Myths of Rich and Poor: Why We’re Better Off Than We Think
by Richard Alm and W. Michael Cox
Richard Alm and W. Michael Cox deliver important conclusions, making the good point that downsizing has beneficial sides. Downsizing creates new opportunities and shifts workers to more productive work.
Alm and Cox also conclude Americans possess more physical stuff than in the early 1970s. Though they mostly use a barrage of small samples, this conclusion appears factual. They use this fact to argue we have had great economic progress, but are probably mistaken. America is much older now than in the 1970s. Individuals own more stuff because they have been collecting it for more years. More workers—the baby boomers—are in their prime earning years. Birth rates plummeted. Adults not spending money on children possess more money for stuff.
Imagine two families similar in every respect except:
· Family A: 1973, two children, one television, one car
· Family B: 2000, one child, three televisions, two cars, two VCRs, PC, microwave, and Zantac
Some would look at this and say family B must be earning more because they have more gadgets, completely ignoring the number of children. The costs of one extra child are several times more than the gadgets combined. Even in purely economic terms a family with two children is at least as wealthy as an otherwise identical family with one child and 1,000 microwave ovens. If Family A did not have the extra child, they would not have bought PCs and other products that did not exist then, but they could purchase boats and other toys available in 1973. But, unfortunately, a harmful attribute about toys is they decrease boredom in the short-term increase boredom in the long-term.
Likewise, Cox and Alm praise record home ownership rates, but today's record home ownership results from demographics, not economic miracles. The proportion of the population in their peak earning years, 40s up to mid 60s, is at record highs. These citizens spent a lifetime collecting assets, including homes. According to the Census Bureau, between 1978 and 1998 home ownership among 30 to 34-year-olds declined from 62.4 percent to 53.6 percent.
A collection of trivial truths and major fallacies, Myths asserts value claims “can be neither verified nor refuted.” Well, their self-contradictory claim about value claims can easily be refuted. Many authors did so, and you can read the arguments in books listed elsewhere on this web site. If value claims can’t be proven or refuted, then the “can be neither verified nor refuted” value claim about value claims cannot be correct either.
Myths offers a festival of small sample fallacies. The authors argue the price of milk matters more than overall inflation, I guess because of the well-known fact that Americans spend 99.999 percent of their incomes on milk. Hell, almost any literate person can find thousands of products having inflation rates lower than the norm. And they can find thousands with rates above the norm.
The Consumer Price Index (CPI) inflation adjustments for quality improvements, Cox and Alm assert, are not large enough. This conclusion may be true, yet remains unsupported in Myths. Somebody should tell the authors that it does not matter whether your argument has one small sample or 200. Small samples do nothing to strengthen an argument. If someone were looking for a guide on how to omit evidence and persuade the gullible, Myths is it.
The Consumer Price Index as a whole, the authors allege, overstates inflation by 1.1 percentage points, partly due to the alleged understatement of quality and partly due to other factors. This claim is unsupported by the dubious experts from the Boskin Commission. The members of the Boskin Commission were true believers beforehand, appointed by fanatical congresspersons who also believed in overstatement because it serves their political interests. I read the Boskin Report. To call it an argument, is a tremendous complement. I have not seen so much mumbo jumbo in days, and I am not talking about technical jargon. I am talking about unclear, unspecific garbage that resembles something written by a federal agent to cover-up a crime. Dean Baker and others offer arguments that make the Boskin conclusions ulikely to be true.
I do not know whether the CPI accounts for penicillin and thousands of other products being less beneficial than they once were. The CPI assumes that because something is better by some arbitrary hedonic criterion that it serves us better morally and economically. According to Baker, neither the CPI nor the Boskin report consider factors that might cause a downward bias.
For someone spending almost all his income on food, clothing, taxes, transportation, education, insurance, health care and housing, does it really matter whether he can buy video games with lifelike decapitations with a smaller fraction of income than the richest person in the world could a generation ago?
Alm and Cox try to use inflation numbers to reach standard of living conclusions. The Census Bureau maintains that inflation numbers should not be mistaken for standard of living.
My best guess on what this means—borrowing from Baker—is if hourly legal fees increase three percent, the Census Bureau counts that as three percent lawyer inflation, but other factors affect standard of living. If citizens sue each other more often, and hire lawyers for more hours, that affects standard of living. If your employer requires a Master’s Degree for your job, though his employees 20 years ago were not required to have a Master’s Degree to do the same job, that affects standard of living.
Techno-Utopian “quality” measurements of inflation have a sinister side. Imagine the year 2130: A machine follows you and reads your mind. It opens every door, turns lights on and off, projects 3-D entertainment on any wall, and so on. Over a decade, the cost of this machine falls from $100 million to $10,000. Used models cost $1000. Most individuals can and do own one. This machine would create a huge reduction in inflation, though a nightmarish influencer of quality of life.
Now imagine median income is $60,000 in 2130. For this worker, all taxes are optimistically $22,000, a one room apartment in a bad neighborhood plus utilities costs $17,000, food $5000, transportation $6000 and health insurance $10,000—leaving nothing for everything else—picnics, furniture, child rearing. These latter goods would likely be disparaged or ignored by the techno-Utopians. The neo-Boskinites would sit there, with no hint of anxiety, telling you that you have nothing to complain about. You are filthy rich. Compared to previous generations, you own a machine that does lots of things for you. It does not matter that you have no family and no life, you can not afford them any more. Living in a moral and esthetic wasteland counts for nothing to them. Thanks to dubious techno-wonders, they would claim you are economically better off than individuals in 1970 or 2000.
Productivity figures also rely on techno-Utopian “hedonic pricing.” For example, if computer chips run faster than before, but employees waste time learning software, playing games and reducing productivity in other ways, government statisticians ignore the latter inefficiencies. The mere fact that computers are more “powerful” ratchets their productivity figures. Surprisingly, or perhaps not, research suggests most industries using computers correlate with below average productivity performance. Salaried work done outside the office, whether at home or elsewhere, also does not get included in productivity figures.
Alm and Cox maintain that income distribution is irrelevant to economics (seriously). Why do Richard Alm and W. Michael Cox spend so much time talking about "irrelevant" distributions? I have no idea. They do not mention, of course, that research from social psychology constantly suggests humans preoccupy themselves with status, comparisons, and distributions. And that people use these comparisons to cruelly treat others. Studies suggest, in fact, that most individuals would prefer worse income, provided they have more than other individuals, over a situation where almost everybody gains. Power marketers do not acknowledge that tight labor markets might be a good thing for the overall economy and at least 95 percent of citizens. What bothers them: Tight labor markets cut profits for the rich and increase incomes for the non-rich. They get the government to intervene to keep labor markets looser. Power marketers label their freedoms real freedom while disparaging freedoms for the non-rich. Government interventions allegedly designed to benefit the non-rich gets labeled “artificial” while government interventions that overwhelmingly benefit the rich are considered natural—corporate welfare, monetary policies, fiscal policies, lengthy copyrights. “[Y]ou-vs.-me scorekeeping has little to do with whether any American can get ahead[,]” clashes with it “all works because of competition[,]” unless “vs.” is the author’s abbreviation for vasectomized. Alm and Cox promote the income redistribution business, too, redistributing from greater contributors to lesser contributors like 70s liberals do.
Philosophies concerned with power and status simultaneously deny concern with power and status.
Some power marketers argue, hilariously, in full ad populum glory, that mistreating lower income workers is acceptable because lower income workers are a minority.
Power marketers would not promote the acceptiability of mistreating the rich on ad populum grounds, hence, not much money could be raised, or so it is alleged.
Alm and Cox argue that, unlike wage statistics, per capita incomes tell a better story. Per capita incomes do not. Per capita incomes result from dividing total national income by total population, including children. Children rarely earn incomes. Children, as a percentage of the population, plummeted. Per capita incomes leave out increases in two working families. If your boss pays you half what someone in the same position earned twenty years ago, but you can make up the difference by telling your spouse to work, that is not economic progress. Deporting all children would raise per capita income about a quarter overnight—for a short time, though it would kill long-term economic growth.
The authors cite David Slesnick’s “calculations” of poverty rates from 1949 through the 1980s, defining poverty as three times the amount needed for a nutritionally adequate diet--a bad idea. Food has a small inflation rate. Tax, housing, health care, education, transportation and childcare costs skyrocketed. Slesnick does not include changes in home productivity. Many individuals in 1949 grew their own food. The authors do not define an adequate diet. Maybe they mean the Tom Monaghan definition. Monaghan, the Dominoes Pizza titan, recommends that young individuals stop at the farm supply store and nourish their families with animal feed. Sure, it tastes almost as bad as dirt and might require forced feedings, but it saves. Hell, if you ate tuna, a vitamin pill, and a half-pound of vegetable oil each day, you could eat a nutritionally “adequate” diet for $400 a year.
The “official” poverty line follows the Consumer Price Index, but basic goods and services—housing, education and health care—have inflation rates above the mean. These items disproportionately eat the incomes of lower income citizens. According to my calculations from government expenditure data, in 1994 Americans in the bottom quintile put 48 percent of their expenditures toward housing, education, and health care while Americans in the top quintile spent 36 percent on these three items, and that does not count wealthy Americans mistakenly lumped in lower income categories. Lower income Americans today often pay more for transportation, childcare, and regressive taxes than did individuals in the past, and they spend more time commuting—expenditures the CPI does not count. What good are toys if you cannot afford decent housing? The claim that almost everyone is quite wealthy because they buy color televisions is bunk. TV is trash. Neoconservtive magazines call television crap, then say we are rich because we own televisions.
Living standards, the authors conclude, improved for all parts of society. Wrong. Cox and Alm complain about others not making proper distinctions based on age, work, and family, but they lump everyone (except the homeless and non-responders) into household consumption thirds and quintiles, making terrible distinctions based on age, work, retirement, number of children. Single retirees, families of five, and millionaire tax evaders find themselves lumped together in consumption categories. In the authors' tables a two-worker family with three children, earning and spending $32,000, gets lumped with a similar spending retired widower having no house payments or similar expenses. The family gets lumped with a “high class” prostitute who reports a low income to the government but may earn and spend $300,000 per year, lumped with millionaires who do not file tax returns or under report income. Households with five or more persons suffered declines in median income between 1973 and 1993 despite increases in two worker families. Median income for men 25 to 34 declined from $32,000 in 1973 to $23,000 in 1993. For women in the same age group, it increased from $13,000 to $15,000 due primarily to increases in hours worked. Between 1973 and 1990 the median income of families having a householder under the age of 30 declined 28.6 percent while regressive taxes skyrocketed and the number of workers per household increased. Between 1977 and 1992 after tax income of the top one percent grew 136 percent--and continued growing since 1992.
Alm and Cox allege a good economic future depends on faith, optimism, and confidence. Our “economy has been working better than ever.” Look at the data. We had poor economic growth for the past generation. What if we subtracted growth due to technology (not counting PCs which probably have not helped), better management, more flexible labor markets, more individuals prime productivity years and similar factors? Would a sharp decline in productivity result? The authors ignore the potential fact that public policies for the past generation stunk. And technology, management, labor markets perform so well our false cause pundits labeled bad policies good policies, ignoring what really improved. Confidence in a belief makes you feel good now, but it can make you or someone else feel miserable later.
What matters more in Myth’s vision is not good or bad but negative and positive attitudes. “Pessimists” (read: those who criticize power markets, not those who criticize other economic ideas) harm the economy, they allege. But if there were no “pessimists,” income misdistribution and misretribution would be worse. Regressive flat taxes and payroll taxes would be the rule, tax expenditures for the rich would be even greater. Capital gains taxes and corporate income taxes would be history. Skepticism about rotten or mediocre things is terrific.
The “optimists” would probably make the non-wealthy pay 30 to 50 percent of their incomes in taxes, and the rich would pay zero to 15 percent. Apparently, “optimism” is synonymous with a freaking ripoff.
Power marketers rarely rest. As soon as they get one policy goody, they demand another. If some other ideology ran the economy, producing the mediocre economic results of the past generation that helped the non-rich more than the rich, folks similar to Cox and Alm would scream for change.
The media have rules for optimism and pessimism. If you criticize techno-utopianism, over-consumption, and class warfare by the wealthy, they pronounce you a pessimist. If you criticize claims on behalf of the non-wealthy, they anoint you an optimist.
Despite the innovation rhetoric, Myths is often a status quo book. “The first admonishment to doctors is ‘do no harm.’ The same should apply to policy makers and regulators.” But do no harm is often a slogan used by cowards not wanting to face tough choices, hoping lives stay comfortable all by themselves. Little goodness exists in do no harm. The “do no harm” individuals often allow evil individuals to destroy while their hands appear clean, except for the dirt of indifference.
Bad news sells in the media, but usually the wrong bad news.
The idea we are bombarded with pessimistic arguments for major change is bunk. Flip through television channels thousands of times. How many arguments for major changes do you see? Almost none. (Note: Quarterback controversies and ideas from the McLaughlin Group are not arguments for major changes.) Cox and Alm pretend they are persecuted prophets protecting us from a tidal wave. The likes of Cox and Alm are the tidal wave.
Myths argues the following can be argued, measured, and resolved: Fun, wants, satisfaction, self-esteem, emotional intelligence (EQ), and self-actualization. Unfortunately, they claim, trivia and happiness cannot be argued, measured and resolved. Go ahead. Throw away your life on the picayune. Get rid of anxiety. Trivia and happiness are empty concepts foisted on you by moralists. Despite their allegation that triviality cannot be argued, Cox and Alm do say that “eyeglasses for chickens, escape hatches for coffins” are worthless, but perhaps because almost nobody buys them. The authors see nothing wrong with “insatiable wants.”
Alm and Cox propose that “self-actualization” is the greatest human good, writing that Maslow “charts precisely this hierarchy of needs,” from physiological to self-actualization. Maslow’s pyramid power is simple, attractive, and wrong. Like the self-esteem movement, Maslow’s pyramid has things all mixed up. Competent psychologists reject his pyramid. Individuals do not behave their way up the pyramid. Good individuals do right things regardless of safety or self-esteem. The realities of overconsumption--peer pressure, status chasing, bored habit--differs from the self-actualization pyramid. (Why are individuals attracted when psychologists concoct hierarchies out of whims? The craving for simple generalization loves pyramids, squares and tables. EQ, a feel good substitute for character, justifies a myriad of wrongs.)
The authors seem to imply that two major purposes exist: Making money and using the money to pursue passive pleasures, including self-actualization.
They cite a University of Michigan survey that alleges we have great class mobility. “Most amazing of all, almost 3 out of 10 of the low-income earners from 1975 had risen to the uppermost 20 percent by 1991.” But nurses aids with children did not move to the top. The survey counts 19-year-old children of lawyers as poor, then when the child becomes partner at 35, this becomes class mobility data. The survey basically says 38-year-olds earn more than 22-year-old students. Older Americans earning more does not equal class mobility. Factors must be kept constant. You compare incomes of today’s 25-year-old with 25-year-olds a generation ago. You do not compare the incomes of 40-year-olds with their incomes when they were 20 and call it national progress. My vision of America is a place where citizens can afford families while in their 20s. The authors envision the United States of Colonel Sanders—-the “time element” theory of economic goodness. The Colonel spent much of his life getting nowhere, then struck it rich in old age. Every stage of life matters, not merely a last trip into the sunset. The author’s income mobility measures of economic shift to older Americans. If income mobility were the goal, you could easily design a society where every 20-year-old was in the bottom five percent and almost every 60-year-old was in the top 20 percent. It also appears from the notes that a large chunk, if not most of the population, was not represented in the Michigan study--the individuals not doing as well.
Surprisingly, the authors mention that the home production share of the economy fell from 45 percent after World War II, to below 30 percent now. They try to bolster their claims—as a fallacious appeal to momentum. They, apparently, did not notice that the decline in home productivity could undermine claims about great riches. (Home productivity means that if family A takes home $20,000 a year and does all their cooking and childcare, they are more productive and can enjoy a higher standard of living than family B taking home $20,000 but paying $3500 a year for those two items—all other factors being equal.)
“Shifting production from home to market makes us better off because the jack of all trades isn’t a very efficient fellow,” a good idea for the rich, but a terrible idea for most Americans. The jack of almost no trades is less efficient. Most jobs at home do not require complex training or special equipment. Less than one percent of housework requires trained professionals. According to Time for Life, almost all household work consists of cooking, cleaning, laundering, traveling, shopping, managing, paper work, animal care, childcare, yard work and easy repairs. Professional cooking and childcare offer savings, though the food is usually unhealthy. The health costs of buffets exceed their restaurant prices.
You pay a house cleaner with after tax, after transportation, after other costs income, then indirectly pay for the cleaner’s transportation and other costs. A penny saved exceeds two pennies in gross income. Shifting production is efficient for those whose incomes linger far above the median, a fraction of Americans.
Few taxes on do-it-yourself activities exist. You have greater control over quality. No commute, no accounting or other business related expenses hinder you. If you earn $13 an hour, hiring someone to mow your lawn for $20 an hour stinks unless you hate mowing the lawn.
A person working long hours and hiring others to do non-employment tasks likely develops a narrow, alienated self, likely to feel like an ant in a colony. Doing a variety of tasks with our hands, does something good for our souls.
Numerous dubious ideas are implied, explicitly stated or euphemistically stated by the authors. First, bad indicators should be explained away as the result of lifestyle choices. Second, the pursuit of instant gratification is a high calling. Third, consumers are almost never tricked into desires. Fourth, individuals are consumers and producers, not citizens, family members, and moral beings. Fifth, the speed of a toy is an important indicator of value; the more passive a toy makes you, the better; the more bells and whistles on a toy, the better; economic progress and toys per capita are equivalent. Sixth, constant consumerism does not make individuals shallow and indifferent. Seventh, let's not criticize conspicuous consumption. Eighth, avoid making distinctions among good and bad technologies. Ignore the expected values of bad technologies. Ninth, "new and improved" by some arbitrary criterion matters much. (The authors fail to mention that crack is new, improved cocaine. A citizen might need heart surgery because of obesity caused by eating new, improved high-calorie foods or sitting and watching new, improved television.) Tenth, children are irrelevant to economics. Eleventh, believe those whose unstated mission in life is selling harmful products. Twelfth, have little interest and confidence in human actions other than market activities. Thirteenth, things are better than 100 years ago; therefore current economic practices are good. Perhaps pundits in 1898 said look how things improved in the past century. Keep doing things the same way. Let’s do no harm. Fourteenth, problems are unimportant if they do not seriously harm the average person. If the average individual never goes bankrupt, debts are not a problem.
The authors offer some inspirational conclusions, telling you how you can improve your economic standing, many of them true: work much, save much, have many working adults in your household, move to where jobs exist, act persistent, willingly switch jobs and careers.
One piece of cheerleading—go to college because college grads earn more—needs qualification. Correlation is not cause. College grads may earn more because they possess more prized traits--looks, intelligence, perseverance, connections, social skills, clean records among many. Prison hurts lifetime income, and college grads spend less time in prison.
College is a good economic idea for some individuals—doctors, lawyers, chemical engineers. Those with bachelor's degrees in English and so on are, economically speaking, wasting time and money.
Many trivial conclusions Cox and Alm offer are true. First, the economy should have done even better over the past generation. Second, protect property. Third, avoid high taxes. Fourth, prevent excessive inflation. Fifth, Americans are economically better off than in 1900. Sixth, medical science advanced.
Fallacies are not the biggest problem with this book. Good points are what matter.
Myths contains few good points. Good arguments are sometimes riddled with fallacies, but good arguments also have good points to give their arguments weight. Fallacies must be ignored as worthless or irrelevant.
Cox and Alm seem to think you “prove” policies are correct by finding some areas where the non-wealthy are better off than the past, regardless how many opportunity losses occur. Or how we harm individuals in other ways. Or how other policies are better.
Power marketers proved power markets beat socialism, but not the superiority of power markets over other alternatives. (The seemingly ideal short-term power market: Adults are sterile, fantastically educated, spectacularly servile, incredibly hard working; paper corporations have better rights than humans; loose labor markets rule; subsidies and transfers to corporations are maximized; tax laws are regressive; money equals an absolute rule of free speech, yet actual speech does not; media and politicians are shills.)
Ultimately, Myths dispirits. The techno-conservatives are correct that individuals own more junk now. But their economic descriptions and prescriptions reek. The economy has been badly managed for at least a generation. The libertarian rhetoric of responsibility contradicts libertarian responsibility destroying polices. The more some modern individuals rely on others, the more they use rhetoric of self-sufficiency. The widget designer who buys what he needs thinks he is an island, even while he gains from others’ labors and corrupt government policies. They frame issues as freedom versus anti-freedom. (Benefit and harm become somehow irrelevant.) For some, freedom merely means “I'm gonna do whatever the hell I want and to hell with how it affects others.” The great imperative appears to be the right to waste time. Libertarianism astonishes. Libertarianism provides pat answers before any arguments arise. You can look at headlines above most libertarian arguments and guess the prescriptions without reading the arguments.
256p (H) 1999
Book review by J.T. Fournier, last updated July 19, 2009.
[Note: All statistics used are from the last year I could easily find figures.]