Extreme Poverty Rates Plummet Under Capitalism

Think extreme poverty rates rise under capitalism? Think again—the truth might surprise you

By Robert P. Murphy.

"The Rich and the Poor Under Capitalism

You might have heard the phrase, “the rich get richer and the poor get poorer.”

Yes, it’s true that the rich (tend to) get richer, but the poor get richer too—especially if we look at a time span of decades or longer, and if we focus our attention on people living in countries where governments adhere to a basic respect for the rule of law and property rights.

Consider: Even those who would be called “poor” in today’s Europe or the United States have a standard of living that would astonish the nobles entertained in the Court of Versailles of Louis XIV (who lived from 1638-1715). Forget about private jets, air conditioning, television, wifi, or automatic elevators: the guests of the famous Sun King didn’t even have flushing toilets, which reportedly caused serious problems at heavily attended parties. Nutrition and medical care wasn’t the best back then, either: Of the six children Louis XIV had with his first wife, only one survived to adulthood, and even he died (at age 49) before his father, such that (because of other early deaths) the crown passed to Louis XIV’s five-year-old great-grandson upon his own death.

Capitalism and Economic Stagnation

“Okay, sure,” you might hear. “Inventors make discoveries every now and then, so over the course of centuries that piles up and even average people end up richer. That’s just the operation of science and technology. But I’m talking about the economic process under unregulated capitalism, which is characterized by stagnation for most participants.”

Actually, that summary gets things backwards. For most of recorded history, humans had very slowly rising living standards, but then material progress suddenly exploded:

Source: American Enterprise Institute

As the chart makes clear, our current living standards vis-a-vis the nobles at the Palace of Versailles is not merely due to routine technological inventions; the progress in the last few centuries is literally unprecedented. In a 2016 New York Times column, economic historian Deirdre McCloskey explains the astonishing surge in economic growth in this way:

[A] mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic.

The Problem of Inequality

“Yes,” you might hear, “we know socialism doesn’t work, and that the modern capitalist approach gives people an incentive to build and keep great fortunes. But those ‘per capita’ figures hide the massive inequalities in a largely unregulated system. Capitalism is great at producing but not at distributing fairly.”

Again, this misreads the historical record. It was precisely the “lower classes” who benefited the most from the economic progress unleashed in the so-called Industrial Revolution and beyond. Yes, the “captains of industry” personally became quite rich, but the rise of big business primarily benefited the working class. After all, the titans of industry engaged in “mass production” in order to sell products to… the masses.

For example, in the United States during the “Roaring ’20s”—and under the laissez-faire administration of Calvin Coolidge—regular American households saw a fantastic improvement in their quality of living. Gene Smiley explains: “A key to much of this growth was the spreading use of commercially generated electricity,” which in turn allowed average consumers to obtain “refrigerators, phonographs, electric irons, electric fans, electric lighting, toasters, vacuum cleaners, and other household appliances.” (Gene Smiley, Rethinking the Great Depression (Chicago: Ivan R. Dee, 2002), pp. 5-6.)

Capitalism and Exploitation

“Fair enough, there may have been some low-hanging fruit when regular households didn’t have the things we now take for granted. But in more recent history, the forces of unrestrained liberalism are actually hurting the most vulnerable. Maybe not in the United States and other advanced countries, but certainly in poorer countries that are often exploited in international affairs.”

On the contrary, this too gets the facts backwards. As the World Bank reports, the global rate of "extreme poverty" (defined as people living on less than $1.90 per day) was cut in half from 1990 to 2010. Back in 1990, 1.85 billion people lived in extreme poverty, but by 2013, the figure had dropped to 767 million—meaning the number of those living on less than $1.90 per day had fallen by more than a billion people.

The following chart summarizes the overall progress of humanity in shrinking the problem of extreme poverty:

Of course, there is more work to be done on this front, but the spread of market institutions (sometimes disparaged as “neo-liberalism” and “globalization”) have gone hand-in-hand with rapid and unprecedented increases in human welfare, even for the poorest among us."

The Biden spending plan risks following last year’s crisis with a new fiscal crisis

By Chris Edwards of Cato.

"The Biden administration has released its federal budget for 2022, which envisions a large increase in the size of government. As the pandemic recedes and economic growth resumes, policymakers should be paring back spending and deficits to normal levels. Unfortunately, the Biden spending plan risks following last year’s crisis with a new fiscal crisis as it tries to sustain spending and borrowing at dangerously high levels.

The chart below shows federal spending and revenues as a percent of gross domestic product. Federal spending trended up from 17.7 percent under President Clinton in 2000 to 21.0 percent under President Trump in 2019. Spending jumped to 31.2 percent in 2020 with the pandemic, which was higher than the 24.4 percent peak reached during the Great Recession. Pandemic‐​related spending is expected to decline the next few years, but Biden is proposing that overall spending and deficits remain at substantially heightened levels.

The Biden budget shows federal debt held by the public rising from 100 percent of GDP in 2020 to 117 percent by 2031. We are not at war, and yet that level of debt is higher than the 31 percent reached in the Civil War, 33 percent reached in World War I, and 106 percent reached in World War II.

Regarding the budget, Treasury Secretary Janet Yellen said, “I believe it is a fiscally responsible program.” Let’s scale the budget figures to family size to see how off‐​base that claim is. Biden proposes to spend $7.2 trillion this year relying on $3.7 trillion in borrowing, and he proposes to push up accumulated debt from $24 trillion this year to $39 trillion by 2031. That is like a family spending $72,000 this year putting $37,000 on credit cards, and then pushing up family debt from $240,000 to $390,000 as it continues spending more than it earns. Would any financial advisor tell the family that was responsible?

Yellen is apparently trusting administration forecasts that interest rates will remain low such that rising federal debt does not explode budget costs. But macroeconomic forecasting is a terribly inaccurate art. In January 2008, for example, the CBO projected strong and rising economic growth, oblivious that a deep recession had already begun. Nobody knows where interest rates, inflation, and growth will be in coming years, so the responsible thing would be to cut debt now while the economy is growing to help avert a financial crisis down the road if things don’t go as planned.

The administration may think that its new social and infrastructure spending is important, but there is no reason why any of it should be done at the federal level. State legislatures are entirely capable of spending more on everything from highways to paid family leave, if that is what their residents want. Besides, the federal government is already overloaded with more than 2,300 mismanaged subsidy and benefit programs, and there is no way that Congress could properly oversee all the new programs that Biden wants to create."

Biden’s Spending Binge Is Costlier Than Advertised

The new taxes he proposes would cost money to collect and put a drag on the productive economy.

By Steve H. Hanke. Excerpts:

"Look no further than Mr. Biden’s proposal to increase IRS funding $80 billion to collect the taxes to fund his new big-government programs.

There are also burdens placed on taxpayers that go well beyond the visible tax payments they make. These include myriad compliance costs: record-keeping, studying tax laws, making calculations, filling out forms, grappling with enforcement actions, and so on.

These administrative and compliance costs are relatively easy to comprehend. A more difficult concept is the excess burden of additional taxes—the disincentives and distortions they impose on the economy. Without those taxes, the economy would generate more income and do it more efficiently.  

The hidden costs associated with IRS administration and taxpayer compliance are estimated to be in the range of 10 cents to 25 cents for each additional dollar of tax revenue collected. The late Martin Feldstein, in a 1999 article for the Review of Economics and Statistics, estimated the excess burden of federal taxes to be $3 for each additional dollar of revenue. The late William A. Niskanen, in an article published by the Federal Reserve Bank of Dallas, put the figure at $2.65.

The hidden costs plus excess burdens amount to roughly $3 per additional tax dollar collected. Therefore, to determine the real cost of the big-government proposals put forward by President Biden in his first 100 days in office, we must multiply their $5.7 trillion sticker price by 3. That yields a true cost of $17.1 trillion, or 80% of last year’s gross domestic product. And all this after less than 100 days in office."

Capital Gains and Tax ‘Fairness’

Olympia passes a 7% tax on gains, joining 13 states in the 50% club with Biden’s tax hike.

WSJ editorial. Excerpt:

"Even economists at the Congressional Budget Office, no nest of supply-siders, think the revenue-maximizing rate is 28%, while other economists think it’s closer to 15%. It sure isn’t 50%.

The same Tax Foundation report suggests that the Biden capital-gains tax plan would shrink federal revenue by $124 billion over 10 years. States would see a decline too."

A Jolt for White House Economists: A Labor Department survey rebuts their jobless benefit claims

WSJ editorial.

"White House economists say there’s no “measurable” evidence that the $300 federal unemployment bonus is discouraging unemployed people from seeking work. They were rebutted by Tuesday’s Bureau of Labor Statistics’ Jolts survey, which showed a record 8.1 million job openings in March.

That roughly equals the number that payroll employment is down from the February 2020 pre-pandemic peak. Job openings increased across the economy, but especially in food services and accommodation (185,000), state and local education (155,000) and arts and entertainment (81,000). Restaurants are reopening and expanding capacity as lockdowns lift and more people get vaccinated, so they need more workers. More schools are reopening, which means they need janitors, bus drivers and security officials.But these jobs often pay less than what most workers could make on unemployment. That explains why the number of job openings in many industries increased more than the number of new hires in March. In leisure and hospitality, job openings increased by a whopping 267,000 but hires declined by 6,000. Hmmm. Job openings in state and local education grew by a sizeable 155,000—2.5 times as much as hires.

Overall job openings in March increased by about 600,000 while new hires ticked up a mere 200,000. The number of workers who quit their jobs also grew by 125,000. This is usually a sign of a strengthening labor market, but in this case some quitters may be leaving their jobs because they figure they can make more unemployed for the next six months after Democrats extended the bonus into September.

This week the governors of Alabama, Arkansas, Mississippi and South Carolina announced they will forego federal funding for the $300-a-week supplement to unemployment insurance, joining Montana Gov. Greg Gianforte, who did so last week. Businesses will be grateful to have workers back, and so will their customers."

The Biden Tax Mirage

Marginal rates have been a lot higher, but the actual share the top 1% pay stays remarkably constant

By Phil Gramm and Mike Solon. Excerpts:

"Proponents of massive tax increases will argue that economic growth and prosperity are compatible with high tax rates by pointing to the 35 years of postwar prosperity in America, when the top federal tax rate was 70% or higher.

But before accepting this as proof by example, it’s worth examining how many taxpayers actually paid those top rates and what percentage of their income high earners actually paid in taxes. Economists Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation have compiled an extraordinary new database using Internal Revenue Service data on taxes actually collected since 1962. The top marginal income-tax rates and the taxes actually paid, including payroll taxes, as a percentage of income for the top 1%, top 10% and bottom 50% of income earners are shown in the nearby chart. The figures for 2016-20 are comparable estimates by the Urban-Brookings Tax Policy Center."

"The top tax rate of 91% in 1962 applied to families with joint incomes, in today’s dollars, of $3.38 million. After deductions and credits, only 447 tax filers out of 71 million paid any taxes at the top rate. The top 1% of income earners paid only 16.1% of their income in federal income and payroll taxes, while the top 10% paid 14.4% and the bottom 50% paid 7%."

"President Kennedy recognized that while confiscatory tax rates collected little revenue, they stifled growth as resources were squandered in the “avoidance of taxes” rather than the “production of goods.” When the top tax rate was reduced to 70%, individual income-tax collections continued to grow and the actual percentage of income paid in taxes by high-income earners barely changed. Only 3,626 out of 75 million filers paid any taxes at the new 70% rate. When the Reagan tax cut reduced the top rate to 50%, gross domestic product grew. Taxes collected from high-income earners as a percentage of their incomes were largely unchanged, as the chart shows. Only 341,000 of 109 million filers paid any taxes at the new 50% top rate. 

The 1986 tax reform reduced the top rate to the postwar low of 28%. The reform also closed loopholes, offsetting the rate reductions and other changes in the tax code. Revenues grew as the economy expanded and asset sales surged at the lower marginal tax rate. Twenty-six million out of 115 million filers paid taxes at the 28% rate. The top rate was raised to 39.6% in 1993 and has fluctuated between 39.6% and 35% since. Only 453,000 out of 123 million filers paid any taxes at the 39.6% rate in 1993.  

Remarkably, while the top marginal rate fell from 91% in 1962 to 28% in 1988, the percentage of income actually paid in income and payroll taxes by the top 1% and 10% of filers rose to 21.5% and 19.6% from 16.1% and 14.4%, respectively. As the top tax rate fell by two-thirds, the percentage of income paid in federal income and payroll taxes by the top 1% and 10% of earners rose by a third.

The percentage of income actually paid by the top 1% of earners, which the Tax Policy Center estimates to be 25.7% in 2020, is close to the average rate paid during the last quarter-century. Whether the federal government could actually impose a top rate of 50% on a significant number of taxpayers, or actually collect much more than 30% of the income of the top 1% of earners in income and payroll taxes, without crippling economic growth is a question our postwar experience certainly doesn’t answer.

It is also worth noting that the Organization for Economic Cooperation and Development has found that high-income Americans already bear a higher relative share of the income-tax burden than the rich do in other developed nations. The top 10% of American households earn about 33.5% of all earned income but pay 45.1% of all income taxes, including Social Security and Medicare taxes. That progressivity ratio of 1.35 is far higher than the German ratio of 1.07, French ratio of 1.1 and Swedish ratio of 1. As a percentage of their incomes, the top 10% of earners in Germany, France and Sweden paid 21%, 19% and 26% less than the top 10% in America. And the bottom 90% of earners paid 17%, 34% and 21% more as a percentage of their incomes respectively than the bottom 90% in America paid. While the OECD study predates the 2017 Tax Cuts and Jobs Act, the Congressional Budget Office found the act made the U.S. tax code even more progressive."

Biden’s Not-So-Clean Energy Transition

The International Energy Agency exposes the hidden environmental costs and infeasibility of going green

By Mark P. Mills. He is a senior fellow at the Manhattan Institute. Excerpts:

"The IEA assembled a large body of data about a central, and until now largely ignored, aspect of the energy transition: It requires mining industries and infrastructure that don’t exist. Wind, solar and battery technologies are built from an array of “energy transition minerals,” or ETMs, that must be mined and processed. The IEA finds that with a global energy transition like the one President Biden envisions, demand for key minerals such as lithium, graphite, nickel and rare-earth metals would explode, rising by 4,200%, 2,500%, 1,900% and 700%, respectively, by 2040.

The world doesn’t have the capacity to meet such demand. As the IEA observes, albeit in cautious bureaucratese, there are no plans to fund and build the necessary mines and refineries. The supply of ETMs is entirely aspirational. And if it were pursued at the quantities dictated by the goals of the energy transition, the world would face daunting environmental, economic and social challenges, along with geopolitical risks.

The IEA stipulates up front one underlying fact that advocates of a transition never mention: Green-energy machines use far more critical minerals than conventional-energy machines do. “A typical electric car requires six times the mineral inputs of a conventional car, and an onshore wind plant requires nine times more mineral resources than a gas-fired power plant,” the report says. “Since 2010, the average amount of minerals needed for a new unit of power generation capacity has increased by 50% as the share of renewables has risen.” That was merely to bring wind and solar to a 10% share of the world’s electricity.

As the IEA notes dryly, the transition is a “shift from a fuel-intensive to a material-intensive energy system.” That means a shift away from liquids and gases whose extraction and transport leave a very light footprint on the land and are transported easily, cheaply and efficiently, and toward big-footprint mines, the energy-intensive transport of massive amounts of rocks and other solid materials, and subsequent chemical processing and refining.

Spooling up production can’t happen overnight. The IEA observes something every miner knows: “It has taken on average over 16 years to move mining projects from discovery to first production.” Start tomorrow and new ETM production will begin only after 2035. This is a considerable problem for the Biden administration’s plan to achieve 100% carbon-free electricity by 2035.

In what may become the understatement of the decade, the IEA concludes that such long lead times “raise questions about the ability of suppliers to ramp up output if demand were to pick up rapidly.” The conditional “if” is a discordant qualifier given the IEA itself has endorsed, and nearly all its member states have already pledged, a rapid transition. The clear consequence is that “deployment of clean energy technologies is set to supercharge demand for critical minerals.”"

"“Mining and mineral processing require large volumes of water”—a serious issue when around half of global lithium and copper production takes place in areas of high water stress—and “pose contamination risks through acid mine drainage, wastewater discharge and the disposal of tailings.”"

"IEA data show that expanded ETM mining will occur mainly in countries with “low governance scores” where “corruption and bribery pose major liability risks.”"

"Energy use per pound mined is even trending up. This is no arcane nuance. It’s the key hidden factor that determines whether, or to what extent, a clean-energy machine actually reduces carbon-dioxide emissions on net. The IEA data show that, depending on the location and nature of future mines, the emissions from obtaining ETMs could wipe out much or most of the emissions saved by driving electric cars."

"radical increases in demand will raise commodity prices, which reverberate throughout the global economy. When it comes to batteries, the IEA notes this could “eat up” the anticipated reductions in manufacturing costs expected from the “learning effects” of increased production."

Too many laws curtail bureaucratic efficiency

See From Weber to Kafka: Political Instability and the Overproduction of Laws. From the American Economic Review (Forthcoming). 

• Gabriele Gratton
• Luigi Guiso
• Claudio Michelacci
• Massimo Morelli
American Economic Review (Forthcoming)

• Article Information

Abstract

With inefficient bureaucratic institutions, the effects of laws are hard to assess and incompetent politicians may pass laws to build a reputation as skillful reformers. Since too many laws curtail bureaucratic efficiency, this mechanism can generate a steady state with Kafkaesque bureaucracy. Temporary surges in political instability heighten the incentives to overproduce laws and can shift the economy towards the Kafkaesque state. Consistent with the theory, after a surge in political instability in the early 1990s, Italy experienced a significant increase in the amount of poor-quality legislation and a decrease in bureaucratic efficiency.

Forthcoming Article Downloads

• Preview (AEA members only) (1.51 MB)

 

Lockdown stringency does not appear to have been the major factor in curbing the long-term spread of the pandemic or curbing the death toll from COVID19

By Livio Di Matteo. He is a Professor of Economics at Lakehead University.

"The key event of 2020 was the COVID19 virus and its impacts on health, mortality rates, economies, and government budgets. From the first reports of a pneumonia of unknown origin in Wuhan, China, the COVID19 pandemic grew and spread to countries around the world, becoming a global storm affecting health and economic performance. Indeed, there is some debate amongst public health officials and epidemiologists as to when the virus began spreading from its origin point. By April of 2021, the tally reached 129 million infections and 2.8 million deaths. This study examines the pandemic by comparing the performance of countries in terms of (1) infection rates and mortality rates; (2) the response to dealing with the pandemic in terms of the strategies employed—testing and restrictions; (3) the severity of the economic shock (changes in GDP); and (4) the economic and fiscal response by governments to the economic shock brought about by the pandemic. As well, regression analysis is employed to assess the relationship between key indicators of the effect of the pandemic on the economy and the response of mitigating measures on the pandemic and the economy. The evidence and results in this study offer some early and tentative analysis as to the effects of the pandemic, differences in international impacts and containment efforts, and the economic and fiscal impacts and effectiveness of associated responses.

Within the range of recent modern experience, the COVID19 pandemic is considered unprecedented but it is not the Black Death, which between 1347 and 1351 is estimated to have carried off up to half of the European population—nor to date has it mortality equal to the Spanish Flu, which is estimated to have killed anywhere from 20 to 100 million people. As well, the mortality and morbidity effects have been more concentrated on the elderly rather than the working-age population aged 20 to 65 years, though recent variants seem to be changing this pattern. While past pandemics had dramatic effects on long-term capital-to-labour ratios, wages, and interest rates, the COVID19 pandemic’s long-term effects have yet to emerge though it has had severe short-term effects through its disruption of modern economic production with its highly integrated supply chains and emphasis on personal services and, in the absence of vaccines and effective treatments, the effect upon economies of restrictions designed to limit the spread of the virus.

The pandemic’s initial effects were exceptionally severe across highly developed and economically advanced countries with less-developed countries hit harder later on. While the IMF35 advanced economies account for 18% of the world’s countries, in 2020 they accounted for just over 50% of the 30 worst-hit countries in the world in terms of cases adjusted for population. These same points also apply to mortality from COVID19 given that again the IMF35 advanced economies accounted for 40% of the 30 countries that had the most deaths per million but only 18% of the countries in this study. The fact that the advanced economies have older population distributions than the developing and emerging world may be a factor in the higher toll on advanced countries.

The economic effects of the pandemic saw an estimated drop in world real GDP in 2020 of 4.3%. Again, the IMF35 advanced economies were harder hit, with estimates by early 2021 suggesting a 5.4% fall in real GDP while IMF-defined emerging market and developing economies saw a 2.6% contraction. Unlike major pandemics of distant history, the economic toll of the pandemic resulted more from the toll of measures enacted to control the spread of the disease than the impact of mortality on working-age populations. Lockdowns, quarantines, and travel restrictions have drastically affected sectors such as international travel, the labour-intensive personal services, food and accommodation, tourism, and arts and entertainment as well as disrupted some aspects of the globalized supply chain. However, except early on in the pandemic, stringency does not appear to have been the major factor in curbing the long-term spread of the pandemic or curbing the death toll from COVID19. Other important public-health measures included effective case testing and tracking, mask wearing, and general public compliance with, and enforcement of, rules.

Though all countries experienced the pandemic, its intensity and severity varied substantially across countries as did the economic and fiscal impact. Countries that were heavily affected by the SARS experience in 2004 collectively appear to have had a significantly lower incidence of COVID19 and fewer deaths, suggesting that episode was a valuable learning experience. Nevertheless, application of this lesson appears inconsistent and incomplete based on differences in the number of cases and deaths across this group of countries. In the case of the fiscal response, some countries incurred deficits below what predictive models might suggest while others incurred much larger ones than the pandemic effects might suggest. Moreover, despite expectations that large public sectors might help stabilize economic performance, countries with relatively larger public sectors going into the pandemic do not seem to have experienced smaller drops in economic activity.

In the end, while there are common variables affecting the impact of COVID19 in aggregate across countries, how each country chose to play the cards that were dealt was likely the bigger determinant of outcomes for health and the economy. Learning behaviour was not guaranteed even amongst countries who might have been expected to learn something from their recent past experiences with infectious diseases. Moreover, despite the marvels of instantaneous 21st-century communications and dissemination of information, during the early stages it often seemed as if each nation had to experience its own pandemic before it took the matter seriously."

Mild Covid-19 Induces Antibody Protection That Could Last a Lifetime: US Researchers

From Yahoo News.

"US researchers have found that people who have had mild illness due to Covid-19, go on to develop antibody-producing immune cells that can last for a lifetime and give them protection against the virus. Researchers at Washington University in St. Louis, US, found that during a viral infection, antibody-producing immune cells rapidly multiply and circulate in the blood, driving antibody levels sky-high.

Once the infection is resolved, most such cells die off, and blood antibody levels drop.

However, a small population of antibody-producing cells, called long-lived plasma cells, migrate to the bone marrow and settle in, where they continually secrete low levels of antibodies into the bloodstream to help guard against another encounter with the virus.

“We found antibody-producing cells in people 11 months after the first symptoms. These cells will live and produce antibodies for the rest of people’s lives. That’s strong evidence for long-lasting immunity,” said Ali Ellebedy, Associate Professor at the varsity’s School of Medicine. The findings of the small study are published in the journal Nature.

For the study, the team involved 77 participants whose antibody levels in blood samples were assessed at three-month intervals starting about a month after initial infection. The team obtained bone marrow from 18 of the participants seven or eight months after their initial infections.

For comparison, the scientists also obtained bone marrow from 11 people who had never had Covid-19.

Of the bone marrow samples, 15 contained antibody-producing cells specifically targeting the virus that causes Covid-19. Such cells could still be found four months later in the five people who came back to provide a second bone-marrow sample.

None of the 11 people who had never had Covid-19 had such antibody-producing cells in their bone marrow.

“Mild infection by Covid-19 will also trigger the immune response as it will lead to immune stimulation both cell mediated and antibody linked creating lasting immunity. In fact, this is the principle of vaccination that triggers the immune response by stimulating the antigen induced reaction giving rise to immunity of the body.

“It has also been shown that the reinfection rate of people already having mild infection is only two per cent which is very less,” Praveen Gupta, director and head, neurology, Fortis Memorial Research Institute, Gurugram told IANS.

“Based on this fact the principle of herd immunity was developed, if a large number of people will get a mild clinical infection that will lead to the development of herd immunity,” he added."

The Case Against Universal Preschool

What little children need is play, care, and love, not school

By Peter Gray. He is a research professor at Boston College.

"The Biden administration has announced an ambitious, expensive plan for universal preschool for three- and four-year-olds. Some of the language in the White House (2021) announcement sounds comforting:

“President Biden is calling for a national partnership with states to offer free, high-quality, accessible, and inclusive preschool to all three-and four-year-olds, benefitting five million children and saving the average family $13,000, when fully implemented. This historic $200 billion investment in America’s future will first prioritize high-need areas and enable communities and families to choose the settings that work best for them. The President’s plan will also ensure that all publicly funded preschool is high-quality, with low student-to-teacher ratios, high-quality and developmentally appropriate curriculum, and supportive classroom environments that are inclusive for all students.”

Yes, the language sounds comforting, but what does it mean? What does “high quality” actually mean? What is a “developmentally appropriate curriculum?” Will families really have a choice of a “setting that works best for them?”

There is no such thing as a “developmentally appropriate curriculum” for three- and four-year-olds. Common sense should tell us that. Curriculum implies imposed learning goals, which implies assessments, which necessarily implies coercing children to abide by the curriculum plan. That is not appropriate for any children in my opinion, but it is certainly not appropriate for three- and four-year-olds. It is unclear where the settings will be for these preschools, but the common assumption is that many if not most of them will be in existing public schools.

Once upon a time kindergarten was a place for children to play, to get used to being away from home, and to practice getting along with other children. Then it became academic, a place to prepare academically for first grade. Kindergarten became what first grade used to be. Is there someone out there who does not believe that once we have public preschools they will be seen as places to prepare academically for kindergarten?

Preschool won’t be compulsory at the beginning, and maybe never compulsory legally, but people will begin to see it as compulsory. I hear it now: “If you don’t send your children to preschool, they will never be able to manage kindergarten! They will be forever behind.” Parents who fail to send their kids will be considered neglectful. Kindly and knowledgeable preschool teachers, who understand the value of play and the harm of academic training, will be berated—by principals, teachers of later grades, and, yes, pushy parents—for not training these tots in literacy and numeracy skills, just as kindergarten teachers who try to preserve play and resist academics are currently berated (see here and here ).

A Brief Review of the Harm of Early Schooling

Many years ago, the esteemed developmental psychologist David Elkind (1987, p 69) described, as follows, the harm of early schooling: "When we instruct children in academic subjects at too early an age, we miseducate them; we put them at risk for short-term stress and long-term personality damage for no useful purpose. There is no evidence that such early instruction has lasting benefits and considerable evidence that it can do lasting harm." 

Today we have even more evidence of the harm of early schooling than was available when Elkind wrote those words. I have described some of that evidence in previous posts. Here, as review, is a list of some of it:

• A well-controlled study of the effects of a government supported pre-kindergarten program for economically deprived families in Tennessee revealed that, by third grade, children in the program performed significantly worse than those who (by random assignment) were not in the program (Lipsey et al, 2018). They scored lower on academic tests, were more likely to be diagnosed as having a learning disorder, were less likely to have been diagnosed as intellectually gifted, and were more likely to have discipline problems than those who had attended no preschool program. In short, the study revealed that being home, even if you are poor, resulted in better academic and behavioral development than attending this academically oriented preschool program (discussed here and here ).

• Many other well-controlled studies have revealed that academic training in preschool or kindergarten results in higher academic test scores in first grade, but by third or fourth grade those advantages have not only been lost but have been reversed. (I describe some of those studies here and discuss reasons why we might expect such harmful effects here .)

• Research on effects of the Head Start program has revealed mixed results. Reviews of such research indicate that when Head Start has operated as a childcare setting, along with help for the whole family, it has been successful in helping young people rise out of poverty. In contrast, when Head Start has operated primarily as preschool, with academic training, it has not been successful and has even been harmful. Apparently, the success of Head Start, when it is successful, comes not from any academic boost to the children but from help to the family, including daycare help, that enables parents to be employed and provide a better home for their family than they otherwise could (discussed here ).

• Evidence of pathological levels of stress to children caused by kindergarten comes from studies of hair cortisol. Cortisol is a stress hormone, which at prolonged high levels can damage the brain. Chronic stress can be measured by measuring the cortisol level in a snip of hair. A research study revealed that hair cortisol levels were significantly higher in children two months after starting kindergarten than they had been two months before starting (Groeneveld et a l., 2013).

Emotional Abuse of Children in Early Education

Educators don’t like to talk about it, and educational researchers largely avoid the topic (for an exception, see Brengten et al, 2006), but everyone knows that teachers are not perfect, that teaching in a system where naturally rambunctious children, with diverse personalities, must all follow the same curriculum can be frustrating, and that sometimes teachers take their frustration out on children in ways that can cause long-term harm. 

In a rare article on emotional maltreatment of children in school, Margaret King and Gregory Janson (2009) describe an example of abuse that is quite common and may not even be seen by many as abuse. I quote from their example:

“Robert is in the first grade. Each morning when Robert enters the classroom, the teacher, Ms. Jones greets him with a smile. Ms. Jones … is a friendly woman who has very specific ways for children to behave in her classroom. When children enter, they know that they are to put their jackets and backpacks away and go to group meeting. Robert is always late getting to group meeting and Ms. Jones responds in the same way each day. She says, ‘’Robert, I am glad that you finally decided to join us. …We have to wait for you every day and we are tired of your tardiness. Aren’t we class?’ Everyone yells, ‘’Yes!’’ Then Ms. Jones asks if any of the students have anything to say to Robert about making the class late starting meeting. Several students respond to her request with negative comments. Ms. Jones continues by saying to Robert, 'If you continue to be late, the class will have to give up recess to make up the time.’”

Every classroom has its Robert, and Ms. Jones’s approach to dealing with Robert is not uncommon. The fault is not Robert’s, and in a way it’s not Ms. Jones’s either. The fault is a system premised on the idea that little children should all march in step to the same drummer. That’s just not the way children are built. By age six most children (at considerable loss to their creativity and initiative) are able and willing to conform to curricular demands, but some are not. This is how children get singled out as “bad” or, more commonly today, “disordered,” and are either punished or drugged. If this happens at age six, it is going to happen even more at ages three and four. This is why I say a curriculum for little children is cruel. There is no such thing as a developmentally appropriate curriculum for little children.

A few years ago, I received an email from a person in New York City describing the plight of her friend and her friend’s four-year-old son. New York already has universal pre-kindergarten for four-year-olds. By the second week of the year, the child was bringing home notes from the teacher saying that he was “academically behind.” The father was at his wits end, trying to train the child in academic skills so he wouldn’t be behind, and the poor child “just wants to go to bed.” This is just one example of the tragedy of school for little children. “Academically behind” at four years old!

What kids need is love, kindness, care, and opportunity to be their playful, curious, creative selves. A place for this might be called a childcare center , or, better yet, a play center . Please, let’s drop the word school or any such term that implies a curriculum in relation to little children. Children are designed to learn, in their own ways, in play. Every attempt to shape them to follow a curriculum is harmful. 

Mr. Biden, I’m all for making opportunities for Child Care available, free, for all families that need or want it. But let’s not call it school or make it anything like school. The caregivers do not need to be certified for teaching academically. In fact, anyone whose orientation is toward academic training should be ruled out. The qualifications for being a caregiver should have nothing to do with academics and everything to do with a joyful love of children, in all their varied ways of being. For the sake of our children and our nation's future, let’s stop the madness of ever-earlier schooling."

Microsoft to Retire Internet Explorer: Lessons for Today’s Antitrust Cases

By Ryan Young of CEI.

"Microsoft just announced it will retire its Internet Explorer browser next year. This is the same program that was at the heart of an antitrust lawsuit against Microsoft in the late 1990s. There are two lessons here for today’s calls for expanding antitrust enforcement. One is that making something the default option does not guarantee that people will use it. The second is that the difference between a 90 percent market share and a laughing stock can be as small as a few years.

Internet Explorer was bundled into Microsoft’s Windows operating system, and Microsoft would not allow computer manufacturers to unbundle it. It was also set as Windows’ default browser in every new machine. It had a 90 percent market share in 2001, when the case was still active. The antitrust case argued that Microsoft’s inclusion of Internet Explorer with Windows was illegal tying—requiring consumers to buy two products together, even if they only want one of them.

The case more or less ended in a draw. The initial decision to break the company up was overturned on appeal. In the final settlement, Microsoft made some minor concessions to the government and paid about $3 billion to competitors who had sued it in separate private antitrust lawsuits.

Just a few years later, Internet Explorer’s 90 percent market share cratered. It turns out that making something the default option is not enough to make people actually use it. A succession of superior browsers, including Mozilla’s Firefox and Google Chrome, have taken turns as the leading browsers. Chrome is the current market leader with about a 65 percent market share.

As a response to the competition, Microsoft launched Edge, a new browser, and made it the default Windows browser. Its market share is currently about 3 percent. Internet Explorer is around 1 percent.

Microsoft’s real-world experience puts a damper on today’s antitrust claims that Google, Apple, and Amazon giving preferential treatment to their in-house offerings is an effective anti-competitive strategy. This is because of what I call the dozen keystrokes argument—that’s about how difficult it is to download a different browser, type in a different search engine’s URL, join a new social network, or find a different product in a search.

Internet Explorer’s journey to the pasture is not the only news story poking holes in populist antitrust arguments. AT&T is selling its WarnerMedia division for about half of what it paid for it just three years ago. The deal was nearly blocked, with critics arguing that combining network infrastructure and media content in the same company would devastate competition. Now AT&T is refocusing on networks, while WarnerMedia is attempting to compete with a raft of streaming services, many of which did not exist just a few years ago. Antitrust regulators’ cries of foul will never change, but markets always do. Just ask Microsof and AT&T."

Are Shipyard Subsidies a Good Idea?

By Colin Grabow of Cato.

"In the current National Review cover story, Jerry Hendrix makes the case for restoring the United States to the status of a great seapower. As part of this undertaking Hendrix, a former Navy captain and Director of the Defense Program at the Center for a New American Security, calls for the introduction of subsidies—or more accurately, re-introduction of subsidies—to promote U.S. commercial shipbuilding:

It is important, even critical, to understand that investment in commercial maritime trade is crucial to returning the United States to its historical position as a seapower. Before 1981 the United States government recognized its civilian merchant fleet as a core strategic reserve of maritime power. Commercial ships could carry merchant trade, but they could also carry logistical supplies for the military in wartime. Shipyards could build new ships for civilian fleets as well as the Navy, but they could also repair ships damaged in wartime operations. Shipyards also drove other portions of the economy. For every shipyard blue‐​collar job, five to seven well‐​paying positions were created in upstream parts and component suppliers.

It was a complicated industrial process that was subsidized as a longstanding policy by the federal government, which recognized that a robust and resilient shipbuilding sector was a critical component of a comprehensive national‐​security strategy. These subsidies, however, were ended in the 1980s, and U.S. shipbuilding subsequently withered even as other nations in Europe and Asia continued to subsidize their own shipbuilders. Today China, the world’s largest shipbuilding nation, has over 1,200 shipyards, one of which produces more tonnage per year than the entirety of U.S. shipbuilding. Today China, South Korea, Japan, and Europe control and profit from their participation in a growing and thriving global shipping market while the United States sits largely on the sidelines.

Critics may say that returning to a policy of providing subsidies to our shipbuilding industry would go against free‐​market principles. But we must recognize that every other shipbuilding nation provides such subsidies, to the great benefit of its industries, its economy, and its national security. Returning subsidies to American shipbuilders does nothing more than provide a level global‐​competitive playing field for them and increase the resilience of our overall national‐​security infrastructure. Additionally, any strategy to confront China on the high seas must include a detailed investment and management plan for the nation’s shipbuilding infrastructure so that we can quickly and efficiently rebuild this part of the nation’s economy while strengthening its security. The nation is perhaps fortunate that there is already an acknowledged need to reenergize the civilian shipbuilding base, because most of the nation’s strategic sealift fleet needs to be recapitalized.

Readers may be left with the impression that the United States was among the world’s great shipbuilding countries until its unilateral removal of subsidies that effectively ceded the field to East Asia and Europe. They could also be forgiven for further believing that the restoration of these subsidies would both provide an economic boon and vault the United States back into the ranks of the world’s leading commercial shipbuilders.

Such notions, however, should be greeted with extreme skepticism.

The shipbuilding subsidies that Hendrix refers to were passed as part of the Merchant Marine Act of 1936 and later expanded by the Merchant Marine Act of 1970 before being scrapped by the Reagan administration in 1981. Called construction differential subsidies, they were meant—as the name implies—to cover the difference in cost between building ships in the United States versus less expensive foreign shipyards. Reaching as high as 50 percent of the ship’s price, these subsidies in large part reflected the yawning gap in productivity between U.S. shipyards and their foreign counterparts.

While the subsidies succeeded in channeling billions of dollars into the accounts of U.S. shipbuilders, they did not transform the United States into a major producer of commercial ships as shown by this chart from Tim Colton and LaVar Huntzinger:

As the president of the American Shipbuilders Association testified before Congress in 1996, from the 1950s to the 1970s U.S. shipyards collectively delivered an average of 19 commercial ships per year. While significantly more than the 2–3 built on average currently, such output did not make the United States anything more than a middling commercial shipbuilder. For perspective, a single shipyard in Asia can deliver 50 ships per year.

There is no reason to think that the re‐​introduction of subsidies today would meet with differing results. Indeed, even returning production to 19 commercial ships per year would be an enormously tall order given the lack of shipyards capable of building them. In the United States today, a mere four shipyards are either currently building large commercial ships or have done so in recent years.

It should also be recognized that current anemic production takes place despite the continued subsidization of U.S. commercial shipbuilding. While construction differential subsidies were discarded 40 years ago, the federal government continues to dispense largesse to the sector via its Title XI ship financing program as well as direct grants to shipyards. More importantly, shipyards are also the intended beneficiaries of the Jones Act’s requirement that all vessels used in domestic trade be constructed in a U.S. shipyard. This provision is a massive de facto subsidy to the U.S. shipbuilding industry that is extremely inefficient, counterproductive, and with hidden costs.

Claims that shipyard subsidies can be justified on economic grounds, meanwhile, are questionable at best. Although Hendrix says that shipyard jobs lead to the creation of five to seven well‐​paying positions among upstream parts and component suppliers, no evidence is provided.

Some of the data that does exist suggests a more modest impact. A 2015 report from the U.S. Maritime Administration, for example, calculated that 110,390 jobs are directly provided by the U.S. private shipbuilding and repairing industry with another 289,030 indirect or induced jobs. That’s fewer than 3 indirect or induced jobs for every shipyard position. Even so, the measure of a shipbuilding subsidy’s effectiveness is not jobs but the delivery of actual ships.

With respect to parts and components suppliers delivering a rich vein of employment, it should be kept in mind that the majority of high‐​value components found in U.S.-built ships are sourced from abroad. The last Jones Act ship delivered, for example, the Matsonia, features imported anchors, boilers, cranes, elevators, auxiliary generators, engines, and its propeller. The ship was designed in South Korea by Daewoo Ship Engineering Company—which also served as the ship’s material supplier—while construction of the vessel’s vehicle garage required the use of technology developed by German and Dutch shipbuilders. The ship may have been assembled in the United States, but much of the value-add—and resulting employment—took place elsewhere.

Perhaps most importantly, even if the economic benefits of shipbuilding are considerable, it doesn’t follow that this is where federal dollars should be spent. Money should be devoted not just to a productive end, but to its most productive end. To do otherwise would be to leave the country poorer than would otherwise be the case. Hendrix, however, does not show that shipbuilding subsidies are the most productive end of the money he proposes spending.

But none of this means that his call for subsidies is necessarily wrong.

If it can be shown that the national security benefits of such outlays would outweigh the costs, then they should be firmly on the table. Indeed, there is an opportunity for policy improvement if such subsidies are paired with repeal of the requirement found in the Jones Act and other U.S. coastwise laws (e.g., the Foreign Dredge Act and Passenger Vessel Services Act) that vessels used in domestic commerce be U.S.-built. Swapping explicit and direct subsidies for an opaque and implicit one would not only introduce needed cost transparency but would also surely prove more effective than a domestic build requirement that has utterly failed to produce either a sizable or competitive commercial shipbuilding industry.

The employment of transparent and targeted subsidies coupled with the domestic assembly requirement’s removal would also prove far more equitable than the status quo. Currently, the cost of the Jones Act’s U.S.-built requirement is disproportionately borne by the residents of Alaska, Hawaii, Guam, and Puerto Rico who must use these absurdly and artificially expensive ships for commerce with the U.S. mainland. That’s not fair. If commercial shipbuilding demands subsidies for reasons of national security, then the burden should be spread across all Americans rather than paid for by a relative few based on geographic location.

So should shipbuilding subsidies be adopted? Perhaps. But only with a clear national security rationale, a realistic understanding of what they can accomplish, and reform of the Jones Act’s U.S.-built requirement as part of the deal. Any hope of making the United States a commercial maritime power must include a marked departure from protectionist policies that have failed the industry—and country—so badly."

Police Accountability Is a Matter of Life and Death

By Clark Neily of Cato.

"One year ago today, George Floyd was murdered by armed agents of the state. Their employer, the Minneapolis Police Department, initially attributed Floyd’s death to a “medical incident,” for which officers had taken him to the hospital. But because 17‐​year‐​old Darnella Frazier captured the horrific incident on video—and perhaps only for that reason—we know what really happened: George Floyd was brutally asphyxiated by police over a period of nearly ten minutes while he called out for his mother and bystanders begged to intervene.

What’s most extraordinary about this travesty is not the flagrant abuse of authority, but the fact that one of the officers was actually held accountable for it. And after a year of furious, sometimes violent protests, that remains the key issue surrounding police reform in America: Accountability.

As Cato scholars and others have repeatedly explained, police cannot do their jobs effectively without the trust and support of the communities they serve. But public confidence in police is at an all time low, and that seriously impairs their ability to do the most important part of their jobs, which is not handing out traffic tickets, resolving domestic disputes, or making misdemeanor arrests for rinky‐​dink crimes like low‐​level drug possession, but keeping our neighborhoods safe from violence and theft.

Why is public confidence in police so low? Doubtless there are many reasons, including overcriminalization, racially disparate enforcement, and using cops to raise revenue through fines, fees, and forfeitures. But perhaps the most corrosive dynamic of all is the widespread—and entirely accurate—perception that instead of being held to a very high standard of accountability, police are held to a very low standard. And what is the cornerstone of this near‐​zero‐​accountability policy for law enforcement? The judge‐​made doctrine of qualified immunity.

As we explained when Cato launched its campaign to eliminate qualified immunity more than three years ago, qualified immunity is an illegitimate legal doctrine that not only discourages the filing of otherwise meritorious civil rights lawsuits, but routinely enables rights‐​violating police to avoid liability for even the most egregious acts of misconduct including stealing money while executing a search warrant, brutally assaulting the purported victim of a domestic violence incident at a public swimming pool, and shooting a ten‐​year‐​old boy in the back of the leg while negligently firing at a non‐​threatening family dog.

Incredibly, the Supreme Court allowed the lower court rulings in each of those—and many other equally egregious—cases to stand last June, less than one month after police murdered George Floyd in broad daylight on the streets of Minneapolis. The message was clear: Do not look to the Supreme Court to clean up the mess it made with its improvident foray into judicial policymaking.

To its credit, Congress appears to have received that message and has publicly committed itself to enacting some sort of police‐​reform legislation at the federal level. Yet here we are on the one‐​year anniversary of George Floyd’s death, and still Congress has done nothing. Frustrating though that may be, however, it’s better than the usual alternative, which is to duck the hard issues by enacting an essentially meaningless basket of window‐​dressing masquerading as real reform.

Not this time. This time, there is an unprecedented confluence of policymakers, activists, and thought‐​leaders from across the political spectrum who understand that accountability is the key to restoring public confidence in police, and that there can be no real accountability without repealing—or at least substantially reforming—the unlawful shield of qualified immunity.

Of course, nothing we do today will bring George Floyd back to life. But what we can do—what we must do—is everything in our power to purge the remaining Derek Chauvins from the ranks of law enforcement and ensure that for the violation of every right—every right—there is a remedy. We have never had a better opportunity to restore public faith in law enforcement by ensuring consistent, meaningful, and just accountability. Shame on us if we squander it. #EndQualifiedImmunity"

Markets enable an extensive networks of cooperation and it might be impossible to know or trace them all

From Cafe Hayek.

"from page 166 of University of Notre Dame philosopher James Otteson’s excellent 2021 book, Seven Deadly Economic Sins:

What markets enable, then, is extensive networks of cooperation. Indeed, the networks can become so vast that it might be literally impossible to know or trace them all. Adam Smith claimed – in the eighteenth century – that an attempt to trace out all the links in even a single chain of cooperation “exceeds all computation.”

DBx: Very often the simplest of intellectual points are of realities profoundly important yet very easily missed. The Smithian-Hayekian point made above by Otteson is one such point.

I call this point “Smithian-Hayekian,” but it is a point that is understood and accepted by all competent economists – indeed, by all people who think with competence about the economy or about society. And its importance cannot be over-emphasized.

If a list were to be made of the top five most significant errors made by people who propose economic or social policies, on that list would surely be some entry such as this: “Failure to appreciate just how inconceivably complex is the economy and society.” Too many people mistake the end results that they see – the rising money price of propane, the department store filled with goods bearing labels reading “Made in China,” the neighbor who loses her job because her employer downsized, the fall in mortgage interest rates – without seeing the vast, swirling, dense, and inconceivably complex economic forces that give rise to each of these, and billions of other, economic phenomena. Too many people think that by forcibly pushing or pulling on the observed phenomena – pushing or pulling on one of the more visible nodes of a massive, globe-spanning web interconnections – the observed phenomena will change in the way that the pusher or puller desires without any other significant consequences.

People do not understand the incredible interconnectedness of countless suppliers with each other and with consumers. This interconnectedness is inseparable from the competitive processes that make available to the masses today’s great variety of affordable goods and services.

…..

The unseen parts of market processes that give rise to the goods, services, and other economic phenomena that are visible on the economy’s surface are magnitudes more vast, relative to the surface phenomena, than is the unseen part of any iceberg relative to the ice that is visible on the ocean’s surface."

Has Inequality Driven A Wedge Between Productivity And Compensation Growth?

By Scott Winship.

"Whenever those who believe inequality is the defining challenge of our time want to make a supposedly slam-dunk case that inequality has eaten into the incomes of people below the top, they trot out some version of the chart below, which Atif Mian and Amir Sufi call simply, "The Most Important Economic Chart," one also recently deployed by Paul Krugman.

The Economic Policy Institute, in particular, has been promoting the idea that inequality has driven a “wedge” between productivity growth and the income growth of the typical household. Workers’ hourly compensation, it is said, should be tied to the value of what they produce, so when productivity—the value created per hour--increases, worker compensation should increase accordingly. But the charts used to demonstrate the supposed breakdown of this relationship obscure the reality that productivity and hourly compensation continue to track each other. There are six rules for getting this depiction correct. [UPDATE: This post has been revised, with the sixth rule elaborated and the results updated. 12/16/2014.]

Rule 1: Look at Hourly Pay, Not Annual Household or Family Income

Perhaps Mian and Sufi's and Krugman’s most egregious no-no is that they suggest that annual family incomes should track productivity. Of course, yearly family incomes are not simply determined by hourly compensation. They are affected by the number of hours worked in a typical week, the number of weeks worked in a typical year, and the number of workers in a family. Unemployment and underemployment affect family income, but so do voluntary decisions not to work, such as those made by students, retirees, homemakers, and new mothers and fathers. Changes in marriage and divorce rates affect the number of workers in a typical family. There is just no reason to think that productivity growth should have necessarily increased family income growth accordingly. Delayed marriage, increased family disruption, rising educational attainment, earlier retirement, and the aging of the baby boomers practically guaranteed that family incomes would not grow as fast.

Rule 2: Look at Hourly Compensation, Not Hourly Wages

This rule is violated less often today than in the past. The gist is that worker compensation includes not only wages (or a salary), but fringe benefits, including health insurance and employer contributions to retirement plans. To an employer, a dollar of compensation is a dollar of compensation, regardless of the form it takes. Employees like fringe benefits and the federal government subsidizes them through the tax code. And as health care costs have risen, benefits have become a bigger share of pay. (Note that using inflation-adjusted compensation means that pure price increases--paying more for the same quality of health care and for the same services--are adjusted out, so this isn't a story about insurers, doctors, or pharmaceutical companies siphoning off more money. Health care has improved.)

Rule 3: Look at the Mean, Not the Median

EPI President Larry Mishel’s report from 2012 on productivity and compensation was titled, “The Wedges between Productivity and Median Compensation Growth.” Productivity growth is routinely compared with the change in median compensation (or median family incomes as in the chart above). The median hourly compensation is the pay of the worker in the exact middle of the distribution. But economic theory does not predict that when the economy’s productivity rises that the median worker’s pay should increase. Worker productivity need not increase by the same amount across the labor force. It may be that productivity has risen primarily among workers who make well above the median compensation. The median worker’s productivity could remain flat even as productivity increases economy-wide, in which case we would not expect to see median compensation rise. If we are to assess whether pay is tracking productivity, we must compare the latter to mean, or average, compensation.

Here’s another EPI chart, also cited by Krugman, that compared productivity growth to mean hourly compensation. Still looks ugly.

Krugman said of this chart, “[I]f you think I’ve overlooked some crushingly obvious point, you might be right—but the odds are that you aren’t. I do know my way around these numbers.” So, does this chart say what Krugman says it does?

Rule 4: Compare the Pay and Productivity of the Same Group of Workers

This latest chart compares the compensation of production and nonsupervisory workers in the private sector to productivity in the overall economy. The twenty percent of the workforce that falls outside “production and nonsupervisory workers” are excluded from the compensation trend—a group that includes supervisors, who are higher-paid than non-supervisors. Meanwhile, the productivity trend includes them. If productivity has increased primarily among supervisory workers, then we wouldn’t expect compensation among other workers to track productivity growth.

Rule 5: Use the same price adjustment for productivity and for compensation.

Charts like the ones above invariably compare inflation-adjusted compensation to inflation-adjusted productivity, but they use different adjustments for each. In research on trends, compensation and other income figures are generally adjusted for inflation based on the prices that American consumers pay for the things they buy, which is usually the right approach. Productivity is adjusted based on the prices that all purchasers of American-produced goods and services pay for them. Those purchasers include—in addition to American consumers—other domestic businesses and foreign consumers, businesses, and governments. If workers are to be paid based on the value of what they produce, it is this second way of adjusting compensation for prices that is the relevant one.

Rule 6: Exclude forms of income that obscure the fundamental question of whether workers receive higher pay when they produce more value.

Productivity is just national income (GDP, technically) divided by total hours worked. National income includes not just worker compensation and corporate profits, but self-employment income, rent, interest, net “indirect” taxes (such as sales taxes), and depreciation. Technically, if one is interested in whether workers are being fairly compensated, it probably makes the most sense to compare the growth of compensation to the growth of compensation plus profits. More broadly, one might be interested in whether compensation is growing in line with the income going to owners of capital generally (including those who receive rent or interest).

But it is hard to justify including net indirect taxes and depreciation in the “national income” part of the productivity measure. Income from net indirect taxes goes to government, not workers or owners, and it is then spent on things that may or may not be valuable to either group. Depreciation—replacement of machines, buildings, and equipment—also isn’t divisible between owners and workers in an obvious way. It simply maintains or enhances the productivity of workers, which then results in income to be divided between labor and capital. In particular, because a rising share of “gross” GDP—typically just called, “GDP”—has gone toward depreciation, “net GDP” (which excludes depreciation) has risen less than gross GDP. Dividing net GDP by total hours worked, rather than using gross GDP in the numerator, results in slower “productivity” growth.

It also makes sense to exclude proprietors' income (self-employment income) from these sorts of analyses. It is not at all clear how to allocate a person's self-employment income into that going to the person as a worker and to the person as an owner.

Finally, it is also problematic to include the housing sector in GDP for purposes of determining how workers are doing. The national accounts allocate rental income to homeowners, because houses produce a stream of benefits (like shelter) that homeowners would otherwise have to “purchase” by paying a landlord. Essentially, homeowners are assumed to pay themselves rent, which is included in national income. That income is also properly considered outside the question of whether worker pay is rising fairly.

OK, I’ve raised a bunch of objections, but do they matter? They do. I produced the chart below using data from a range of sources.* I look at hourly compensation and compare it to “net” productivity (excluding depreciation and also proprietors' income). Both apply to the “nonfarm business sector,” which excludes the parts of GDP produced from the farm, government, non-profit, and housing sectors, thereby avoiding the issues of homeowners renting to themselves and of indirect taxes (along with other measurement issues in the government sector). And I use the same price adjustment for both compensation and productivity. Here’s what the chart looks like:

Hourly compensation has tracked productivity over the past 65 years. Now, to be sure, the hourly compensation of the median worker has not tracked productivity in the entire economy or in the nonfarm business sector. But to argue that inequality has driven a wedge between compensation and productivity requires showing that the pay of the median worker has lagged the productivity of the median worker. That median worker looks a lot different today than in 1947, when few married women worked, when immigration had been slowed to a trickle decades earlier, and when manufacturing was still the backbone of the American economy. I've not shown that the median worker has been unaffected by inequality, but EPI and others haven't shown that that median worker has been harmed.

Edited 10/20/2104, 9:03 PM: I had deflated hourly compensation and "net" productivity using the implicit price deflator for gross GDP. I changed the chart to use the implicit price deflator for net GDP. The results were essentially identical. I changed the note below to reflect the new methodology. Thank you to James Sherk for catching the error--check out his detailed review of most of the issues discussed here.

* For each year, I compute the ratio of real hourly compensation in the year to real hourly compensation in 1947 and the ratio of real “net” productivity in the year to real “net” productivity in 1947. Proprietors' income is excluded from the productivity figures.

Real Hourly compensation figures for the nonfarm business sector are indices from the Bureau of Labor Statistics Major Sector Productivity and Costs program. The BLS estimates use the CPI-U-RS to adjust for inflation, so I re-adjust them using the implicit price deflator for net GDP for the nonfarm business sector (NIPA Table 1.9.4).

To compute the change in real “net” productivity (less proprietors' income) since 1947, I divide the change in real hourly compensation since 1947 (from above) by the change since 1947 in the share of real net GDP (less proprietors' income) going to real compensation. Note that the share of real net GDP (less proprietors' income) going to real compensation is the same as the share of nominal “net” productivity (less proprietors' income) going to nominal hourly compensation, because the hours are the same in the numerator and denominator and because adjusting both the numerator and denominator using the same deflator is equivalent using nominal quantities.

To compute the share of net GDP (less proprietors' income) going to compensation, I use total nominal compensation figures for the nonfarm business sector from NIPA Table 6.2 (using an index from the BLS Major Sector Productivity and Costs program to extend the series beyond 2000) and I divide it by (nominal net GDP for the nonfarm business sector from NIPA Table 1.9.5 less proprietors' income from NIPA Table 6.12).

Results available from the author on request."

Social Cost of Carbon Calculations Are Inaccurate And Useless

From The Texas Public Policy Foundation.

"The Texas Public Policy Foundation filed an amicus brief supporting the Missouri state coalition’s preliminary injunction motion seeking to enjoin the Biden social cost of carbon rule. Research compiled by TPPF experts Dr. Vance Ginn, Dr. Brent Bennett, and Dr. EJ Antoni demonstrates that “the models that are used to quantify the social cost of carbon fail to properly account for human adaptation, which renders them so inaccurate as to make them useless for evaluating public policy,” according to the brief.

“Regulatory policy based on social cost of carbon emissions is arbitrary to its core and should have no place in federal policy,” said TPPF Chief Economist Vance Ginn. “It is a form of social engineering based on a subjective determination of government bureaucrats rather than the profit-loss system in the productive private sector with a legal system that penalizes bad actors.”

“The use of the social cost of carbon in regulatory analysis cannot be reconciled with sound cost-benefit principles,” said Dr. Brent Bennett, policy director for TPPF’s Life:Powered campaign. “It attempts to equate highly uncertain benefits of emissions reductions in the distant future with the very real costs of achieving those reductions in the present. Regulators should abandon using faulty economics to justify emissions regulations and instead focus on cost-effective adaptation methods to deal with the mild and manageable warming that is most likely to occur.”

“Economic models commonly project only a decade into the future because the number of things we know we don’t know increases too quickly for the models to provide any reliable estimates. And even those projections over a decade are imprecise,” said TPPF economist Dr. EJ Antoni. “Modeling that cannot accurately predict inflation and employment numbers for next month certainly cannot predict economic values for the next century, and beyond.”"

Another Judge Evicts the CDC

Health bureaucrats can’t lawfully ban evictions, but do politicians care?

 WSJ editorial.

"Yet another court loss for the federal government’s Covid-19 eviction moratorium raises a question: Will the government ever have to answer for acting unlawfully? Or do politicians, in this pen-and-phone era, not care if they’ve wandered so far out on a legal limb that they’re standing on air?

Using public-health powers, the Centers for Disease Control and Prevention (CDC) last year issued an order banning the eviction of millions of tenants. The latest extension pushes that order through June 30, and the threatened penalties for disobedient landlords go as high as $250,000 and a year in jail. Where does the CDC get this power? It isn’t the Centers for Rent Control.

A 1944 law, the Public Health Service Act, lets the CDC write regulations that it judges “necessary” to stop disease from entering the U.S. or from spreading between states. To carry out that mandate, the CDC “may provide for such inspection, fumigation, disinfection, sanitation, pest extermination, destruction of animals or articles found to be so infected or contaminated as to be sources of dangerous infection to human beings, and other measures.”

If interpreted as a broad grant of authority, with a catchall phrase for “other measures,” that could mean practically anything. But to steal a game from “Sesame Street,” one of these three things doesn’t belong: fumigation; pest extermination; and an eviction ban that applies to every residence in the nation.  

In a ruling Wednesday, federal Judge Dabney Friedrich placed the statutory language in its proper context, saying that the CDC’s catchall rules must relate to “animals or articles” that are infected or contaminated. “The national eviction moratorium,” she wrote, “satisfies none of these textual limitations.”

Accepting the CDC’s position, Judge Friedrich said, “would mean that Congress delegated” to the executive branch a sweeping power “to resolve not only this important question, but endless others.” The only real limit would be a need to gesture toward a link to illness.

What about regulating carbon dioxide? “Changes in climate,” the World Health Organization says, “are likely to lengthen the transmission seasons of important vector-borne diseases and to alter their geographic range.”

This obviously isn’t what Congress was delegating to the CDC, and other district courts have also said the eviction ban exceeds the law. Both parties are guilty, since the policy began under President Trump and was extended under President Biden. But the legal problem for constitutionalists is if the order lapses on June 30, as it should, then these cases might be moot. The risk of unconstitutional government rises if politicians get away with it."

The Capital-Gains Revenue Illusion

House Democrats are already asking for death-tax exceptions

WSJ editorial.

"Evidence that President Biden’s capital-gains tax increase is counterproductive keeps rolling in, and the latest is from the Penn Wharton Budget Model, a nonpartisan outfit often cited as an authority by Democratic economists.

Penn Wharton estimates that raising the top capital-gains tax rate to 43.4% would shrink federal revenue by $33 billion over 10 years. That’s a smaller hit than the Tax Foundation’s $124 billion loss, but it acknowledges the same economic reality. Taxpayers in range of the higher top rate will find ways to shrink their bills.

To compensate, the Biden Administration has proposed a $1 million cap on the “step-up in basis,” which excludes unrealized gains from taxation at death. This is a backdoor death tax, and Penn Wharton estimates the change would raise up to $113 billion over a decade.

But that is also a static analysis that doesn’t account for other taxpayer behavior. The wealthy already employ legions of tax lawyers and accountants to avoid the current 40% estate tax, and they can do the same to duck the new capital-gains death tax. Charitable donations and creating trusts and foundations are popular methods.

Meanwhile, 13 House Democrats have written to Speaker Nancy Pelosi asking for an exemption for family farms from the step-up in basis tax hit. “The requirement to recognize capital gains at death runs the risk of forcing farms and ranches to sell part, or all, of a farm that may have been passed down for several generations in order to pay the tax burden,” wrote the Members, who include some of the most vulnerable incumbents.

Once the exceptions start, more will get in line, and the estimate of a revenue gain will look even more fanciful."