A few weeks ago I posted an article on the Rebel Yid Facebook Page by local columnist Charles Richardson, Tripping Over Stereotypes.  It addressed a comment from Rick Santorum that assumed that most welfare recipients were black, even in Iowa with a small black population.  It did not brand Santorum as a racist, but addressed some common stereotypes that we often innocently stumble on.

The post received several strong comments.  One reader went on a bit of a racist rant and was blocked, but others made remarks that also caused me some concern.  One reader noted that while minorities were only 3% of the population in Iowa they comprised 15% of the welfare recipients and were thus 5 times more likely to be on welfare.

Some readers stopped following me, claiming I was too liberal.  I have certainly lost followers before but never for that reason.   They may have lent some small credibility to my often challenged claim to be beyond left and right.

In an effort to address the other comments, there are two common fallacies on such statistics. The first is the fallacy of reversal.  If 30% percent of welfare recipients  are minority that does not mean that 30% of minorities are on welfare.  ( the numbers are simply to illustrate the point and are not real.)  In Poland just before WW II,  20% of the small Polish Communist Party was Jewish, but this represented less than 1% of the large Jewish population of Poland- 10% of the population before the holocaust).

These fallacies have enormous implications.  Many American leaders feared opening up the immigration before the war, believing that Jews were largely communist.

This fallacy is common. We have been told that marijuana is a gateway drug to harder drugs because a large percent of heroin users had previously smoked marijuana.  But just because 90% of heroin addicts had previously used pot does not mean that 90% of pot smokers will become heroin addicts.  This same logic could be used to make beer and cigarettes a gateway drug.

The second most common statistical fallacy is that correlation is equivalent to causation.  The correlation of minority status to welfare recipients does not mean that the cause of dependency is the fact of being in a minority.  Whether the assumption is genetic inferiority or social discrimination, the proper research will address the significant number of  other factors that would explain this correlation.

You are more likely to be in poverty if you have dropped out of high school, had a child out of wedlock as a teenager, have been convicted of a crime, use recreational drugs regularly, or are unaffiliated with a church.

If I was to describe two different people:  one was a high school drop out single mother with her first child at 17, and the other was only described as a minority, and you had to guess which one was more likely to be on welfare, you would quickly realize that factors other than minority status may be involved in poverty.

Charles Murray’s new book, Coming Apart, focuses on the white community only to illustrate that the loss of common values is more critical to understanding these social problems  than minority profiling. Bradford Wilcox reviewed the book in the Wall Street Journal in Values Inequality, 1/31/12.

Excerpt:

Focusing on whites to avoid conflating race with class, Mr. Murray contends instead that a large swath of white America—poor and working-class whites, who make up approximately 30% of the white population—is turning away from the core values that have sustained the American experiment. At the same time, the top 20% of the white population has quietly been recovering its cultural moorings after a flirtation with the counterculture in the 1960s and 1970s. Thus, argues Mr. Murray in his elegiac book, the greatest source of inequality in America now is not economic; it is cultural.

Since the 1980s, divorce rates have risen, marital quality has fallen and nonmarital childbearing is skyrocketing among the white lower class. Less than 5% of white college-educated women have children outside of marriage, compared with approximately 40% of white women with just a high-school diploma. The bottom line is that a growing marriage divide now runs through the heart of white America.

Mr. Murray tells similar stories about crime, religion and work. Who would have guessed, for instance, that the white upper class is now much more likely to be found in church on any given Sunday than the white working class? Or that, just before the recession struck, white men in the 30-49 age bracket with a high-school diploma were about four times more likely to have simply stopped looking for work, compared with their college-educated peers? By Mr. Murray’s account, faith and industriousness are in increasingly short supply among working-class whites.

We have a political system that is addicted to race to explain our social problems.  This may be as much of an obstacle to understanding our problem as the stereotypes that remain in our discourse.

Alan Reynolds

Alan Reynolds writes in The Wall Street Journal, Tax Rates, Inequality and the 1%, 12/6/11.

Excerpt:

A recent report from the Congressional Budget Office (CB0) says, “The share of income received by the top 1% grew from about 8% in 1979 to over 17% in 2007.”

But here’s a question: Why did the report stop at 2007? The CBO didn’t say, although its report briefly acknowledged—in a footnote—that “high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009.”

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top. Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce “inequality.” Of course, the same recessions also increase poverty and unemployment.

The latest cyclical destruction of top incomes has been unusually deep and persistent, because fully 43.7% of top earners’ incomes in 2007 were from capital gains, dividends and interest, with another 17.1% from small business. Since 2007, capital gains on stocks and real estate have often turned to losses, dividends on financial stocks were slashed, interest income nearly disappeared, and many small businesses remain unprofitable.

HKO comments:

Alan Reynolds has written extensively on the data relevant to income distribution. Income and Wealth, written in 2005 is an excellent and very readable explanation of the data and a refutation of many distortions that have been so commonly repeated that they still pose as fact.  You will find posts from his book and subsequent articles throughout this blog by putting his name in the search block.

Cato's David Boaz

Cato’s David Boaz writes Occupy Pennsylvania Avenue in The Cato Policy Report for Jan/ Feb 2012

Excerpt:

The libertarian argument for keeping more of society in the private sector is not that there’s no self-interest or corruption in business; it is that the market system has more competition, more checks and balances, and more incentives to satisfy customers. You can make money in the private sector by cutting costs; government agencies that cut costs find their appropriations reduced. Businesses must constantly search for better ways to deliver goods and services lest customers move to their competitors. Government agencies are usually monopolies that forbid competition. With no owners seeking a profit on their investment, no financial reward for doing a good job, no penalty for wasting money, government employees have little incentive to deliver goods and services efficiently.

As Adam Smith suggested with his “invisible hand” metaphor, the competitive market system channels self-interest in a socially beneficial way — into the search for ways to attract customers — while the non-market system actually encourages pure self-interest. And one aspect of that is lobbying. Big government means big lobbying. When you lay out a picnic, you get ants. And today’s federal budget is the biggest picnic in history.

Lobbyists love spending bills. They also love a complicated tax system with myriad rates and exemptions. And they especially love complex regulations, which generate demand for consultants who can navigate the regulatory agencies. Just look at some of the lobbying stories from 2011: “Desperate to Stop AT&T [in Washington, not in the hearts and minds of consumers], Sprint Doubles Lobbying Spend.” “Google, facing an antitrust probe by federal authorities, boosted its lobbying expenditures.” “Goldman Sachs flexes its lobbying muscle.”

As Craig Holman of Public Citizen, an organization founded by Ralph Nader, told Marketplace Radio after a report on rising lobbying expenditures during the financial crisis, “the amount spent on lobbying … is related entirely to how much the federal government intervenes in the private economy.”

HKO

Lobbying is a by-product of regulation, yet the same people who decry lobbying the most are often the biggest pushers of new regulations.  Political self interest is often more corrupting than economic self interest because they substitute the force of government rule for the force of market discipline.  When wealth is sought from government connections rather than market service the economy becomes stagnant

Mark Perry analyzes the current Bureau of Labor Statistics unemployment data is his blog, Carpe Diem, a required daily read for me.

Excerpt from Interesting Facts from Today’s Employment Report, 1/6/12:

The unemployment rate for workers with a college degree fell to 4.1% in December, which  is the lowest jobless rate for that group since January 2009, almost three years ago.   The number of employed college graduates is at an all-time high of 45.2 million, and more than 1.6 million above the December 2007 level when the recession started.  In contrast, the jobless rate for workers with less than a high school degree jumped to 13.8% in December from 13.3% in November, and the employment level for those workers remains 1.24 million jobs below the December 2007 level. This contrast suggests that educational level might be an important factor in the labor market improvements and the drop in the jobless rate to 8.5%, with college-educated workers being the group that is gaining jobs during the recovery, while the least educated workers are the group finding it hardest to find jobs.

HKO comments:

This may not be very surprising, but it does point to changes that have caused this.  Our economy has shifted from manufacturing production to information processing. Even in a modern steel mill, workers are scarce but the booth suspended in the air controlling quality and processing is governed by a worker sitting before an array of computer screens that look like the Starship Enterprise.    It could also mean that current college grads have skills that may have been comparable to high school grads a generation ago.

Control room of a modern steel mill

Modern financial giants like Google and Facebook have a fraction of the workers that such a financial base would have required during the previous industrial era.  A high school grad used to be able to get a decent job in an auto factory ora  steel mill or with a construction company.  Especially with the collapse of the housing market, construction jobs are substantially down.  Even with government supportted tech schools teaching useful trades, the demand for these are substantially down.

All of this is made much worse by a huge jump in the minimum wage that occurred when the Democrats took control of the House in 2006, just before the financial collapse.   To the extent that the mandated minimum wage is in excess of the market wage, this will show up in higher unemployment.  Reducing the minimum wage may be sound economics but it is probably politically suicidal.  We will like just have to wait until the market rate catches up to the mandated rate.

Lastly, one economist noted that each successive recession appears to have a longer period of unemployment. This may be due to the longer period of unemployment benefits.  This is magnified at some point by a period of unemployment that is so long that it makes an employer skeptical of the work ethic of the prospect.  The longer one is unemployed the more unemployable he becomes.

Economist Alfred Marshall

In 1879 as Karl Marx was becoming popular in Europe Alfred Marshall wrote The Economics of Industry.   Marx was a reaction to the principles of Adam Smith.  Karl Marx focused on the distribution of an existing pie where Adam Smith sought the benefits for all of an expanding pie.  Marx saw the profit motive as leading to increasing alienation of workers and the inevitable collapse of capitalism.

Marshall’s obsessive effort to understand how business worked led to his most important discovery.  The economic function of the business firm in a competitive market was not only or even primarily to produce profits for owners. It was to produce higher living standards for consumers and workers.  How did it do this? By producing and distributing more goods and services of better quality and at lower cost with fewer resources. Why?  Competition forced owners and managers to constantly make small changes to improve their products, manufacturing techniques, distribution, and marketing.  The constant search to find efficiency gains, economize on resources, and do more with less resulted over time in doing more with the same or fewer resources. Multiplied over hundreds or thousands of enterprises throughout the economy , the accumulation of incremental improvements over time raised average productivity and wages. In other words, competition forced businesses to raise productivity in order to stay profitable.  Competition forced owners to shares the fruits of these efforts with managers and employees, in the form of higher pay, and with customers, in the form of higher quality or lower prices.

The implication that business was the engine that drove wages and living standards higher ran counter to the general condemnation of business by intellectuals.   Even Adam Smith, who famously described  the benefits of competition in terms of an invisible hand that led producers to serve consumers without their intending to do so, had not suggested that the role of butchers, bakers, and giant joint stock companies was to raise living standards.  Although Karl Marx had recognized that business enterprises were engines of technological change and productivity gains, he could not imagine that they may also provide the means by which humanity could escape poverty and take control of its material condition.

From Grand Pursuit – The Story of Economic Genius by Sylvia Nasar

Sylvia Nasar’s book traces the development of economics from Adam Smith through Milton Friedman.  The book gives a background of the key developers of economic theory by relating their thinking to their personal development and the history of their time.

Unlike the hard sciences where laboratory conditions can prove or disprove a theory in a short period of time, the impacts of economic theory only play out at the speed of history.  All too often in the development of economics, rational and mathematical models are humbled by the development of history and the unexpected genius of people who respond much different in the real world than the mechanical objects they are treated as by the brilliant but flawed theories of those intellectuals who confuse thought with understanding, and knowledge with wisdom.