Organization: Penn State University
Date: Tue, 17 Nov 1992 07:17:34 EST
From: <DGS4@psuvm.psu.edu>
Newsgroups: talk.politics.misc,sci.econ
Subject: Re: Look Back in Anger
 <1992Nov16.131926.5633@desire.wright.edu>

In article <1992Nov16.131926.5633@desire.wright.edu>, demon@desire.wright.edu
(Stupendous Man) says:
>
>In article <92321.103319DGS4@psuvm.psu.edu>, <DGS4@psuvm.psu.edu> writes:
>>
>> In article <1992Nov15.223328.5620@desire.wright.edu>,
>demon@desire.wright.edu
>> (Stupendous Man) says:
>>>
>>>In article <92320.184749DGS4@psuvm.psu.edu>, <DGS4@psuvm.psu.edu> writes:
>>>>...
>>>> The poor did get poorer, relative to the rich, though both groups were
>>>
>>>        There's the rub.  Shall we chain weights to the best sprinters,
>>>telling
>>>them that they're so far ahead of the guy in last place that it's "not
>fair"?
>>>Do that to relay racers who inherit a lead?
>>
>> Of course, I never suggested chaining weights to anyone.  What I've said is
>> that inequality is supposed to serve a purpose in a free market economy.  It
>> is supposed to motivate entrepreneurs to risk capital for larger rewards.
>> That is supposed to pay off for all people in society by raising the
>> growth rate of GDP.
>>
>> I see no evidence that the increase in inequality during Reagan's terms
>> did raise the long-term growth rate of GDP.
>
>        The growth rate improved from 2.6% during the 70s (actually 1973-1982)
>to 3.5% (1983-1990).  WWII-1972 was 3.6%.  Certainly the affect was to raise
>the GDP growth rate.  It's even more impressive when you realize that this
>growth was achieved during the most intensive period of global competition
>ever.  A lot of the post WWII growth in GNP was largely because no one else
>was around to sell.

Can you say, "selection bias"??  You exclude several years which
assist in the production of your numbers.  Most economists will tell you
not to measure GDP growth from beginning of expansion to end of expansion
as you have done in the latter period.  In any case, long run
GDP growth depends on productivity growth.  The rate of growth of
productivity in the U.S. still remains far too low.



>>>        Economics is not a foot race, but I think the analogy is fitting.   w
>Ho
>>>much do the poor have to earn before we stop with the N% less than the rich
>>
>> Any result in a free market economy depends on the initial endowments of the
>> individuals.  In the economic foot race between an African-American and a
>> Caucasian, for example, suppose the Caucasian wins by 50 yards.  Does it
>make
>> any difference to you if the Afican-American started the race 1 mile behind
>> his competition?  By looking only at the finish line, you ignore
>> important information.
>
>        Exactly, which is why we need to examine who much each sector of the
>population improved/declined.  Those making $25k and less improved their net
>worth by 19% during the 83-90 expansion.  (All numbers have been real gains.)
>        The lowest gain of any part of the population, but also the only part
>of the popluation that depends on the government for a significant portion of
>their "income".  (Quotes because direct payments are not include as income for
>almost every economic stat you can name.)

As I said, that's no better income mobility than in other periods of
recent memeory.  So what's the big deal?  Reagan's policies did not
change income mobility.  Am I supposed to consider that an accomplishment?


>
>>>comparisons?
>>>        My government teacher in high school had an apt analogy for
>socialism
>>>in all things.  She told us in a socialist school system, everyone would get
>>>Cs.  Cheers from the below C students, and well deserved raspberrys from    e
>thos
>>>above a C average.  Of course the real point was that such a policy would
>>>result in no one working for more than a C, lowering the average even       .
>further
>>
>> Why divide the world into "free" and "socialist"?  There are a lot of
>> nebulous situations in between.  I have argued that some level of
>> inequality in outcomes is absolutely necessary in a free market
>> economy.  There are several questions that still remain.  How much
>> inequality is needed?  Did the rise in inequality in the 1980s pay back
>> benefits in terms of long-term growth?  Can we use public policy to
>> alter endowments so that the realized inequality reflects differences in
>> effort, not differences in initial advantages?
>
>        My point is that often attempts by the government to "equalize"
>backfire.

My point is that Reagan did not improve mobility, did not improve long-term
growth, but did increase inequality.  Since this thread is in sci.econ
tell me what the economic value of inequality is.  I would argue, as most
economists do, that inequality serves to motivate differential efforts.
It makes entrepreneurs risk capital for reward.  In the course of that
the general standard of living is improved for all people.  Yet, Reagan's
increase in inequality has not done that.

>
>...
>>>> nothing necessarily good or bad about the increase in inequality.
>>>> I think inequality is a necessary
>>>> component of a free market economy.  My question is what did we get for
>the
>>>> increase in inequality during this period?  I don't see much benefit, so
>>>far.
>>>
>>>        But why should we have to get anything?  Someone who bets on a 10:1
>>>horse will win more than a 2:1 bet if they win.  Looking for an overall gain
>>>from such a situation is meaningless.
>>
>> What is the purpose of inequality in a free market?  Isn't it to motivate
>
>        There is no "purpose" to inequality.  Inequality is a derived figure.
>It's not a natural part of the system.  It has to be introduced by people.
>You'll get into a circular logic loop by trying to prove that free market
>systems are bad because of inequalities.  Free markets have nothing to do with
>artificial limits/quotas/etc.

I suggest you re-read Adam Smith.  Inequality is a natural result of the
free-market economic system.  It results from differential rewards as
a result of differential productivities, as well as differential
endowments.  Economic theory clearly shows that under certain conditions
you can alter the endowments to get a desired Pareto-optimal result.  That
raises the political question of whether a people can and should use
government powers to achieve a desired result.

You really should be more consistent Brett.  Earlier you said that if
a teacher didn't allow work to be rewarded with differential grades
than everyone would only try to get C's.  Isn't the "purpose" of grade
inequality to motivate differential effort?  Inequality most certainly
has a fundamental purpose in free market economics.

>> effort?  Doesn't that motivation result in increased growth rates that
>> benefit all?  Isn't that the one of the main purposes behind free markets?
>
>        Free markets simply are.  It's not like they have programmed
>responses.
>Free markets remove restrictions from gains and losses and risk.  If you want
>to term this an inequality I can't agree with you.  Generally the higher the
>risk the greater the potential reward, but that's not inequality.

O.K., now I see the difference between our defintions of inequality.
By inequality I mean measured differences in income/wealth (using
common measures like the Gini index).  In the most basic terms the
measured inequality that we see in a free market results from two
sources, differential endowments and differential productivity (notice
I am assuming away that there might not be a strict connection
between productivity and the reward of that productivity).

You seem to assume that none of the inequality is the result of
differential endowments and free markets perfectly reward different
individual productivities.  Thus, the ineqaulity that results is a
a perfect match to different productivity.  I risk.  If I am productive
I am rewarded.

Don't you think, however, that your assumptions, as I have stated them,
are unrealistic?  If either is true, then measured inequality is not a
good indicator of differential efforts.

>>>        We can tiptoe around the real issue, or address it.  Why are the
>poor
>>>poor?  What is the most meaningful difference between the poor and the
>>>not-poor.
>>>        Education?
>>>        Opportunity?
>>>        Government?
>>>        IMO, it's the government.  A system that started out with the
>>>intention
>>>of buffering the bottom 20% became an institution for perpetuating the
>>>condition.  Both becuase politicians and bureaucrats figured out that these
>>>people meant job security for them, and because role models play an
>important
>>>part how well children do relative to their parents.
>>>        The welfare system provides neither good role models nor an
>efficient
>>>way out of poverty.
>>
>> To link to another thread that is developing, provide me evidence that the
>> welfare system is the cause of long-term poverty.
>
>        Long term poverty exists outside of welfare.  Welfare didn't cause it.
>But welfare does not solve it, either.  So my argument is why continue with a
>system that while it has been in place has seen an increase in the number of
>people living below the poverty line?  That, to me, indicates a failed system.

I don't see the increase in number of people below the poverty line.  In the
1950s 50 percent of elderly persons were below poverty.  Now, that is less
than 15 percent.

I see a system that has imperfections and needs to be fine-tuned. The
fundamental premise (that government can set a floor below which people
should not fall without seriously impeding the operation of a free market)
is correct (from a pragmatic point of view).


>        IMO welfare does influence people to not take the economic risks that
>might get them out of welfare by making it an all or nothing venture.  As soon
>as they start to make money, they get dropped.  So they have to be pretty sure
>that they will succeed in order to even attempt it.
>        I'm not equipped to do a study, but perhaps someone has numbers from
>the CATO institute or similar agency.

Look back at why those sorts of institutional constraints were put into
welfare.  Conservative critics argued that people who work should not
be getting hand-outs.  Clearly, the system needs to be fine-tuned.  We
could benefit by looking at other systems where benefits do not depend on
whether or not you are working.

>
>> As you show, there is quite
>> a bit of mobility from bottom to top in the U.S.  How can you reconcile that
>> with your statement that our government is perpetuating poverty?  Can you
>
>        Total numbers.  A lot of people get out, but a lot of people drop into
>it also.  The economic expansion was big enough to cause an overall gain, but
>not big enough to offset the drag on the lower income groups.  Some of that is
>cultural and not economic, though.

So now you are telling me that during the Reagan period a lot of people
got out of poverty but even more fell into poverty?  Tell me again why
I should think this was a good period for the U.S. economy.

>
>> show me that long-term generational poverty increased after the             n
>implementatio
>> of the Great Society?
>
>        The current povert rate is higher now that it was in 1965.  Despite a
>few trillion spent on the war on poverty.  Perhaps it's time we declared an
>economic Vietnam and went on a new path.

That is unresponsive to my question.  I ask for numbers on generational
poverty and you give me the static poverty rate.



>
>> Will you include all the generational poverty among
>> African-Americans and the rural poor in your pre-Great Society estimates?
>
>        Don't have the numbers.

Of course you don't.  So stop talking through your hat, suggesting that
the current welfare system perpetuates poverty any more so than the system
in previous eras.  Perhaps our current system is an incredibly improvement
over the system prior to 1965.  Neither you nor I have the numbers, so
we can't prove it.

You should, however, be careful.  You keep telling us how mobile the income
distribution was in the 1980s, yet you keep arguing that "the system"
perpetuates poverty.


>> Education is clearly a difference between rich and poor in the U.S. both in
>> level and quality.  Discrimination still plays a role, though it has been
>> diminishing.
>>
>> Other than the obvious arguments about property rights...
>>
>> Tell me why I should value the Reagan Revolution if it did not increase
>> income mobility, did not increase long-term growth, and did increase
>> inequality?
>
>        I don't agree with any of your statements.  Did not increase mobility
>(I'd like to see the 70s numbers on that) implies a negative affect.  Simply
>maintaining income mobility is sufficient.  Not optimal, but sufficient.
>        Long term growth did improve.
>        I see no increase in inequality *except* for those who depend on the
>government of part of their net worth.  The middle class gained on the rich
>during the expansion.

Every measurement of inequality (Ginis, shares of income, etc.) showed
major increases in the 1980s.  Your evidence on GDP growth is suspect.

So the accomplishment of the Reagan era was to maintain income
mobility at the same rate as in previous times?  Damn, let's hold a
party.

>> Tell me why I should value free-market economies if they
>> do not increase income mobility and increase long-term growth?
>
>        I don't think your looking at the evidence.


Dennis G. Shea, Penn State
<<DISCLAIMER>>
Ain't nobody's bizness but my own. I'll be happy to accept all
the credit for anything I've written.  It's funny, however, how
employers only acknowledge the profitable ideas.
Newsgroups: talk.politics.misc