, don’t start your response with a sentence ending in an exclamation point.)

That said, don’t focus on Piketty.  When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”?  So responses like “he made all his data freely available,” or “he admits all along how complicated this all is,” address b) but not the more important a).  And if you are seeing people focus on b) rather than a), they have a problem themselves.  On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.

Addendum: Ryan Avent has a good survey of some key issues and responses."

In some ways the new FT criticisms may not matter much, although I think not in a way which is reassuring for Piketty.  There were already several major problems with Piketty’s analysis and also empirics, including what Alex has called the asset price problem.  He wrote:

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis.

Adjusting for that factor seems to make the main results go away, and that is a purely empirical problem which has not been answered, at least not yet.
Another pre-existing empirical problem is that 19th century data seem to indicate that a “Piketty world,” even if we take it on its own terms, far from being a disaster, would likely be accompanied by rising real wages and declining consumption inequality, albeit rising wealth inequality.
That hasn’t been answered either, although a few people have suggested (without serious back-up) that if wealth inequality is going up that has to lead to political problems, or problems of some kind or another, and thus it can’t be something we can approve of or accept with equanimity, because inequality is really really bad, and therefore Piketty is somehow right anyway.  That’s a weak response to begin with and furthermore it doesn’t fit the available data.
Empirically, inheritances aren’t nearly as important as Piketty seems to suggest.
On Twitter Clive Crook wrote of the:

…distance between treacherous data and super-bold conclusions an issue at the outset. This underlines the point.

Now, when you cut through the small stuff, the new empirical problem seems to be that UK revisions, combined with a population-weighted series for Europe, contradicts Piketty’s claim of rising wealth inequality for Europe.   I would call that a serious problem.  I am not impressed by the “downplaying” responses which focus on coding errors, Swedish data points, and the other small stuff.  Let’s face up to the real (new) problem, namely that robustness suddenly seems much weaker.  You can’t argue that population-weighting is “the right way to do it,” but it is an entirely plausible way to estimate the wealth inequality trend.  If Piketty’s results don’t survive population weighting (and what are apparently the superior UK numbers), that suggests the overall rise in European wealth inequality is not very robust to how the pie is carved up and also that it is not backed by dominant, “rule the roost” sorts of forces.
It should be noted that Piketty’s response to the new criticisms was quite weak.  Maybe he’s not to be blamed for what was surely a rapid and caught-off-guard response, and perhaps there is more to come, but it doesn’t reassure me either.  He also should have run it by a PR person first (for instance, don’t start your response with a sentence ending in an exclamation point.)
That said, don’t focus on Piketty.  When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”?  So responses like “he made all his data freely available,” or “he admits all along how complicated this all is,” address b) but not the more important a).  And if you are seeing people focus on b) rather than a), they have a problem themselves.  On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.
Addendum: Ryan Avent has a good survey of some key issues and responses.
- See more at: http://marginalrevolution.com/marginalrevolution/2014/05/what-do-the-piketty-data-problems-really-mean.html#sthash.vHgd7K36.dpuf

Green Cars Won't Save the Planet

Great post from Megan McArdle. Excerpts:

"Start with a fact: The world emits 32.5 billion metric tons of carbon dioxide every year. About two-thirds of that comes from the top 10 carbon-emitting nations:

What do you notice about this list? First, it’s heavy on producers of fossil fuels -- Russia, the U.S., Canada, Saudi Arabia. Second, it’s heavy on population; together, these countries account for about half the world’s people. And third, it’s heavy on rich countries; how much carbon you consume correlates with how much stuff you produce.

Now look at another fact: how that ranking changes if you look at per-capita emissions, rather than total emissions:

The first thing is obvious: The list is now dominated by producers of fossil fuels, rather than population. But the second is that the countries at the bottom are big, poor countries that are still trying to get rich.

Let’s say China doesn’t aspire to U.S. levels of consumption and industrial output, just to dainty Japanese levels. That still means raising its per-capita carbon emissions by nearly 50 percent -- or 3.6 billion metric tons of carbon a year. To offset those emissions, the U.S. would have to cut its emissions by just about two-thirds. And that’s just to keep the world's emissions static -- the level at which the polar ice cap is already melting, remember? If we want emissions to fall, we’ll have to do even better.

Of course, Europe could help. But Europe is going to be needed to offset India's and Brazil's emissions increases, which -- if those countries manage to get rich -- will be even more dramatic than China’s. At some level, it becomes mathematically impossible for the rest of the world to become as wealthy as us while reducing emissions to a safe level.

Are there efficiency gains to be had? Of course there are. In fact, per-capita emissions have been going down in all those wealthy countries, including the U.S. But the reductions have been dwarfed by gains in the developing world, especially China.

The calculation above already assumes that as China gets richer, it will experience massive efficiency gains. Currently, China has about one-seventh the per-capita income of Japan but two-thirds the carbon emissions -- in part because China relies on cheap coal for electricity and heating, in part because the world has outsourced her dirty, inefficient production to Chinese industry. I’m assuming that China will eventually reach, and be satisfied with, Japanese levels of consumption and energy efficiency. If not, world emissions will soar still higher.

What would it take for us to cut our carbon output by a third? Well, look at where our consumption goes:

Source: Environmental Protection Agency

Commercial and residential emissions are mostly heating and cooling; industry is nonelectric greenhouse-gas emissions (for example, making steel uses carbon from fossil fuels not only to melt the metal ore, but also as part of the chemical process that makes it strong; cement also emits carbon as part of the production process).

We can break it down still further, into the sectors that use this energy. Here’s what electricity consumption looks like:

Source: Environmental Protection Agency

And here’s transportation broken down:

Source: Environmental Protection Agency 

Passenger cars do consume a lot of energy. But they are 45 percent of 28 percent of our emissions, or about 13 percent of the total. By one estimate, driving a Volt in a middle American city such as Houston saves about 25 to 30 percent of the carbon emissions associated with driving. That suggests that if everyone in the country bought a Volt, we might shave our emissions by 3.5 percent -- impressive, and maybe worth doing, but hardly enough to offset the rise in China's emissions.

All of which is a long-winded way of saying that this isn’t some easy fix that consists of buying somewhat more expensive products while keeping our way of life essentially the same. America’s outsized carbon emissions are not mainly due to the fact that we drive huge sport utility vehicles. Our outsized carbon emissions are mainly due to the fact that we produce a lot of fossil fuels and a lot of stuff. We like to live in large houses that have several hundred square feet of space per person. We like to be warm in winter and cool in summer, in a climate that has a lot more temperature extremes than Europe. We grow and eat a lot of food. When stuff breaks, we throw it out instead of relying on Mom’s skills with a needle and Dad’s carpentry mojo for repairs.
There are, to be sure, people in America who actually are getting serious about reducing their carbon footprint: They shun large houses, air travel, air conditioning, out-of-season produce, most manufactured goods. But this is a tiny minority, and very few of the people I hear saying we should “get serious” about global warming have any intention of living this way, though they might be happy to buy a Volt. And if a government tried to enact the kind of carbon tax that would force them to live this way, they’d fire their legislators as soon as they figured out that it was costing them $1,000 or so a year just to run the clothes dryer.

Moreover, many of the reductions you could theoretically imagine -- lowering our emissions by ceasing to extract oil and natural gas from the earth, shifting further away from manufacturing -- seem broadly incompatible with the other policy goals these same people have, such as providing remunerative and stable employment for millions of lower-skilled American workers.

Since we are probably not going to conserve our way to safety, and hopefully not going to invade China to keep it from getting rich, if we want to keep the climate from warming further, then we have something much more important to do than buy Volts: find a stable, cheap renewable resource that can actually replace all our power generation needs, or figure out an engineering solution that can take greenhouse gasses out of the atmosphere, or keep the planet from warming anyway. Perhaps those things are not possible. But however difficult they are, they seem more likely than getting Americans to drop their per-capita emissions back to something more like Slovakia’s."

The middle class is doing fine

From Scott Sumner of EconLog.

"When I start reading an article there are a few red flags I look out for. If the writer starts discussing income inequality data as if it tells us something useful about economic inequality, I know I can pretty much ignore anything the author has to say. The same is true if the author claims that the middle class has seen declining living standards since the 1970s. Anyone old enough to remember the 1970s (like me) knows that isn't true. One big problem in both areas is that people tend to ignore the relationship between age and income. People often have low incomes when they are young or old, and higher incomes when middle-aged.

Scott Winship has an excellent article discussing some of the problems with income data. If you look at total income plus benefits adjusted for taxes and transfers, then real incomes for the middle quintile rose by 36% between 1979 and 2010. (Think of this quintile as roughly the median income.) Pessimists point to the fact that this gain in purchasing power was almost entirely due to taxes and transfers, and that wage and salary income actually fell for middle income Americans, in real terms. But Winship points out that this is highly misleading, as that decline is entirely due to the rapidly growing number of retired people in the middle quintile. Because those people rely heavily on non-wage income, it makes it look like wage and salary income for the middle class has done very poorly since 1979. Here's Winship:

The growth of elderly households is the entire reason that wages and salaries detracted from income growth and that taxes and transfers accounted for nearly all of the growth. People in such households grew from 15 percent of all people in the middle fifth in 1979 to 26 percent of them in 2010. It is not just that the retiree population has grown--thanks to Social Security and Medicare, the number of retirees in the middle fifth specifically has grown much faster than their rate of growth in the general population. 

Wages and salaries are the single biggest factor explaining income growth for those middle class families living in households with children. Wages and salaries are nearly as important for childless nonelderly households.

Winship also notes that some pessimists argue that we should look at how incomes are doing net of taxes and transfers, as that's an indication of how well the free market system is serving Americans. That reminds me of the first time I ever challenged a professor in class. I was a sophomore at Wisconsin, taking intermediate price theory. The professor (who also worked at the Poverty Institute) made a similar argument---that income net of taxes and transfers shows how the free market would distribute income. I made what I thought was a pretty obvious point. If we didn't have all those transfer programs then wage and salary data would look very different. Indeed before we had welfare and Social Security the poor and elderly used to work at a much higher rate then they do today. Those programs might be beneficial, but it's absurd to assume they don't impact wage and salary incomes. Thus incomes net of taxes and transfers do not provide any sort of indication of what sort of income growth you'd expect in a free market economy."

From Greg Mankiw

"From a recent interview of the MIT economist (discussing this article):

Q. You are focused on inequality among the so-called “99 percent,” not between the 1 percent and the 99 percent. Why?

A. There’s a real national debate about the significance and causes of inequality. This public debate is dominated by the discussion of the top 1 percent. And the top 1 percent is important, but focusing on the top 1 percent conveys the message that the game is all rigged, that if you’re not in the elite stratum, there’s nothing to shoot for. And that’s just not the case. The growth of skill differentials among the other 99 percent is arguably even more consequential than the rise of the 1 percent for the welfare of most citizens. 

Here’s a concrete way to see it: The earnings gap between the median college-educated two-income family and the median high school-educated two-income family rose by $28,000 between 1979 and 2012. This [shift] — which excludes the top 1 percent, since we’re focusing on medians — is four times as large as the redistribution that has taken place from the bottom 99 percent to the top 1 percent of households in the same period."

"too many advocates of government intervention fancy themselves to possess some special god-like wisdom"

From Cafe Hayek.

"from page 563 of the late Karl Brunner’s 1970 Kyklos article, “Knowledge, Values and the Choice of Economic Organization“ (original emphasis; footnote deleted):

The sacrifice of cognition is particularly easy to detect in objections to the market system induced by discrepancies between one’s desires (usually glorified as social values) and the result of market processes.  One dislikes the results of the market process.  One also is convinced that one knows what the world needs and finds the allocations emerging on the market not satisfactorily tending to these favored needs.  Ergo, the market has failed and should be replaced by an administrative arrangement.  One is always convinced that this arrangement operates in the manner desired by ones’s wishes.  The obvious naiveté of this critique does not preclude its frequency and appeal to many articulators.

Among the valuable insights in this passage from Brunner is the recognition that not only do too many advocates of government intervention fancy themselves to possess some special god-like wisdom, but they also believe in miracles."

"This famous Sidney Harris cartoon (below) captures what is wrong – what is deeply unscientific – about far-too-much modern economics.  The miracle assumed by the unscientific ‘scientific’ modern economist is that government will act (1) apolitically, (2) without any of the human imperfections, myopia, and psychological quirks that (are assumed to) give rise to the market imperfections that allegedly justify government intervention, and (3) with more information and wisdom than is discovered and used in markets.
All the fabulous ballistics (a term that I understand was used by the late Jack Hirshleifer) that lead up to the miracle and that describe matters following the miracle might well be the flawless products of unquestionable brilliance.  But it is simply, deeply, and inexcusably unscientific for economists (or any one, for that matter) to merely assume that government will perform as the social-engineering theory requires it to perform.  Put differently, despite more than a half-century of scholarship in public-choice economics, too many economists mysteriously regard warnings about government failing to act ‘perfectly’ as being unworthy or, at least, only of secondary or tertiary significance.  It’s unscientific – deeply so."

One man by himself digitized 22M pages of old newspapers vs. the Library of Congress, which spent $22M for 7M pages!

From Mark Perry of "Carpe Diem."

"From Jim Epstein at Reason’s Hit and Run Blog:

One retired engineer working alone has built an historic newspaper site that is orders of magnitude bigger and more popular than one created by a federal bureaucracy (the Library of Congress) that has received $22 million in funding for its project from the National Endowment for the Humanities. Armed with only a few PCs and a cheap microfilm scanner, high school-educated Tom Tryniski working all by himself has played David to the Library of Congress’ Goliath.

Tryniski’s site, which he created in his living room in upstate New York, has grown into one of the largest historic newspaper databases in the world, with 22 million newspaper pages. By contrast, the Library of Congress’ historic newspaper site, Chronicling America, has 5 million newspaper pages on its site while costing taxpayers about $3 per page (based on $22 million in total grant funding for an estimated 7,271,000 pages that will eventually be on the website). In January, visitors to Fultonhistory.com accessed more than 6 million pages while Chronicling America registered fewer than 3 million views.

Who’d a-Thunk It? One dedicated entrepreneurial individual working without compensation outproduces/outdigitizes (by a factor of 3) a large government bureaucracy (and probably a small army of bureaucrats) that is spending millions and millions of taxpayer dollars?"

John Stuart Mill On The Role Of Government

From Library of Economics and Liberty. This excerpt is from his book Principles of Political Economy with some of their Applications to Social Philosophy. In particular, Book V, Chapter XI: Of the Grounds and Limits of the Laisser-faire or Non-Interference Principle. 

"V.11.8

§4. A third general objection to government agency, rests on the principle of the division of labour. Every additional function undertaken by the government, is a fresh occupation imposed upon a body already overcharged with duties. A natural consequence is that most things are ill done; much not done at all, because the government is not able to do it without delays which are fatal to its purpose; that the more troublesome and less showy, of the functions undertaken, are postponed or neglected, and an excuse is always ready for the neglect; while the heads of the administration have their minds so fully taken up with official details, in however perfunctory a manner superintended, that they have no time or thought to spare for the great interests of the state, and the preparation of enlarged measures of social improvement.

V.11.9

But these inconveniences, though real and serious, result much more from the bad organization of governments, than from the extent and variety of the duties undertaken by them. Government is not a name for some one functionary, or definite number of functionaries: there may be almost any amount of division of labour within the administrative body itself. The evil in question is felt in great magnitude under some of the governments of the Continent, where six or eight men, living at the capital and known by the name of ministers, demand that the whole public business of the country shall pass, or be supposed to pass, under their individual eye. But the inconvenience would be reduced to a very manageable compass, in a country in which there was a proper distribution of functions between the central and local officers of government, and in which the central body was divided into a sufficient number of departments. When Parliament thought it expedient to confer on the government an inspecting and partially controlling authority over railways, it did not add railways to the department of the Home Minister, but created a Railway Board. When it determined to have a central superintending authority for pauper administration, it established the Poor Law Commission. There are few countries in which a greater number of functions are discharged by public officers, than in some states of the American Union, particularly the New England States; but the division of labour in public business is extreme; most of these officers being not even amenable to any common superior, but performing their duties freely, under the double check of election by their townsmen, and civil as well as criminal responsibility to the tribunals.

V.11.10

It is, no doubt, indispensable to good government that the chiefs of the administration, whether permanent or temporary, should extend a commanding, though general, view over the ensemble of all the interests confided, in any degree, to the responsibility of the central power. But with a skilful internal organization of the administrative machine, leaving to subordinates, and as far as possible, to local subordinates, not only the execution, but to a greater degree the control, of details; holding them accountable for the results of their acts rather than for the acts themselves, except where these come within the cognizance of the tribunals; taking the most effectual securities for honest and capable appointments; opening a broad path to promotion from the inferior degrees of the administrative scale to the superior; leaving, at each step, to the functionary, a wider range in the origination of measures, so that, in the highest grade of all, deliberation might be concentrated on the great collective interests of the country in each department; if all this were done, the government would not probably be overburthened by any business, in other respects fit to be undertaken by it; though the overburthening would remain as a serious addition to the inconveniences incurred by its undertaking any which was unfit.

V.11.11

§5. But though a better organization of governments would greatly diminish the force of the objection to the mere multiplication of their duties, it would still remain true that in all the more advanced communities, the great majority of things are worse done by the intervention of government, than the individuals most interested in the matter would do them, or cause them to be done, if left to themselves. The grounds of this truth are expressed with tolerable exactness in the popular dictum, that people understand their own business and their own interests better, and care for them more, than the government does, or can be expected to do. This maxim holds true throughout the greatest part of the business of life, and wherever it is true we ought to condemn every kind of government intervention that conflicts with it. The inferiority of government agency, for example, in any of the common operations of industry or commerce, is proved by the fact, that it is hardly ever able to maintain.. itself in equal competition with individual agency, where the individuals possess the requisite degree of industrial enterprise, and can command the necessary assemblage of means. All the facilities which a government enjoys of access to information; all the means which it possesses of remunerating, and therefore of commanding, the best available talent in the market—are not an equivalent for the one great disadvantage of an inferior interest in the result.

V.11.12

It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. There must be many persons equally qualified for the work with those whom the government employs, even if it selects its instruments with no reference to any consideration but their fitness. Now these are the very persons into whose hands, in the cases of most common occurrence, a system of individual agency naturally tends to throw the work, because they are capable of doing it better or*109 on cheaper terms than any other persons. So far as this is the case, it is evident that government, by excluding or even by superseding individual agency, either substitutes a less qualified instrumentality for one better qualified, or at any rate substitutes its own mode of accomplishing the work, for all the variety of modes which would be tried by a number of equally qualified persons aiming at the same end; a competition by many degrees more propitious to the progress of improvement than any uniformity of system.

§6. I have reserved for the last place one of the strongest of the reasons against the extension of government agency, Even if the government could comprehend within itself, in each department, all the most eminent intellectual capacity and active talent of the nation, it would not be the less desirable that the conduct of a large portion of the affairs of the society should be left in the hands of the persons immediately interested in them. The business of life is an essential part of the practical education of a people; without which, book and school instruction, though most necessary and salutary, does not suffice to qualify them for conduct, and for the adaptation of means to ends. Instruction is only one of the desiderata of mental improvement; another, almost as indispensable, is a vigorous exercise of the active energies; labour, contrivance, judgment, self-control: and the natural stimulus to these is the difficulties of life. This doctrine is not to be confounded with the complacent optimism, which represents the evils of life as desirable things, because they call forth qualities adapted to combat with evils. It is only because the difficulties exist, that the qualities which combat with them are of any value. As practical beings it is our business to free human life from as many as possible of its difficulties, and not to keep up a stock of them as hunters preserve game, for the exercise of pursuing it. But since the need of active talent and practical judgment in the affairs of life can only be diminished, and not, even on the most favourable supposition, done away with, it is important that those endowments should be cultivated not merely in a select few, but in all, and that the cultivation should be more varied and complete than most persons are able to find in the narrow sphere of their merely individual interests. A people among whom there is no habit of spontaneous action for a collective interest—who look habitually to their government to command or prompt them in all matters of joint concern—who expect to have everything done for them, except what can be made an affair of mere habit and routine—have their faculties only half developed; their education is defective in one of its most important branches."

Foreign-Aid Follies: Rogoff's Review Of Angus Deaton's Book The Great Escape: Health, Wealth, and the Origins of Inequality

Click here to read it. Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly. Excerpts:

"Do we really know how to help countries overcome poverty?

In his eloquently written and deeply researched new book ... Princeton University’s Angus Deaton urges caution .... it is unquestionably the most important book on development assistance to appear in a long time."

"Although Deaton supports select initiatives, particularly for delivering medical and technological knowledge, he questions whether the vast majority of aid passes the basic Hippocratic litmus test of “first do no harm.”"

"Economists have developed some useful indicators, but they are vastly less precise than politicians and the media seem to understand."

"Attempts to convert national incomes into a common denominator are fraught with complications. To take one prominent example, there is a 25% margin of error on purchasing-power-parity comparisons between GDP in the United States and China."

"How can one compare cost-of-living indices in different periods when new goods are constantly upending traditional consumption models? Consider the impact of cell phones in Africa, for example, or the Internet in India."

 "the “hydraulic model” of aid – the idea that if we simply pumped in more aid, better results would gush out – ignores the fact that funds are often fungible. Even if aid is narrowly targeted at say, food or health, a government can simply economize on expenditures that it might have made anyway and redirect them elsewhere – for example, to the military."

"An influx of Western NGOs often bids talent away from nascent businesses that could help the country long after the NGOs reset their priorities and move on."

 "inflows into one economic sector – typically oil or minerals – drive up economy-wide prices (including the exchange rate), rendering other sectors uncompetitive. Moreover, a great deal of this aid is delivered in kind and for strategic reasons, often supporting ineffective and kleptocratic governments."

"Western countries developed without receiving any aid....China and India, too, have succeeded in lifting hundreds of millions of people out of poverty with relatively little Western aid ... aid providers must be extremely careful not to interfere with political and social forces that, over time, can generate organic – and therefore more lasting – internal change."

"small randomized trials to .... The results are often specific to a particular country’s circumstances, and there is no reason to presume that they would scale up when fully confronted with a developing country’s governance problems."

"For most of mankind, now is a better time than ever before to be alive. The path to development remains for others to follow. Highly targeted Western aid and advice can help, but donors must take more care not to stand in the way of the beneficiaries in assisting them."

Kenneth Rogoff On Piketty

See Where Is the Inequality Problem? Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly. Excerpts:

"Reading Thomas Piketty’s influential new book Capital in the Twenty-First Century, one might conclude that the world has not been this unequal since the days of robber barons and kings. That is odd, because one might conclude from reading another excellent new book, Angus Deaton’s The Great Escape (which I recently reviewed), that the world is more equal than ever.

Which view is right? The answer depends on whether one looks only at countries individually or at the world as a whole.

"over the last few decades, several billion people in the developing world... escaped truly desperate levels of poverty. The same machine that has increased inequality in rich countries has leveled the playing field globally for billions....he last 30 years have been among the greatest in human history for improving the lot of the poor."

"Piketty’s brilliant book documents within-country inequality," 

"that labor’s share of GDP has been declining globally since the 1970’s."

"However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?"

"Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible."

"Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise."

"Fortunately, there are much better ways to address rich-country inequality while still fostering long-term growth in demand for products from developing countries. For example, a shift to a relatively flat consumption tax (with a large deductible for progressivity) would be a far simpler and more effective way to tax past wealth accumulation."

"A progressive consumption tax is relatively efficient and does not distort savings decisions as much as today’s income taxes do. Why try to move to an improbable global wealth tax when alternatives are available that are growth friendly, raise significant revenue, and can be made progressive through a very high exemption."

"I don’t understand why he assumes that an 80% rate would not cause significant distortions, especially as this assumption contradicts a large body of work by the Nobel laureates Thomas Sargent and Edward Prescott."

"Focusing on the US, Jeffrey Frankel of Harvard University has suggested the elimination of payroll taxes for low-income workers, a cut in deductions for high-income workers, and higher inheritance taxes. Universal pre-school education would enhance long-term growth, as would a much greater emphasis on lifetime adult education (my addition), possibly via online courses. Carbon taxes would help mitigate global warming while raising considerable revenues."

"many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades."