November 28, 2015

More on inequality and stagnant wages

Filed under: Business, Economics — Tags: — Nicholas @ 02:00

A few months back, Tim Worstall explained why we can soon stop worrying about the rise in income inequality, because the disturbance which caused it in the first place is finally settling out:

We’re constantly told that rising inequality is the greatest threat to the peace and prosperity of the nation. And further, that the stagnant wages of the ordinary working guy and gal are an abomination: as is the increasing amount of the nation’s income going to the already well off. Therefore something must be done. And there’s interesting news for us all. Which is that we don’t have to do anything at all to reverse this trend, the world economy is going to do that for us. We don’t need to change domestic tax rates, start to place tariffs on imports, shout at China for being a currency manipulator, none of the things currently being touted. Because the reason for that income stagnation and rising inequality is itself reversing.

OK, this does rather depend upon agreeing what the original cause of them both was but I think it’s reasonably clear that it is the process of globalisation that has done it. As Branko Milanovic tells us, here’s the winners and losers from globalisation:

Changes in global income from 1988 to 2008

That 75% to 95% of the global income distribution, the people who haven’t done well out of it, is essentially some of the people in the communist transition countries and most of those on below median wages in the rich countries. That latter group being exactly who everyone is worrying about in terms of stagnant incomes. The poor of the world have made out like bandits from globalisation which is why I support it. And, yes, the already rich have done well too.

And the point is, this is exactly what we would expect from having added a couple of billion low wage and low skill workers to the global economy. The low skill and low wage workers already in that global economy aren’t going to do very well, as Charles Goodhart explains via Ambrose Evans Pritchard:

    Prof Goodhart and Manoj Pradhan argue in a paper for Morgan Stanley that this was made even sweeter by the collapse of the Soviet Union and China’s spectacular entry into the global trading system. The working age cohort was 685m in the developed world in 1990. China and eastern Europe added a further 820m, more than doubling the work pool of the globalised market in the blink of an eye. “It was the biggest ‘positive labour shock’ the world has ever seen. It is what led to 25 years of wage stagnation,” said Prof Goodhart, speaking at a forum held by Lombard Street Research.

November 27, 2015

Wealth, inequality, and billionaires

Filed under: Economics, Government, Politics — Tags: , , , — Nicholas @ 04:00

Several months ago, the Washington Post reported on a new study of wealth and inequality that tracked how many billionaires got rich through competition in the market and how many got rich through political “connections”:

The researchers found that wealth inequality was growing over time: Wealth inequality increased in 17 of the 23 countries they measured between 1987 and 2002, and fell in only six, Bagchi says. They also found that their measure of wealth inequality corresponded with a negative effect on economic growth. In other words, the higher the proportion of billionaire wealth in a country, the slower that country’s growth. In contrast, they found that income inequality and poverty had little effect on growth.

The most fascinating finding came from the next step in their research, when they looked at the connection between wealth, growth and political connections.

The researchers argue that past studies have looked at the level of inequality in a country, but not why inequality occurs — whether it’s a product of structural inequality, like political power or racism, or simply a product of some people or companies faring better than others in the market. For example, Indonesia and the United Kingdom actually score similarly on a common measure of inequality called the Gini coefficient, say the authors. Yet clearly the political and business environments in those countries are very different.

So Bagchi and Svejnar carefully went through the lists of all the Forbes billionaires, and divided them into those who had acquired their wealth due to political connections, and those who had not. This is kind of a slippery slope — almost all billionaires have probably benefited from government connections at one time or another. But the researchers used a very conservative standard for classifying people as politically connected, only assigning billionaires to this group when it was clear that their wealth was a product of government connections. Just benefiting from a government that was pro-business, like those in Singapore and Hong Kong, wasn’t enough. Rather, the researchers were looking for a situation like Indonesia under Suharto, where political connections were usually needed to secure import licenses, or Russia in the mid-1990s, when some state employees made fortunes overnight as the state privatized assets.

The researchers found that some countries had a much higher proportion of billionaire wealth that was due to political connections than others did. As the graph below, which ranks only countries that appeared in all four of the Forbes billionaire lists they analyzed, shows, Colombia, India, Australia and Indonesia ranked high on the list, while the U.S. and U.K. ranked very low.

Wealth and political connections

Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had zero politically connected billionaires. The U.S. also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.

When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn’t due to political connections, income inequality and poverty all had little effect on growth.

The Balance of Industries and Creative Destruction

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 18 Mar 2015

Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the Invisible Hand ensures that costs are minimized and production is maximized. If these conditions aren’t met, market inefficiencies arise and the Invisible Hand cannot do its work. In this video, we show how two major processes, creative destruction and the elimination principle, work with the Invisible Hand to create a competitive marketplace that works for producers and consumers.

November 24, 2015

QotD: The real lack of diversity issue

Filed under: Cancon, Economics, Media, Quotations — Tags: , , — Nicholas @ 01:00

As an editor, I have the privilege of working with all sorts of interesting and influential Canadians. On paper, many of these people are “diverse” — men, women, black, white, straight, gay, trans, cis, Jew, Christian, Hindu, Muslim. Yet scratch the surface, and you find a remarkable sameness to our intellectual, cultural, and political elites, no matter what words they use to self identify. In most cases, they grow up middle-class or wealthier, attend the same good schools, and join the same high-value social networks. They have nice teeth because mom and dad pay for braces, and hit a nice forehand (or three iron) because mom and dad pay for lessons. They know the best patisseries in Paris, because of that epic backpacking trip between undergrad and law school. And as ambitious young adults, they feel okay about ditching the law-firm grind for a prominent life in politics, art, journalism or activism — because a wealthy parent or spouse is paying the mortgage.

We rightly worry about how many women, or blacks, or First Nations individuals are represented in public life. Yet that concern is rarely extended to people whose marginalization cannot be reduced to tidy demographic categories.

In two decades of journalism, I have written and edited countless articles about Canada’s criminal justice system. But never once have I, or any of my close journalistic colleagues, ever spent a night in prison. I have written and edited countless articles about the Canadian military. But never once have I, or any of my close journalistic colleagues, witnessed the hell of war. Nor, to my knowledge, have I ever had a close colleague who lived in public housing; who experienced real hunger; who suffered from a serious health condition that went untreated for economic reasons; whose career or education was compromised by the need to support impoverished relatives; or who had been forced to remain in an abusive relationship for purely financial reasons. We often describe people like this as living “on the margins.” But collectively, this is a vast bulk of Canadians whose hardship and anxiety are rarely witnessed by politicians and media except through survey data and think-tank reports.

Jonathan Kay, “Diversity’s Final Frontier: The real schism in our society isn’t sex or race. It’s social class”, The Walrus, 2015-11-03.

November 23, 2015

Minimization of Total Industry Costs of Production

Filed under: Economics — Tags: , , , — Nicholas @ 04:00

Published on 18 Mar 2015

This section connects several ideas covered in previous videos about the price system and profit maximization. In this video, we begin to understand two basic functions of the Invisible Hand. In competitive markets, the market price (with the help of the Invisible Hand) balances production across firms so that total industry costs are minimized. Competitive markets also connect different industries. By balancing production, the Invisible Hand of the market ensures that the total value of production is maximized across different industries. We’ll use the example of minimizing total costs of corn production, and demonstrate our findings through several charts.

November 20, 2015

Here’s a very disturbing economic issue

Filed under: Bureaucracy, Business, Economics, USA — Tags: , — Nicholas @ 03:00

At Coyote Blog, Warren Meyer shares his concerns about the constantly increasing regulatory burden of American business:

5-10 years ago, in my small business, I spent my free time, and most of our organization’s training time, on new business initiatives (e.g. growth into new businesses, new out-warding-facing technologies for customers, etc). Over the last five years, all of my time and the organization’s free bandwidth has been spent on regulatory compliance. Obamacare alone has sucked up endless hours and hassles — and continues to do so as we work through arcane reporting requirements. But changing Federal and state OSHA requirements, changing minimum wage and other labor regulations, and numerous changes to state and local legislation have also consumed an inordinate amount of our time. We spent over a year in trial and error just trying to work out how to comply with California meal break law, with each successive approach we took challenged in some court case, forcing us to start over. For next year, we are working to figure out how to comply with the 2015 Obama mandate that all of our salaried managers now have to punch a time clock and get paid hourly.

Greg Mankiw points to a nice talk on this topic by Steven Davis. For years I have been saying that one effect of all this regulation is to essentially increase the minimum viable size of any business, because of the fixed compliance costs. A corollary to this rising minimum size hypothesis is that the rate of new business formation is likely dropping, since more and more capital is needed just to overcome the compliance costs before one reaches this rising minimum viable size. The author has a nice chart on this point, which is actually pretty scary. This is probably the best single chart I have seen to illustrate the rise of the corporate state:


November 18, 2015

Adam Smith – The Inventor of Market Economy I THE INDUSTRIAL REVOLUTION

Filed under: Britain, Economics, History — Tags: , , , , , — Nicholas @ 05:00

Published on 22 Feb 2015

Adam Smith was one of the first men who explored economic connections in England and made clear, in a time when Mercantilism reigned, that the demands of the market should determine the economy and not the state. In his books Smith was a strong advocator of the free market economy. Today we give you the biography of the man behind the classic economic liberalism and how his ideas would change the world forever.

QotD: Piketty’s pessimism

Filed under: Books, Economics, Quotations — Tags: , , — Nicholas @ 01:00

Piketty’s theory is that the yield on capital usually exceeds the growth rate of the economy, and so the share of capital’s returns in national income will steadily increase, simply because interest income is growing faster than the income the whole society is getting. Let us therefore bring in the government to implement “a progressive global tax on capital” — to tax the rich. It is, he says, our only hope. Reading the book is a good opportunity to understand the latest of the leftish worries about capitalism, and to test its economic and philosophical strength. Piketty’s worry about the rich getting richer is indeed merely the latest of a long series going back to Thomas Malthus, David Ricardo, and Karl Marx. Since those founding geniuses of classical economics, trade-tested progress has enormously enriched large parts of humanity — which is now seven times larger in population than in 1800 — and bids fair in the next 50 years or so to enrich everyone on the planet. And yet the left routinely forgets this most important secular event since the invention of agriculture — the Great Enrichment of the last two centuries — and goes on worrying and worrying in a new version every half generation or so.

All the worries, from Malthus to Piketty, share an underlying pessimism, whether from imperfection in the capital market or from the behavioral inadequacies of the individual consumer or from the Laws of Motion of a Capitalist System. During such a pretty good history from 1800 to the present, the economic pessimists on the left have nonetheless been subject to nightmares of terrible, terrible faults. Admittedly, such pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure. Yet pessimism has consistently been a poor guide to the modern economic world.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

November 13, 2015

QotD: To many the very concept of “tax competition” is anathema

Filed under: Economics, Government, Quotations — Tags: , — Nicholas @ 01:00

I have written a fair bit on this site and elsewhere (I work in the financial/media world) about this subject, and there is no doubt in my mind that the idea that tax competition is harmful is almost always held by politicians and collectivist-minded commentators who want to create a sort of global tax cartel. Cartels are, we learn in our textbooks, harmful although they tend to fracture with time. (The OPEC cartel had a problem in the 80s and 90 sustaining high oil prices, which at one stage went below $10 a barrel). However futile the attempt, however, do not underestimate the harm that is being done in the process of trying to shut down offshore financial centres and the like. The possibility that people can and will take their money elsewhere is one of the few constraints that exist on otherwise rapacious governments. So naturally, governments try to stop this from happening – hence all this talk about shutting down tax “competition”.

When governments claim that tax dodgers are taking food from the mouths of poor babies, treat it with scorn. The money that goes offshore doesn’t disappear down some black hole, never to appear again: that money, if it is to earn a return and outpace inflation, is invested – ie, it is put to work, often far more effectively than would otherwise be the case.

Johnathan Pearce, “The end of tax competition?”, Samizdata, 2014-11-07.

November 12, 2015

Entry, Exit, and Supply Curves: Decreasing Costs

Filed under: Business, Economics — Tags: , , — Nicholas @ 05:00

Published on 18 Mar 2015

In this video, we talk about the special case of the decreasing cost industry. As output increases, costs will continue to fall, and more firms will enter which, again, increases output. It’s a virtuous circle! At the end of this video, we review the major points made in this section. If you find that something doesn’t quite make sense, feel free to re-watch videos as many times as you’d like.

November 4, 2015

Entry, Exit, and Supply Curves: Constant Costs

Filed under: Economics — Tags: — Nicholas @ 02:00

Published on 18 Mar 2015

Some industries have a flat supply curve. These are called constant cost industries. Take domain name registration: to increase the supply of domain names, we must only increase the inputs by a negligible amount. That is why even as the Internet expands so rapidly, it still costs only about six or seven dollars to register a new domain name. By showing you how these industries respond to an increase in demand, we can explain why they are constant cost industries.

November 3, 2015

Brian Micklethwait explains why libertarians love Uber

Filed under: Business, Economics, Liberty — Tags: , , , — Nicholas @ 02:00

At Samizdata, Brian Micklethwait discusses why Uber comes up in conversation with libertarians … constantly:

I and my libertarian friends all love Uber. By that I don’t just mean that we love using Uber, the service, although I am sure that just like many others, we do. I mean that we love talking about Uber, as a libertarian issue, as an issue that nicely illustrates what libertarianism is all about and the sorts of things that libertarians believe in. In particular, we believe in: technological innovation and the freedom to do it, for the benefit of all, except those in the immediate vicinity of it and overtaken by it, because they make a living from the technology that is being overtaken.


To me, the really interesting thing about Uber as an issue is how it makes a nonsense of the old Public Choice dilemma in pro-free market lobbying and opinion-mongering. I’m talking about the fact, which it does often tend to be, that when there is a lurch, proposed or actual, towards a free market, unleashed either by politics or by technology or by a mixture of the two, the people who suffer or who look like they will soon suffer are highly concentrated and easily organised and know exactly who they are. However, those who will benefit from the new dispensation are dispersed and hard to organise and tend not to know who they are. Consequently you get this imbalance in the political argument, in favour of the status quo, even if, in the longer run, many more people would benefit from the new dispensation than the old, and would like it very much, in the event that that ever discovered that they were benefiting from it.

Uber might have been invented to solve the above problem.

Thought: maybe there is a sense in which it was invented to solve this problem. Discuss.

October 29, 2015

Entry, Exit, and Supply Curves: Increasing Costs

Filed under: Economics — Tags: — Nicholas @ 05:00

Published on 18 Mar 2015

We understand cost curves and entry and entry/exit decisions. Now we are going to explore how each firm’s decisions influence the supply curve. Here’s the key question: As industry output increases, what happens to costs? We look at three options: an increasing cost industry, a constant cost industry, and a decreasing cost industry.

First up, we look at oil as an example of an increasing cost industry. Other examples of increasing cost industries include copper, gold, and silver, coffee, and even the profession of nuclear engineers.

October 24, 2015

Maximizing Profit and the Average Cost Curve

Filed under: Economics — Tags: — Nicholas @ 04:00

Published on 18 Mar 2015

Being able to predict your company’s profit is a very useful tool. In this video, we introduce the third concept you need to maximize profit — average cost. When looked at in conjunction with the marginal revenue and marginal cost, the average cost curve will show you how to accurately predict how much profit you can make!
The usefulness of these tools does not stop there. Sometimes, you can’t make a profit. You’ll have to take a loss. These tools can also show you how to minimize losses, and make decisions on whether a company should enter or exit an industry.
We also define terms such as zero profits and sunk costs in this video.

October 23, 2015

QotD: “Ever wonder why on earth anyone thought socialism would work?”

Filed under: Economics, History, Politics, Quotations — Tags: , , , — Nicholas @ 01:00

No, seriously: Ever wonder why? “From each according to his ability, to each according to his need” sounds very fine, but by the time socialism rolled around, this idea had been tried, and fallen apart, in multiple communes. Moreover, sponging, shirking relatives had been observed in families from the dawn of history. The universal desire to work less than needed had long been countered by some variant on the biblical rule that “he who does not work, does not eat.” Why, then, did people want to throw out the profit motive and have the government run everything?

Conservatives and libertarians who ask themselves this question generally assume that socialists must have been naïve pointy-heads who didn’t understand that socialism would run into incentive problems. And of course, as in any sizeable movement, there were just such naïve pointy-heads. Even if I’m no expert on the history of socialist thought, the reading I have done suggests that the movement itself was not actually this naïve; there were people who understood that, as economists like to say, “incentives matter.” They thought that socialist economies would perform better despite the incentive problem because of various efficiencies: streamlining overhead, creating massive economies of scale, eliminating “wasteful competition,” and the many-splendored production enhancements possible through “scientific planning.”

In hindsight, this sounds ridiculous, because we know that socialized economies failed on a massive, almost unprecedented scale. Scientific planning proved inferior to the invisible hand of the market, scale turned out to have diseconomies as well as economies, and administrative overhead was not, to put it lightly, reduced. But before socialism was tried, this all seemed plausible.

Megan McArdle, “Will Ebola Be Good for the CDC?”, Bloomberg View, 2014-10-20.

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