… it is a mistake to use “money” and “wealth” as synonyms. Money is not wealth (though it is often a signifier of wealth). Wealth is a concept far greater, deeper, and more complex than mere money can encompass. Money is a tool; wealth is a state of being, an environment, a continuum in which we conduct our lives. When the left speaks of inequality in purely monetary terms, they are engaging in a puerile and futile kind of reductionism.
Consider a man with a wife and three teenage daughters, who lives in a house with only one bathroom. This man wouldn’t need a million dollars to feel wealthier; he’d just need a second bathroom. A chance to have a hot shower in the morning and have a clean space on the sink for his shaving gear. Wealth to this man is not the money it would take to build the extra bathroom; wealth is the time and comfort the new bathroom brings. Wealth is comfort he gains, his improved state of mind, the increased peace in his household, his improved quality of life. The marginal utility of the additional bathroom is great indeed (the utility of additional bathrooms would be less). The wealth of that additional bathroom is much greater, proportionally, than if this man and his family lived in a huge mansion with fifteen bathrooms. (In fact, the huge house might decrease his happiness due to the expense of upkeep and maintenance. Who knows?)
You don’t make a poor person wealthy by giving them money; history is full of lottery winners who ended up just as poor as when they started, and many’s the dissipated scion of a rich family who frittered away the family fortune. Wealthy people tend to have a lot of money because money is correlated with wealth (but does not cause it). Income, investments, assets — all can generate money for a wealthy person.
But wealth is more than just stuff. A loving spouse and healthy, happy children are treasures. Running a successful business can mean more than just the profits it generates; there is deep satisfaction in conducting a successful enterprise. A deep love of art or music can enhance and enrich a life. The company of good friends is truly priceless, and something that wise people learn to value more as time goes by.
Money gives access to some of those things, but all the money in the world can’t buy an appreciation of those things.
But to speak of wealth even in this broadened sense is misleading, for in America even “poor” people are wealthy beyond the dreams of people in many places in the world. And compared to people in most ages of the earth prior to the 20th century, there are no poor Americans. It’s amazing to consider how much better life for an average person is now compared to past times. We have food in amazing abundance and variety. Every house has a big-screen television, central heating and air-conditioning, and a refrigerator and range. Everybody has at least one car. Everybody has a cellular phone, and most people have a computer. Few of us work more than eight hours a day to afford all these things, leaving plenty of free time to relax. Medical technology has extended our lifespans, and made our tour upon the earth far more pleasant than in former times. We live healthier, more active, more stimulating lives than at any point in our history — wealthier lives.
Monty, “Wealth as an end and wealth as means to an end”, Ace of Spades HQ, 2014-06-24.
June 25, 2014
QotD: The difference between money and wealth
June 22, 2014
QotD: Environmentalism and capitalism
Environmentalists seem to all feel that capitalism is the enemy of sustainability, but in fact capitalism is the greatest system to promote sustainability that has ever been devised. Every single resource has a price that reflects its relative scarcity as compared to demand. Scarcer resources have higher prices that automatically promote conservation and seeking of substitutes. So an analysis of an investment’s ability to return its cost is in effect a sustainability analysis. What environmentalists don’t like is that wind does not cover the cost of its resources, in other words it does not produce enough power to justify the scarce resources it uses. Screwing around with that to only look at some of the resources is just dishonest.
[…]
I did not critique the analysis of energy payback per se, but if I were to dig into it, I would want to look at two common fallacies with many wind analyses. 1) They typically miss the cost of standby power needed to cover wind’s unpredictability, which has a substantial energy cost. In Germany, during their big wind push, they had to have 80-90% of wind power backed up with hot fossil fuel backup. 2) They typically look at nameplate capacity and not real capacities in the field. In fact, real capacities should further be discounted for when wind power produces electricity that the grid cannot take (ie when there is negative pricing in the wholesale market, which actually occurs).
Warren Meyer, “Bizarre Payback Analysis Being Used for Alternate Energy”, Coyote Blog, 2014-06-16.
June 10, 2014
The Catholic case against libertarianism
First, let’s talk about the evils of the free market and how God wants to abolish free exchange of goods for our spiritual and moral welfare, shall we?
Something strange happened in Washington last week: A panel of Catholic intellectuals and clergy, led by His Eminence Oscar Andrés Maradiaga, was convened to denounce a political philosophy under the headline “Erroneous Autonomy: The Catholic Case against Libertarianism.” The conference was mainly about free-market economics rather than libertarianism per se, and it was an excellent reminder that the hierarchy of the Church has no special grace to pronounce upon matters of specific economic organization. The best that can be said of the clergy’s corporate approach to economic thinking is that it is intellectually incoherent, which is lucky inasmuch as the depths of its illiteracy become more dramatic and destructive as it approaches coherence.
[…]
The increasingly global and specialized division of labor and the resulting chains of production — i.e., modern capitalism, the unprecedented worldwide project of voluntary human cooperation that is the unique defining feature of our time — is what cut the global poverty rate in half in 20 years. It was not Buddhist mindfulness or Catholic homilies that did that. In the 200,000-year history of Homo sapiens, neither of those great religious traditions, nor anything else that human beings ever came up with, made a dent in the poverty rate. Capitalism did. One of the great ironies of our times is that so many of the descendents of the old Catholic immigrant working class have found themselves attracted to an American Buddhism that, with its love of ornate titles, its costumes, its fascination with apostolic succession, and its increasingly coddled professional clergy, is a 21st-century expression of Buddhism apparently committed to transforming itself — plus ça change! — into 15th-century Catholicism. Perhaps it should not be entirely surprising that it has embraced the same intellectual errors.
Cardinal Rodríguez Maradiaga and likeminded thinkers, stuck as they are in the hopelessly 19th-century distributist model of economic analysis, apparently are incapable of thinking through the implications of their own dogma. The question of how certain goods are “distributed” in society is a second-order question at best; by definition prior to it is the question of whether there is anything to distribute. To put it in Christian terms, all of the great givers in Scripture — the Good Samaritan, the widow with her mite, Joseph of Arimathea — had something to give. If the Good Samaritan had been the Poor Samaritan, with no resources to dedicate to the stranger’s care, then the poor waylaid traveler would have been out of luck. All the good intentions that we may muster are not half so useful to a hungry person as a loaf of bread.
Those who put distribution at the top of their list of priorities both make the error of assuming the existence of some exogenous agency that oversees distribution (that being the Distribution Fairy) and entirely ignore the vital question of what gets produced and by whom. Poverty is the direct by-product of low levels of production; the United States and Singapore are fat and happy with $53,101 and $64,584 in per capita economic output, respectively; Zimbabwe, which endured the services of a government very much interested in the redistribution of capital, gets to divide up $788 per person per year, meaning that under circumstances of perfect mathematical equality life would still be miserable for everybody. Sweden can carve up its per capita pie however it likes, but it’s still going to be 22.5 percent smaller than the U.S. pie and less than two-thirds the size of Singapore’s tasty pastry. You cannot redistribute what you don’t have — and that holds true not only for countries but, finally, for the planet and the species, which of course is what globalization is all about. That men of the cloth, of all people, should be blind to what is really happening right now on the global economic scale is remarkable, ironic, and sad.
June 9, 2014
Australia gets sensible about military shipbuilding
Australia has similar military issues to the ones Canada faces, but unlike our own government (who view military spending primarily as the regional economic development variant of crony capitalism), Australia is amenable to economic sense when it comes to building the new support ships for the Royal Australian Navy:
The RAN is about to bring 3 large Hobart Class destroyers into service, but it’s the new LPD HMAS Choules and 2 Canberra Class 27,500t LHD amphibious assault ships that are going to put a real strain on the RAN’s support fleet. Liberal Party defense minister Sen. Johnson didn’t mince words when he announced the competition, early in their governing term:
“With the large LHD’s [sic] – 28,000 tonnes each – we must have a suitable replenishment ship to supply and support those vessels going forward, the planning for this should have been done a long, long time ago.”
The Australian government is explicit about needing “fuel, aviation fuel, supplies, provisions and munitions on these ships,” and they’ve short-listed 2 main competitors to build the ships outside of Australia:
Cantabria Class. The Cantabrias are an enlarged 19,500t version of the Patino Class replenishment ship. Fuel capacity rises to 8,920 m3 ship fuel and 1,585 m3 of JP-5 naval aviation fuel. Throw in 470t of general cargo, 280t of secured ammunition, and 215 m3 of fresh water to round out its wet/dry capabilities. These ships also carry a crew medical center with 10 beds, including operating facilities equipped for telemedicine by videoconference, an X-ray room, dental surgery, sterilization laboratory, and gas containment.Spain already uses this ship type, and Navantia S.A. is already building the Hobart Class and Canberra Class, giving them a deep relationship with Australian industry and the Navy.
Aegir Class. The government named Daewoo Shipbuilding and Marine Engineering (DSME), who are currently building Britain’s MARS 37,000t oiler/support ships based on BMT’s Aegir design. The concept is scalable, and Australia’s government sized the variant they’ve shortlisted at around 26,000t. BMT’s Aegir 26 design offers up to 19,000 m3 of cargo fuel, and 2-5 replenishment at sea stations for hoses and transfer lines. The design itself is somewhat customizable, so it will be interesting to see what the offer’s final specifications and features are.
Recall that HMAS Sirius was also built in South Korea, albeit in a different dockyard. That isn’t surprising, because South Korea arguably has the world’s best shipbuilding industry. Norway and Britain have each purchased customized versions of the Aegir Class ships.
Both the Royal Navy and the Royal Australian Navy are willing to buy ships from Korea. Why not the Royal Canadian Navy’s next ships? Because the government would rather spend many times more money and get smaller, less capable ships as long as they get to spread the money around to cronies:
They won’t be built in Australia, because the government doesn’t believe that the industrial infrastructure and experience is in place to build 20,000+ tonne ships locally. Britain has made a similar calculation, while Canada provides a cautionary example by building smaller supply ships locally at over 5x Britain’s cost.
H/T to Mark Collins for the link. Mark also posted this back in 2013:
To add insult to injury, the Royal Fleet Auxiliary, the civilian-manned support ships for the Royal Navy, are purchasing 4 replenishment vessels under the MARS tanker program to be built in South Korea by Daewoo (arguably the foremost shipbuilder in the world). These ships are slightly larger than the Berlin-class. What is the British government paying for these 4 vessels? £452M or about $686M USD. Not per ship but for all four. The per unit cost is around $170M. If we somehow manage to keep the cost for the JSS at $1.3B per unit, that will still be over 7.5x what the British are paying. If the cost goes up to ~$2B per JSS, we’re looking at almost 12x the cost [though the RCN’s JSS is supposed to have some additional capabilities (already much reduced from 2006 to now, and see the very optimistic timeline here) — but how many of them can the government afford?].
QotD: Economic modelling
If we think of ourselves as empiricists who judge the value of the theory on the basis of how well it predicts, then we should have ditched economic models years ago. Never have our models managed with data to predict the major turning points, ever, in the history of capitalism. So if we were honest, we should simply accept that and rethink our approach.
But actually, I think they’re even worse. We can’t even predict the past very well using our models. Economic models are failing to model the past in a way that can explain the past. So what we end up doing with our economic models is retrofitting the data and our own prejudices about how the economy works.
This is why I’m saying that this profession of mine is not really anywhere near astronomy. It’s much closer to mathematized superstition, organized superstition, which has a priesthood to replicate on the basis of how well we learn the rituals.
Yanis Varoufakis, talking to Peter Suderman, “A Multiplayer Game Environment Is Actually a Dream Come True for an Economist”, Reason, 2014-05-30.
June 4, 2014
Piketty’s book as revealed truth
Sean Collins says “thou shalt not doubt St. Thomas”:
The Piketty-FT debate should be seen for the arcane technical dispute that it is, but instead many claimed that it was a Big Deal, a decisive political debate for our times. This overblown reaction highlights how Pikettymania has got out of control. Your attitude to Piketty’s Capital – a 700-page tome that many have not read – has become a badge indicating that you are right-on (or not) when it comes to inequality.
Pikettymania took flight when the left hailed him as extraordinary, a hero, and claimed his book would utterly transform the policy discussion towards questioning capitalism. Liberal economist Paul Krugman considers Capital ‘the most important economics book of the year – and maybe the decade’. Even those who disagree with the content feel obliged to claim the book is exceptional; for example, Lawrence Summers, a top economist in the Clinton and Obama administrations, says it is a ‘Nobel Prize-worthy contribution’, even though he finds Piketty’s theory to be wrong.
[…]
When the Great Man himself responded to the FT, his annoyance at having to deal with someone raising questions about his awesome work was clear. ‘Ridiculous’ and ‘dishonest’ was how he initially described the FT’s findings. In his full reply, he says the FT’s points were ‘criticism for the sake of criticism’ — in other words, this wasn’t a genuine search for the truth. In response to a number of the FT’s specific charges, Piketty says that he often had to adjust the data because of their inadequacies, and he applied his best judgment. He admits that in a few cases he could have been more explicit in describing his adjustments.
Such a response may lead to more questions, but not from his loyal supporters, who were busy celebrating Piketty’s ‘victory’ over the FT. ‘Piketty’s devastating point-by-point rebuttal’, says Robert Kuttner, shows that Giles ‘made a fool of himself’. Economist and New York Times contributor Justin Wolfers tweeted, ‘Debate’s over folks’ — providing further evidence for Joel Kotkin’s theory of the spread of a ‘debate is over’ syndrome among the modern left, which seeks to impose a stifling conformity on a variety of issues (from climate change to the causes of poverty and the definition of marriage, among others). Krugman concluded that the FT-Piketty debate showed the persistence of inequality ‘deniers’ — the same term of abuse thrown at today’s heretics who dare to question climate-change orthodoxy.
This anti-intellectual ‘nothing to see here, folks’ approach is wrong; more, not less, debate should be encouraged. Piketty’s data is fair game, but there’s much more to his argument that should be questioned, too. Even if Piketty’s figures are perfect, he still cannot explain why inequality changes over time, nor back up his predictions for the future. Moreover — as I pointed out in my review of his book — we should challenge the elite’s obsession with the lives of the rich and famous, which distracts from a proper discussion about economic growth and increasing living standards for all.
A real-life experiment – does a higher minimum wage cause job losses?
Seattle just changed their minimum wage to $15 per hour (that’s the city, but not the surrounding suburbs). Tim Worstall outlines what we may see in this handy real world economic experiment:
The first and most obvious effect of a $15 an hour minimum is that there are going to be job losses. Don’t forget that the message from the academic literature is that “modest” increases in the minimum don’t seem to have “much” effect on employment levels. And we’d all agree that a $100 minimum would have rather large effects. So our puzzle here is to try to decide what is the definition of “modest”. Clearly $100 an hour isn’t. But also we can dismiss something like $1 an hour as being problematic. Since no one at all gets paid a sum that small making the minimum $1, or $1.50, has no effect on anything whatsoever.
The best result we have from the academic literature is that a minimum wage in the 40-45% region of the median wage has little to no effect on unemployment. The reason being similar to that of a $1 one. So few people get paid so little that it just doesn’t affect the wages of anyone very much. The same research tells us that once we get to 45-50% of the median wage then we do start to see significant unemployment effects.
This $15 an hour in Seattle will be around 60% of the local median wage. We would therefore expect to see reasonably large unemployment effects.
We would also expect to see unemployment among high school graduates rise very much more than the rate in general. For this minimum applies only inside the City of Seattle: it doesn’t apply to the surrounding counties or suburbs that aren’t part of that political jurisdiction. Imagine that you were a college graduate having to do some basic work to make ends meet while you were waiting for that career opening. If you’re going to get $7.25 outside Seattle and $15 inside it you’d probably be willing to make the trip each day to earn that extra. Of course, as a high school graduate you would too. But now think of yourself as the employer. You’ve got the choice of a college graduate or a high school graduate, both willing to do the same job at the same price. Who are you going to hire? Logically, the higher grade worker, that college grad.
So we would expect minimum wage jobs within Seattle to be colonised by those college grads at the expense of those high school ones. We would therefore expect to see a much larger rise in the unemployment rate of those high school grads as against the general unemployment rate. In fact, we’d expect to see this happening so strongly that we’d take the empirical evidence of that widening unemployment gap to be evidence that it was this minimum wage rise causing it.
May 29, 2014
Harper’s “starve the beast” policy continues
In Maclean’s, Paul Wells updates us on the multi-year diet Stephen Harper has been running on the government’s “revenue generating” tools:
If I were the Conservative Party, I’d be using the latest report [PDF] from the office of Parliamentary Budget Officer Jean-Denis Fréchette to fundraise too. By the standards that motivate Conservative donors, this report is highly motivating.
The report, by PBO analyst Trevor Shaw, examines the reduction in federal revenues resulting from all the major changes to personal income tax and the GST since 2005. It’s an odd choice of starting point — 2005 was the second of Paul Martin’s two calendar years as prime minister — but only a small part of the reduction Shaw measures is attributable to that second Martin budget. Most has happened since.
And the net effect is striking:
“In total, cumulative changes have reduced federal tax revenue by $30 billion, or 12 per cent. These changes have been progressive, overall. Low and middle income earners have benefited more, in relative terms, than higher income earners.”
Shaw attributes $17.1 billion of the reduction to changes to personal income tax level and structure, and $13.3 billion to changes in GST/HST rates. He doesn’t count revenue reductions from changes to corporate income tax. We’ll get back to that. But on the personal income-tax and GST side, the final number is probably actually a little bigger than $30 billion: Shaw writes that he couldn’t get enough data to make his own estimate of revenue reductions due to Tax Free Savings Accounts, but passes along a Finance Canada estimate that it’s good for $410 million in revenue reductions. So, figure $30 billion and change in the current tax year that Ottawa would have raised if it hadn’t been for the past decade’s worth of tax changes.
NDP leader Thomas Mulcair is apparently hoping to make up the “shortfall” (from the point of view where any reduction in government spending is bad) by jacking up corporate taxes. This may not work as well as he hopes:
First, Mulcair is fooling himself if he thinks corporate taxes can be increased to make up for the shortfall in personal-tax income Harper has engineered. As the PBO points out, “Personal income tax and the federal portion of the GST/HST account for 75 per cent of federal tax revenues.” There’s way less room to make money off rich fat cats than Mulcair pretends. I mean, he’s welcome to keep pretending, but if he keeps his word an NDP government will remain short of cash. And a Liberal government, more so.
Second, this is why Stephen Harper is in politics. I wrote a book about that. He may one day stop being prime minister, at which point the real fun begins, because his opponents are promising to run a Pierre Trudeau government or a Jack Layton government at John Diefenbaker prices. It can’t be done. Their inability to do it will be Harper’s legacy.
May 27, 2014
WSJ – “…the Canadian government is paying almost 80% of his developers’ salaries”
Stephen Gordon linked to this rather boggling Wall Street Journal article that outlines how the Canadian and provincial governments are attempting to lure start-up technology businesses to locate in Canada with vast bribes of taxpayer money:
Imagine you are launching or running a startup and there’s a place where all of your developers — the biggest expense for most tech companies — cost one quarter what they do in Silicon Valley. Sure, it’s cold there, but talent is plentiful and the locals are friendly. Would you trade your hash browns for poutine?
Adam Adelman, co-founder of Mighty Cast, a startup working on a new kind of wearable technology, recently told me the Canadian government is paying almost 80% of his developers’ salaries. And that’s not a tax credit. It’s a rebate, a check he gets from the government whether or not his startup makes money.
Even at Mighty Cast, a two-year-old hardware startup, salaries have been 80% of expenses. Combine that with the lower salaries demanded by engineers in Montreal, where Mighty Cast moved its headquarters after its genesis in Silicon Valley, and Mr. Adelman says he’s able to stretch his angel round of investment four times as far.
So the federal government is literally giving away money to start-up tech companies to compete at a huge advantage against actual Canadian companies? Nearly 80% of the payroll is funded from taxes, partly collected from the domestic competition? Does this seem like a good idea to anyone who isn’t already drawing 100% of their income from Ottawa?
The government is particularly badly suited to picking technology winners, and this program sounds like a vast give-away for the well-connected few, literally at the expense of everyone else. Maple-flavoured crony capitalism, with the official stamp of approval of Stephen Harper’s “conservative” government.
QotD: What capitalism should do now
Just as democracy can be corrupted by repressive populism, so can capitalism be perverted by “rent-seeking” — when people seek to gain more than the goods and services they produce are worth to others.
Sometimes they use political influence to sustain monopolies or to prevent new entrants and innovators from competing for custom. Sometimes they use governments to provide subsidies from taxpayers, or to prohibit cheaper imports.
Sometimes they do deals with governments that provide taxpayer funds to cushion losses derived from incompetence or recklessness. These forms of crony capitalism detract from capitalism’s real benefits and achievements.
What capitalism should now do is to free itself from these rent-seeking perversions and spread its benefits as widely as possible.
It should act against anti-competitive practices to give people instead the power of free choices between competing goods and services. It should spread ownership of capital and investment as widely as possible through such things as personal pensions and individual savings accounts.
It should lower the barriers to entry so that everyone can aspire to start up a business to bring goods and services to others. It should seek a tax system that rewards success rather than punishing it.
Capitalism should become inclusive, making it as easy and as attractive as possible for as many as possible to set aside some part of present consumption in order to invest some of their resources and their time in providing goods and services that others will want. It should become true capitalism.
Dr. Madsen Pirie, contributing to “Viewpoints: What should capitalism do?”, BBC News, 2014-05-26.
May 25, 2014
The case for reparations
Another discussion that seems to have taken centre stage recently (at least in some US publications) is the argument that reparations are owed to the descendents of African American slaves:
Ta-Nehisi Coates has an excellent essay about the historical treatment of African Americans over the centuries, the legacy of slavery and Jim Crow and all that. And more specifically he addresses the problem of what African Americans have had stolen from them over that period of time. All of which leads various economist types to try to put a value on the theft of that labour. Tyler Cowen thinks that non-slaves have lost as much (or, given their greater number, cumulatively) or more thus there is no amount of reparations possible. For slavery itself means that current society is poorer than it would have been without slavery. If we leave that argument aside there’s another way of calculating what reparations might or should be. And it has been done rather cleverly here. However, I think we still end up in roughly the same sort of place. Which is that even if reparations for slavery are logically or morally due, the actual amount is still going to end up being pretty much nothing.
[…]
Thus today’s value of what was stolen from the slaves is that $1.75 trillion. Which is, when you look at it, a formidable sum of money. Except, actually, it isn’t. The net wealth of the entire country is around $80 trillion or so. So it’s a trivial percentage of the national wealth. Or we could look at it another way. There’s 42 million or so African Americans (defined as having some possibly slave and black antebellum ancestry) so the capital sum would be some $40,000 for each of them. Which, while a nice enough sum to receive isn’t the sort of life changing sum some might think might be due in reparations.
And we can also break it down another way. Think of that as the capital sum and then apply that 4% return to it. That would be an extra $1,600 in income per year to each and every descendant of slaves. Or, in total, something like $70 billion a year. Which, in the context of a $15 trillion economy is pretty much next to nothing. About, in fact, the size of the food stamp or SNAP program.
Even if slavery reparations are righteously due they would amount to around and about the current cost of food stamps. Which is, as I say, around and about nothing given the size of the entire economy. And, I would also wager, not an amount that anyone at all thinks is going to fix the problems that beset parts of American society today.
QotD: Free markets and quality
“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” Adam Smith, The Wealth of Nations
A tender medallion of steak, a foaming pint of bitter and a crusty roll still hot from the oven — no wonder that Adam Smith chose an alliterative trio of artisanal food providers to make his point about the benefits of capitalism. If he had chosen a junk bond salesman, a fund manager, and a quantitative analyst, wielding a Gaussian copula in an effort to price a synthetic credit derivative, his defence of the market mechanism might not have resonated down the centuries in quite the same way.
Smith’s point was a good one. We are unlikely to give our custom to butchers who poison us, brewers who serve foul beer or bakers who overcharge; food sellers find it profitable to serve decent food at reasonable prices. The system needs some oversight — hygiene inspectors, trading standards officers, the Competition Commission — but the main engine of quality is the market mechanism. People prefer cheap and delicious food to food that is pricey and tastes horrid — and that fact alone delivers more than regulators ever could.
Tim Harford, “Why can’t banking be more like baking?”, TimHarford.com, 2013-11-05
May 24, 2014
Piketty’s Charge
The book that everyone has been so enthusiastic about (well, everyone who supports vastly increased taxes and a much larger government anyway) may rely for much of its power on faulty data:
FT economics editor Chris Giles says he has found serious errors in data used by Thomas Piketty in his best seller Capitalism in the 21st Century, about growing inequality in the Western world.
“Some issues concern sourcing and definitional problems,” Giles writes. “Some numbers appear simply to be constructed out of thin air.”
Correcting for the errors revealed fundamentally different conclusions about rising inequality, Giles said.
“Two of Capital in the 21st Century’s central findings – that wealth inequality has begun to rise over the past 30 years and that the US obviously has a more unequal distribution of wealth than Europe – no longer seem to hold,” he writes.
He continues:
For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.
Update, 25 May: The concern is not just “fat fingered” data transcription errors, but deliberate falsification of data.
But while the two Harvard professors’ errors seemed to have been unintended, Giles levels a more serious critique: that Piketty actively manipulated his data.
His most damning claim: Piketty altered U.K. data to show that wealth distribution there is worse off than it appears to be.
Piketty says the share of income going to the top 10% never fell lower than 60%, and since the end of the 1970s has returned to 70%, a level not seen in 70 years.
But the data Piketty himself cites shows the top 10% share of wealth is no greater than 50%, and may be as low as 42%.
Giles writes: “This appears to be the result of swapping between data sources, not following the source notes, misinterpreting the more recent data and exaggerating increases in wealth inequality.”
[…]
In a follow-up video on FT.com, Giles shows another example: Piketty appears to have added random numbers to certain formula to bend the data toward his hypothesis. “A 2 is added because the number wasn’t high enough — it didn’t seem to fit what he wanted to show in his charts, so he just added 2 to it,” Giles says. “There was quite a lot of this sort of thing in his spreadsheets.”
Update, 27 May. Nate Silver warns that we should be skeptical of both Piketty and his critics:
Science is messy, and the social sciences are messier than the hard sciences. Research findings based on relatively new and novel data sets (like Piketty’s) are subject to one set of problems — the data itself will have been less well scrutinized and is more likely to contain errors, small and large. Research on well-worn datasets are subject to another. Such data is probably in better shape, but if researchers are coming to some new and novel conclusions from it, that may reflect some flaw in their interpretation or analysis.
The closest thing to a solution is to remain appropriately skeptical, perhaps especially when the research finding is agreeable to you. A lot of apparently damning critiques prove to be less so when you assume from the start that data analysis and empirical research, like other forms of intellectual endeavor, are not free from human error. Nonetheless, once the dust settles, it seems likely that both Piketty and Giles will have moved us toward an improved understanding of wealth inequality and its implications.
May 22, 2014
Here’s a suddenly topical idea that (if implemented) will increase the gender wage gap
I don’t know why the topic of menstrual sick leave is suddenly a topic of discussion at many media sites, but it’s a bad idea for womens’ equality as Tim Worstall explains:
Standard theory tells us that if we raise the cost to employers of employing a certain class or group of people then the wages paid to that class or group will fall relative to those groups that have not had the extra costs loaded onto their employment. For the employer is paying to get a job done. If we mandate free lunches, or impose employment taxes (like the employer side of social security), or a certain amount of sick leave, then the cost of providing those will be coming from that gross amount that the employer is willing to pay to get that job done. The more we insist that some of those costs be spent on not wages then the less there is that will be paid in wages.
And if we insist that one group or another has an extra set of costs associated with their employment then we’ll end up seeing the wages of that group fall relative to groups that don’t have those associated costs. The provision of paid menstrual leave will act in exactly this manner. Sure, whatever the allowance is not all women will take it. Say that it’s one day a month out of a standard 22 or 23 day working month. If all women religiously took it we would expect female wages to fall by 1/22 or 1/23 relative to those of men (or of post-menopausal women). Not all women would take it, undoubtedly, so the effect would probably be less than this.
[…]
As above, if we formalised this arrangement then we don’t think that all women would take all of those sick days. But we do have evidence that part of the gender pay gap is already caused by this very problem. And formalising the arrangement will lead to more women taking the sick leave than happens currently. That’s just a natural human reaction. All of which means that, if we did institute formal paid menstrual leave then we’d expect to see a widening of the gender pay gap.
As more women entered the formal work force over the last century or so, many governments and regulators have imposed additional costs on businesses by mandating different treatment for women: while they often claimed they were acting out of concern, the typical result was to make women’s work proportionally more expensive than that of men. If women are limited — by law — to a shorter working day, or to have additional breaks, or to be entitled to extra sick days, then the rational response of businesses will be to hire more men and fewer women (even for work that does not require more physical strength). The push for a new category of special treatment for women will have exactly the same effect: making women more expensive as employees than men.
