American's Woke Up and Realized They are Getting Screwed. Envy Isn't the Emotion They're Expressing.

Arthur Brooks has a column in today's NY Times that I take a bit of exception to. In it, he makes the claim that envy is on the rise in America and that this is a problem.

My central issue with this is that I believe that over the past 30 years institutional and cultural shifts have resulted in an increasing exploitation of the majority of society by those at the very top of the income scale. There is no other credible explanation for why these trends are so pronounced in the Anglo-Saxon countries, with the US an outlier among this group, and so much weaker in the rest of the developed world. While there is a small shift towards inequality that is occurring across all developed nations, probably largely the result of the vast increase in labor supply caused by the development of the third world, this international component is far smaller than the country specific shifts we have observed in the U.S., Canada, and Great Britain.

However, Brooks mentions none of this, instead trying to frame it as if there is a cultural shift towards envy being caused by politicians "fomenting bitterness" and reduced mobility resulting from regulations, taxes, and a lack of school choice (never mind that this agenda doesn't well describe the policies of countries with greater mobility than us). He summarizes Alexis de Tocqueville, stating that:

Alexis de Tocqueville phrased it a little differently, but his classic 19th-century text contains the same observation. Visiting from France, he marveled at Americans’ ability to keep envy at bay, and to see others’ successes as portents of good times for all.

It's been a long time since I've read de Tocqueville, but from what I remember of it his main explanation for American's attitude is that rich and poor alike share in all aspects of life. They meet and discuss the issues of the day at each other's homes and public entertainments, they recognize the mutual equality of each in politics, they live amongst each other and interact continuously in life's daily commerce, and the benefits and burdens of living in a civilized society are shared according to each individual's means and talents.

This is not descriptive of modern America. Our rich do not brush up against their inferiors in every day life. Today, they have separate stores, separate clubs, and a diverse array of high brow entertainments unavailable to the working poor. Their children attend separate schools, they live in separate, wealthy suburbs, and network amongst each other, not their less affluent fellow citizens. Furthermore, they pour money into influencing their favored political candidates, violating the original Americans' compact amongst each other to have equal voice in the political sphere even when of unequal means.

It isn't envy to realize that this is not de Tocqueville's America. If the rich want to maintain their wealth while dispelling envy the onus is on them to return to these roots. Live in Detroit instead of Grosse Pointe, send their kids to public schools instead of private schools, and shop at Walmart. Talk to the grocery store clerk about the most recent episode of Teen Mom and commiserate about the pot holes and bad public transit that each takes along the same commuting route. In short, live life amongst those of lesser means.

Heritability of Personal Characteristics Does Not Imply Heritability of Social Characteristics

Gregory Clark has a very interesting article in the NY Times regarding research he has conducted tracking surnames and high status occupations. I recommend reading it.

However, while the data presented is fascinating I find the conclusions he draws highly questionable.

For example he writes that:

The notion of genetic transmission of “social competence” — some mysterious mix of drive and ability — may unsettle us. But studies of adoption, in some ways the most dramatic of social interventions, support this view. A number of studies of adopted children in the United States and Nordic countries show convincingly that their life chances are more strongly predicted from their biological parents than their adoptive families. In America, for example, the I.Q. of adopted children correlates with their adoptive parents’ when they are young, but the correlation is close to zero by adulthood. There is a low correlation between the incomes and educational attainment of adopted children and those of their adoptive parents.

Then goes on to say that:

These studies, along with studies of correlations across various types of siblings (identical twins, fraternal twins, half siblings) suggest that genetics is the main carrier of social status.

If we are right that nature predominates over nurture, and explains the low rate of social mobility, is that inherently a tragedy? It depends on your point of view.

I have to confess that I'm not as familiar with studies showing correlations between children's incomes and their adoptive parents, what little I have read does seem to indicate the correlation is much stronger than it is with IQ making this assertion questionable.

The real problem, however, has to do with the vastly different timing of reversion to the mean in IQ and social status. Dr. Clark is writing about reversion to the mean taking 15 or more generations. However, reversion to the mean with IQ only takes a couple of generations. I found this blog post by  Steve Sailer illustrating this, I'm not really familiar with the blog so can't vouch for the source but it is consistent with what I know from more formal reading:

The speed of the regression to the mean.

If one starts with two parents whose IQs are 160 and looks at the average IQs across generations the speed of the regression to the mean is quite fast.

Parents 160, 160
Children average 136 (assume these mate with a 136)
Grandchildren average 122 (assume these mate with a 122)
Greatgrandchildren average 113 (assume these mate with a 113)

How can genetic reversion to the mean explain the very slow social reversion to the mean? There is almost an order of magnitude difference in speed (2 generations vs 10 - 15).

Furthermore, while IQ studies tend to show high correlations between IQ and job performance the correlation between IQ and social status or income is much lower. The data certainly hint that social outcomes are the result of something other than merit and it stands to reason that something other than genetic heritability of merit is at work. Of course, there could be a strong genetic component that is not linked with ability, it is pretty well established that people tend to like and hire people more like themselves so it may be that non-performance related characteristics are being selected for and leading to unequal social outcomes. But the implications of this are very different than if elite selection is based on performance related personal characteristics.

Why Not Help Those Not Willing to Work for It Out of the Labor Force?

I was reading a wonk blog post that mentioned this statement by President Obama, "He’s said he wants to create 'more chances for folks to earn their way into the middle class as long as they’re willing to work for it.'"

The obvious corollary to this should be helping those who are not willing to work to get into the middle class to not have to. A major problem for many employers of lower wage workers is that they have issues finding employees who can do basic things like show up to work on time and spend their shift working rather than goofing off. This understandably makes them reluctant to take chances on lower wage workers more generally by giving them opportunities for greater responsibility and instead instills an attitude that low wage workers are dispensable.

This raises the question in my mind of why we consider it a good thing to make everyone work? Someone that doesn't want to work and is content living in a rat's nest of an apartment eating Cheetos, getting stoned, and playing video games isn't going to be anyone's idea of a model worker. Why is it a good idea to make someone willing to work to get ahead to have to compete with losers in the job market? Most businesses have crude measures for recruiting low wage workers, its hard to distinguish Mr. Cheetos from someone that has worked hard at multiple low wage employers with high turnover. Most small businesses won't bother trying.

Yet we constantly hear of policies that are designed primarily to punish Mr. Cheetos until he is willing to go out and get a job. This makes no sense, Mr. Cheetos is a terrible worker no one wants. Why not pursue policies to keep Mr. Cheetos on the couch so employers only have Mr. Willing To Work to choose from?

Wouldn't everyone be better off in this scenario?

Of course, if you believe in labor exploitation it makes a lot of sense to get Mr. Cheetos off the couch because this produces more labor supply and makes it easier to exploit Mr. Willing to Work but this isn't a theory often mentioned in polite company.

Interfluidity on Marriage Promotion as a Cargo Cult

I just wanted to point out a great post on interfluidity on marriage promotion for anyone that didn't see it. Given the importance I place on how incorrect ideas about what is causing poverty (like dependency or social breakdown) negatively impact policies I think it is important to share great writing like this. Here's an excerpt:

But neither wedding cake nor the marriages they celebrate cause observed “marriage premia” any more than dances on tarmacs caused airplanes landing on Melanesian islands. In fact, for the most part, the evidence we have suggests that marriage is an effect of other things that facilitate good social outcomes rather than a cause on its own. In particular, for poor women, the availability of suitable mates is a binding constraint on marriage behavior. People in actually observed marriages do well because they are the lucky ones to find scarce good mates, not because marriage would be a good thing for everyone else too. Marrying badly, that is marriage followed by subsequent divorce, increases the poverty rate among poor women compared to never marrying at all. Married biological parents who stay together may be good for child rearing, but kids of mothers who marry anyone other than their biological father do no better than children of mothers who never marry at all.

Read the whole thing. The author has a much better handle on the research than most of what I've read in blogs on the subject and makes a convincing case.

Markets Have Little To Do With Inequality, It's All About Power

I'm far from the first person to say this but reading over some blog posts on inequality have left me a bit exasperated at how the inequality debate keeps getting framed. A lot of right leaning people seem to think that the opposition to inequality is a criticism of the market system and fall back on technological and trade explanations. People on the left then go back to saying how annoyed they are by this because they are not talking of the divide between the 95th (or even 99th) and the 50th percentile but instead are talking about the divide between the 99.5th and the 99th percentile which cannot be explained by structural factors like technological shifts.

The central problem here is the right seems unable to acknowledge that economic success brings power and that this power is a distortion of markets. If market forces were at work the extreme inequality wouldn't exist, instead the wealth would be more evenly spread as competitive forces lead companies to either return more wages to employees or to slash prices forcing real wages up. The issue is that at some point in an organization market forces stop operating and the discretion of powerful individuals in the organization takes over. This allows these individuals to pursue policies that divert wealth to either shareholders or managers rather than to making the organization more competitive by slashing prices or by raising workforce quality through higher wages.

Of course, those in these positions justify their policies with elaborate theories justifying their income as the result of merit or some other nonsense. But there is no solid evidence backing these claims up, it's cognitive bias or, for the honest ones, outright legal theft. Owners and managers are complicit as a result of their positions in power in diverting wealth towards themselves. To counteract this power we need to exercise our political rights through our government since political power is more evenly distributed then economic power. As long as the myth persists that inequality is caused by market forces, rather than the exercise of power by the powerful, there will be a substantial obstacle to the level of political organization necessary to break this power.

And for those worried about government power, ask yourselves this. When was the last time that you heard of a government dictating when a non incarcerated individual can take a piss? Yet we hear of many companies doing this to their low wage employees. Which is exercising more power over an individual's life?

Power Can't Keep Labor Down Forever

The NY Times has an interesting article on how employer groups are taking a strong stand against worker centers. I hadn't heard of these before, but worker centers are groups which advocate for employee rights without going to the level of organizing workers at the individual employer level.

I don't have enough knowledge to add any insights into the organizations themselves. However, I do think this is an interesting example of how needs drive an institutional response no matter how hostile the economically and politically powerful are to those needs. America has been very anti-union for many decades and there have been a variety of institutional responses, both politically and systemically at the employer level, that have served to greatly weaken unions.

This did not however in any way diminish the need society has for the functions that unions played. Given that our institutions no longer allow unions to fulfill their social purpose it is inevitable that new institutions would develop that would be able to get around the limitations placed on unions. Worker centers seem to be at least one possible form those institutions will take.

The message employers should be getting from this is that there is a social need that needs to be filled and that their activities are actively undermining this need. It is impossible to be successful in this for any length of time and they would be better off coming to terms with the fact that they cannot simply get their way through wielding power. Sooner or later they will have to cede influence to labor, the question is if they want to do this with organized labor, which they have a long history with and can probably reach some form of mutually beneficial symbiotic relationship with, or if they want to role the dice with innovative new organizations that are being formed in response to the social needs going unmet due to their anti-union activities.

Given the often expressed fear of uncertainty I hear about the sensible thing would be to make nice with the unions. I doubt, however, that business groups will be able to acknowledge to themselves that these groups fulfill a necessary social function and will instead take the riskier, and almost definitely worse for everyone, option of rolling the dice and relying on their power instead.

Why I Have Serious Doubts About Private Sector Health Insurance

I was reading an interview with Robert Laszewski by Ezra Klein (which I clicked on because of a link from Marginal Revolution) and had a bit of an epiphany when I read the last question and response:

EK: Do you think there’s anything the Obama administration can do about that? Or is it just a question of the marketplace at work now?
RL: I don’t think there’s anything they can do for March 31. But as we move to 2015 open enrollment, the Secretary of Health and Human Services has some power to reshape the plans. The mandated benefits are so high they’ve driven costs up and created narrower networks. The statute talks about actuarial levels so the Secretary can’t just do anything she wants. But given a combination of regulatory authority and what the Obama administration has been willing to do already in overriding statute, I think they could do some pretty significant things.
If an entrepreneur had crafted Obamacare he would’ve gone to a middle class family. A family of four make $54,000 a year has to pay $400 in premiums net of subsidy and for that the standard silver plan has an average deductible around $2,500 and a narrow network. They’re going to pay almost $5,000 for that?
So the entrepreneur would say I’ve got $5,000 in premium and all this deductible, what do they want for that? And they probably would’ve said we want office visits and lab tests because the kids need to go in occasionally and then we want catastrophic care. The problem with Obamacare is it’s product driven and not market driven. They didn’t ask the customer what they wanted. And I think that’s the fundamental problem with Obamacare. It meets the needs of very poor people because you’re giving them health insurance for free. But it doesn’t really meet the needs of healthy people and middle-class people.

 [bold italics mine]

The essential problem is that almost half of health spending is driven by about 5% of consumers, a majority of whom have chronic medical conditions. Pretty much all of the cost, and many of the access, problems come down to how to spread around the costs of these high cost patients.

However, the problem lies in the text that I highlighted and put in italics. What consumers want is a health plan that they see working for them on their routine visits, routine visits that make up a vanishingly small part of our total health expenditures (from memory it's something less than 5% but I'm not inclined to search for one of the sources I read this in at the moment). This leads to the virtually unique situation where a system that is responsive to consumer demand is a system that is fundamentally broken because consumer demand is so divergent from the major drivers of cost and measures of quality (like mortality and morbidity or comparative cost of care; I would also add that hearing from my fiance she comes across a fairly large number of patients who have very good things to say about doctors that are responsive to consumer demands but give incorrect diagnoses and inappropriate treatment plans, this really is a bizarre market where we have to leave our standard rationality assumptions at the door).

I remember when there was a bit of an outcry because McDonalds, and some other employers, were cutting their health plans in response to these laws. These plans were exactly the sort that many consumers demanded, they saw them used frequently because they covered things like getting a kid amoxicillin for their strep throat. However, these were mostly mini-meds, the McDonalds plan had a $2000 yearly limit if I remember correctly. Even combining this with a catastrophic plan, plans like these simply won't do a good job getting the early treatment for chronic medical problems, or for long term health issues like maternal care (impacting the infant's long term health), that is essential to bending the cost curve.

Ultimately, the problem is that the market responds to people's short term needs while the political system responds to people's long term needs. In the short term, people want a plan that they will feel is doing something for them by paying for routine care while insuring them for an acute emergency. In the long term, people want a system that provides excellent health care to get mortality and morbidity down and that costs far less than today. However, with health care these priorities are opposed to some degree. One of the low hanging fruits to trim costs is to discourage people from overuse of routine care and antibiotics, making the routine visits that customers demand more difficult is in their long term interest, especially if it gets practitioners to focus more on long term health management rather than acute care. More importantly, designing a health care system at works means designing one that benefits not the middle class family that the entrepreneur focuses on but rather the individual with a chronic medical condition who is marginally attached to the labor market and good health insurance is the marginal intervention that will tip them into the labor force.

What this means for Obamacare I don't know. I see the good sense that getting people to sign up will mean moving towards the approach an entrepreneur would take. I also believe that this is a not insignificant part of why our health care system is such a disaster, these are the worst group to focus on to meet the public's demand for an efficient, affordable, and effective health care system. Solving the divide between what people want as families and what they want as the more amorphous public is something that I don't know how to bridge using market mechanisms.