Explaining the Wealth Gap

The wealth gap is a constant debate posed by politicians on the left because much of their base tends to be from the lower half of the income spectrum. Talking points include, raising the minimum wage and taxing the rich because wealthy individuals are making more money than they have since the 1920s. These misinformed policy initiatives are easy for those with little economic training to believe, but will ultimately lead to harmful unintended consequences. To quickly refute the first point, most large employers already pay above the minimum wage. For smaller employers, the raise in the minimum wage will cause them to either fire workers, hire fewer workers, or limit the amount of pay increases they award. Many large employers even support a raise of the minimum wage because of the burden it adds to their smaller competitors. The second point has to do with a calculation error that can be read about in an article posted in the Wall Street Journal by Alan Reynolds.

The point of this entry however, is not to refute policy proposals, but to explain the reason for the wealth gap. The causes are not due to a class struggle, but are a result of structural changes in the macro economy and demographics. Today over 80% of the labor force works in the service sector. Service jobs often require high levels of education; and generally, the more education one has, the higher his or her earning potential is. There has been no point in U.S history where education has had such a high correlation with earnings as it does today. The low earning potential of high school graduates relative to college graduates demonstrates this point.

In previous periods of U.S. history, agriculture followed by manufacturing composed a much larger portion of the labor force. With agriculture and manufacturing, my level of education has little to do with how well I perform at my job. For example, my knowledge of economics may give me some marginal advantage in earning a profit as a farmer, but has little relevance in my ability to perform the majority of my farming tasks such as planting and harvesting crops. Therefore, I have little to no comparative advantage over another farmer because my education is almost irrelevant in my ability to farm. This would be the case even if I studied agriculture because the skills are easily attainable. On the other hand, if I am a financial analyst, my knowledge of business and economics would give me a distinct advantage over someone without that knowledge. Without higher education, I would have little chance of succeeding in such a profession. Because the U.S. is in a transitional period where more and more of the labor force is moving into the service sector, those without high levels of education will earn lower incomes than those with education causing the income gap to widen.

The next explanation for the wealth gap has to do with demographics. Think for an instant about when you are going to reach your maximum earning potential. Most likely it will be in your 50s or early 60s. At that point, you will have acquired more experience than most people in your profession and generally, you will be compensated well because of it. Also, in your 50s and early 60s, your investments will have had time to grow providing you with a nest egg for retirement. In addition, you are close to paying off your mortgage on your house, one of the greatest assets for many Americans. That being said, think about the population size of all of the different generations. Which one is the largest? The Baby Boomers. This group is comprised of people who are in their 50s and early 60s and are set to retire in the next few years. They hold more wealth than any other generation right now. Therefore, it is intuitive that the gap would widen if the generation with the largest population is the wealthiest. Holding all else equal, one would expect to see the wealth gap shrink as more Americans attain college degrees and move into the service sector. Furthermore, as the baby boomer population passes on we will likely see reductions in income inequality.

Take a Shorter Shower Month

Georgia has had another summer conclude with a prolonged drought. It seems every year the summer ends with mandates on when to wash your car or water your lawn, followed by incentives to rat out your neighbor if you see he/she doing one of these activities during unspecified times. This year in addition to the other restrictions, we now have "Take a Shorter Shower Month!" To add to that, around town I see signs in bathrooms recommending to conserve water. I take that to mean: don't flush your turds. The combination of people restricting the amount of showers they're taking along with a town filled with un-flushed turds, has left this place with a disturbing odor. I'm just kidding about the smell and the turd thing, but there is an issue here with mandates and recommendations being the solution to water shortages. Do these things really work?

From an economist's perspective the answer is more than likely no. My taking a long shower has the effect of a negative externality. Because water prices are regulated by local governments, the price remains relatively low when the resource is scarce. Therefore, I have no reason to cut down on my water consumption because the increased cost is marginal to me. However, by continuing to take long showers I impose a cost on society by using up increasingly scarce water supplies during a drought. Negative externalities tend to lead to an undesired amount of consumption because the private costs are less than the social costs.

The positive analysis would suggest that the price should be set by the market. Therefore when the water becomes more scarce the price goes up. At that point taking a long shower would actually cost me something. If water prices were set by the market, my shower behavior would likely change to: turning on the water for a brief second, then turning it off to soap up (this is starting to get hot), and then turning it on only to rinse off. On the other hand, the state recommended shorter shower, cause me to do...well essentially nothing. I'm too tired in the morning to remember the shorter shower month.

Though the market solution sounds simple, it is unlikely to happen because of how political attractive cheap water is. Because the U.S. has generally had an abundance of fresh, drinkable water, it has been easy for local governments to offer water at a relatively fixed low price. If a politician today stated that she wanted to let the price of water be set by the market, there would likely be some backlash from those who are accustomed to cheap water and don't understand the implications of fixed prices. Unless there is some apocalyptic shortage, there is really no incentive for politicians to alter the way water prices are determined.

Could a compromise be reached where in times of water shortages prices are allowed to fluctuate more freely with supply and demand, and then revert back to regulated prices when the drought ends? Likely not. If such a policy were enacted, people would prepare for when a drought comes, stockpiling water at a relatively cheap price to consume when the price increases due to reductions in supply. Everyone would have small water towers on their property for use during droughts. So what is the solution?

The most efficient and politically feasible solution, would be to let water prices be set by the market. Then charge a local tax on wealthier individuals for water consumption and redistribute that money to poorer individuals in the form of a tax credit or cash subsidy. Though this is by no means the ideal solution, it is the the most efficient compromise for fixing the supply and demand issues with clean water and allowing all individuals to have access to it.

Puzzling Career Fair

Today I attended my second university career fair. As with my first experience, it was filled with eager young recruiters and sweaty college students with nervous demeanours. The whole experience was rather discomforting for me and yet I felt compelled to go by my hopes of somehow landing a job. Though most of the time I wanted to run out, there was one aspect of walking around in a convention hall filled with tables and people that I found entertaining; seeing companies that shouldn't be recruiting college educated students. Case in point: local police departments. Personally, I thought the reason people go to college was so they don't have to be police officers. I mean no disrespect to the hard working men and women who make a career out of protecting the public, but the return on a college investment takes an extremely long time to materialize if one chooses to be a cop. In many cases, it may never materialize because in addition to the out-of-pocket expenses for college, an individual forgoes the opportunity to earn full-time wages while in school. Most soon-to-be college graduates understand this and that's why I couldn't find anyone at those tables. The police departments aren't dumb either and know their chances are slim of attracting college students. So why are they there?...Desperation. Baby Boomers are retiring from the force, and more young adults are attaining higher education, increasing the opportunity cost of a low-paying law enforcement job. However, the main culprit for the shortage of police officers would have to be the Iraq War. The Military competes for the same recruits that a police department would want; young, high school educated individuals who seek adventure. Though the Military has higher short-term risks, the risks are just that, short-lived. The long-term benefits are very enticing in comparison with a local police department. Though I don't know the best way to solve this problem, one solution would be to hire private security firms to serve low-crime areas and move public security forces to high crime areas.

The Universal Declaration of Human Rights Infringes On My Rights

Adopted and proclaimed by the UN General Assembly resolution 217 A (III) of 10 December 1948, the Universal Declaration of Human Rights seeks to ensure [equal and inalienable rights for all members of the human family and to provide the foundation of freedom, justice and peace in the world] (Universal Declaration of Human Rights Preamble). Having witnessed the atrocities in Nazi Germany, the UN decided it was necessary to specify the rights of individuals. Also at this time, Keynesian Economics provided theory for social welfare policies. It was during this era that the social security program was created and minimum wage laws passed in the U.S. Government was seen as a way to fix the ills of capitalism and take care of the people. At that time, infringement on personal liberties and government inefficiencies were not widely criticized. Therefore, by putting the document in the context of when it was written, it's easy to see why absurd rights of entitlement were declared. In Article 17(2) it states "no one shall be arbitrarily deprived of his property." This is one of the best rights issued in the declaration! It is a principle initially held by all of the prosperous nations of the world today. However, as one continues to read the declaration, latter articles seem to contradict this right and impose restrictions on individual liberty.

Article 23(1) states "everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment." You have a right to protection against unemployment? If there is unemployment insurance provided by the government, then that deprives one man of his property through taxation to support another man. This right in Article 23 directly contradicts the right given in Article 17. The right should say something more along the lines of "you have the right to provide for yourself and whom ever you care to provide for, in anyway you see fit, as long as it does not involve the violation of another man's property right."

Furthermore, Article 24 states "everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay." How does someone have a right to a holiday with pay? If a woman wishes to have a paid holiday, she has the freedom to search for a job that provides those benefits. It should by no means be mandated. If paid holidays are a right, why aren't other employee benefits rights (i.e. employer provided health care and 401k's)?

The best(and by best I mean worst) right in the declaration comes in Article 25(1) "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control." Though I wish everyone could have all of theses protections, they are certainly not rights. In order to provide all of these entitlements, the state would be forced to take property from some and give to others. In doing so they would infringe on property rights and individual liberty of citizens.

Most of the contradictions in the UDHR come from the idea of negative vs. positive rights. A Positive Right is defined as such: B is to assist A in doing x, if A wants to do x but can't do so on his own or with the voluntary assistance of others. On the other hand, a Negative Right is defined as: B's duty to refrain from preventing A from doing x. The cost to me(B) of observing your rights is higher in the case of positive rights. In the case of negative rights the cost to do x is equal to the cost of refraining from preventing you from doing x. As an example, take the right to life in consideration. It's a negative right, and as long as I am not a serial murderer, the cost to me of refraining from killing you is zero. Taking a look at the costs of positive rights, one can see they are far greater. My cost of your positive right to do x is equal to the cost of assisting you to do x when asked. In the case of positive rights, you add the accounting costs and the opportunity costs. For example, to pay for your right to health care, I have to pay taxes and could have used that money to pay for my mother to visit the doctor. In conclusion, positive rights are simply not compatible with one another. Because there is a scarcity of resources, if we expend them helping A, we can't also expend those same ones helping B. However, negative rights are intrinsically compatible with one another. (The ideas of this final paragraph are from Jan Narveson's lecture on Negative Versus Positive Rights).

Is Obestity a Result of American Laziness or Structural Changes?

Today many people around the world and in our own society view Americans as lazy. Why is this? We work hard, have more gyms than any other country, and we love our sports. For many of us there aren't enough hours in the day, and we come home exhausted. The idea that Americans are lazy comes from the drastic climb of obesity in the United States. Almost every night on the news you can see some special report about how Americans are getting fatter. Though many people do have poor unhealthy diets, there is often a factor that is overlooked when thinking about why Americans are so plump: structural changes in the economy.

In 1860 the United States was an agro-economy. The average daily caloric intake was 5000 calories! That's double the surgeon general's suggested caloric intake today. Back then farmers needed that many calories because they spent long hours in the field doing back-breaking labor. As of 1920, the last year the number of farms increased in the U.S, we were no longer an agro-economy. Workers were now living in cities and working in factories, but still the labor was highly physical. Diets still needed more calories than they do now.

Today the U.S. has stopped being a manufacturing economy and is now a service economy. However, the majority of parents grew up when manufacturing was a dominant industry in this country. Therefore, they grew up with their parents feeding them large portions in order to sustain their ability to work. With many workers doing very little physical activity at work nowadays, they don't need as many calories. However, as a result of their upbringing, large portions are the norm.

This idea doesn't completely explain why obesity is growing. Fatty foods taste better and therefore we want more; we have higher incomes, so we can buy more food; access to food in the U.S. is more convenient than ever, and it's much easier to eat more than less. Individuals need to realize that the amount of physical activity they're involved in does not require the amount of food that it once did. Changes in the way we eat are already starting to occur. Notice the increase in the amount of people who consume five or six small meals throughout the day rather than three large meals. Though it may take generations to adjust, the U.S. should see obesity rates decline as we alter our diets to fit our activity in the workplace.

Women's Lib: The Case Against Labor Laws in the Late 19th and Early 20th Century

I've been debating my thesis topic for sometime now and I finally found something interesting and unusual. Oddly enough, it involves the standard of living and rights of women. When discussing the topic with a professor a female student over heard me and exclaimed "you're writing about women?!" Initially, I was hesitant to write about women's rights. It's an awfully strange topic for a young college male to write about and lord knows I didn't want to be grouped in with the "femi-nazi" crowd. However, my argument actually refutes much of the feminist conventional wisdom regarding women's history in the U.S.

Today many historians and feminist see women as being exploited by employers at the turn of the 20th century. During industrialization, it is said that times were hard for women and therefore it was necessary for government intervention in what is now known as the Progressive Era. By todays standards, times were tough for women and that's why I think many people don't argue against that point. However, when looking at the issue in the context of the time period, one can argue that things were getting better for women as a result of industrialization, not worse; and ultimately government intervention slowed the growth in women's rights and incomes.

Prior to 1900, women had extremely limited property rights. Essentially her father, or if she were married, her husband, had control over a woman's property. And being a largely agrarian society, many women spent long hours working on farms or in the home. Women had nothing to show for their labor. As industrialization picked up in the U.S., women began to leave farms and went to work in factories where they could earn wages and make some choices for themselves. During this period wages rose modestly, and standards of living improved. Though life was improving on net, women were still being paid less than men. In an attempt to improve wages and working conditions, women unionized in such organizations as the Women's Trade Union League (WTUL). The goal of the WTUL was to organize working women under auspices of the American Federation of Labor (AFL). However, the majority of AFL members were male, therefore its main mission was often to protect male workers at the expense of lower paid female workers. The WTUL organized strikes and protests, but they were still dissatisfied with the result and turned to lobbying and the courts. Both laws and court decisions led to limits on the amount of hours women could work and regulations on working conditions.

If the economic analysis holds, these restrictions would lead to fewer women being hired as the cost to employers rises. In closing, had female labor not had these restrictions, incomes would have grown more rapidly and consequently women's rights would have improved sooner. Take my assumptions with a grain of salt . As of right now, they are strictly based on theory. However, I strongly believe the statistics will support the theory. At some point in the near future, I will post the results of my research.

Another Fun Fact about the Flaws of Social Security

When Franklin Delanor Roosevelt signed the Social Security Act into law in 1935, the life expectancy in the United States was 67 years of age. This means on average the federal government only had to pay benefits for two years to U.S. citizens. As of 2005, life expectancy had risen to 77.6 years of age. Even with the age in which beneficiaries receive payment (and I use the term "payment" loosely) gradually increasing to 67 years of age, the government still has to come up with funds for over 10 years! Modest projections show average life expectancy increasing to 83 by the year 2075, but is that even a realistic estimate? I'm no statitian, and I didn't pick apart the National Center for Health Statistics method for calculation. However, at this point in time, the Health Care industry is the fastest growing industry in the U.S. With the baby boomers set to retire in a couple of years, that growth is only going to continue to expand. There is no telling the advancements we will be able to make in health care. If the current system is left as is, many of us will see one or both of the following: higher taxes not only for social security, but Medicare as well, and/or reduced benefits. Many of us may not see benefits until we're in our early 70's.

Back Seat Driver: Paternalist Government in your Car

When most of us were younger, probably in our teens, we all heard our parents justify a demand with “I know what’s best for you.” Though at the time we thought we had the world figured out, in most cases, our naivety or ignorance clouded our judgments. As people become young adults, their judgments improve due to an increase of knowledge and experience. In most instances, we feel confident about our individual decisions. If there are actions one feels are doing more harm than good, one generally develops subtle ways to alter behavior. For instance, a friend of mine who was never fat by any means, but wanted to get in shape, developed a method to improve his fitness. He set attainable goals and didn’t make any drastic changes to his life. One of the things he did was to put all of his junk food on the top shelf of the pantry. He wasn’t trying to completely cut out cookies and chips from his diet, but if he wanted to have one of those items he would need to reach to the top shelf; in doing so, this would remind him about his diet and motivate him not to consume the food. Another measure I found interesting and that I have now implemented in my own diet, is to serve a normal sized portion for meals. In the past, I wouldn’t hesitate to get seconds, but now I give myself thirty minutes after my first serving. Then, if I feel hungry after thirty minutes, I’ll get seconds, but in most instances I am satisfied by not eating a second helping. Wow, this sounds more like a Dr. Phil diet book than an entry on economics. Anyway the point is, individuals do these sorts of things all of the time in order to influence a behavior they desire.

When the government intrudes into our individual right to make decisions for ourselves, the outcome generally does more harm than good. It is foolish to believe that markets don’t respond in ways that make us healthier and safer, and that we need government to mandate actions to protect us. Paternalist legislation by government tends to increase costs for producers, and add to burdens paid by taxpayers to enforce such laws. From a philosophical perspective, does the government have a right to tell you what’s best for you? Do you let your friends make decisions for you because they think something is best for you? No. Then why let a politician or a bureaucrat do so?

The case of New York City banning Trans Fat oils from restaurants is a great example. This law prevents one from making a free choice to eat unhealthy food cooked with Trans Fat. Though many chain restaurants may be able to make the adjustment and pay the cost of switching oils, many small local restaurants may incur a substantial cost in relation to their revenues. In addition, some businesses may need to alter their recipes, and customers may not enjoy the change. Without the ban, the consumer has already spoken in the realm of fatty restaurant foods. Look at McDonald’s for instance. The restaurant chain has made a complete transformation over the past several years. Introducing smaller portioned meals like the “snack wrap” and an array of gourmet salads. Most fast food restaurants are trying to switch to healthier means of cooking in order to keep their customers. All of the major fast food chains are in the process of eliminating trans fat oils. Though the market may take more time to adjust to healthy preferences, it does so in an efficient manner that benefits producers, consumers, and taxpayers.

Alright, I’m finally going to discuss the title of this entry. In recent months, my home state of Georgia has enacted a law banning the use of hand-held cell phones (hands-free are still permitted). Don’t get me wrong, I hate seeing someone not paying attention to their driving because they’re yapping on the phone. Hypocritically though, I also talk on my phone in the car. Research shows the extent to which cell phones are distracting in the car. According to the 100-Car Naturalistic Driving Study, conducted by the Virginia Tech Transportation Institute and the National Highway Traffic Safety Administration (NHTSA), 80 percent of crashes and 65 percent of near-crashes involved some form of driver inattention within three seconds of the event. Cell phones were the highest sited distraction, but they only increased the risk of an accident by 1.3 times, where as a falling cup increased the risk by 9 times. It is clear that cell phones are a distraction, but what is the best way to lessen the risk of talking while driving? Should individuals and markets solve the problem? Or should governments decide what is in our best interest?

In economics, we assume that humans are rational beings; therefore, when people are in cars, they are subconsciously weighing the likelihood of being in an accident (the cost of talking on the phone versus the benefit of talking on the phone). For example, we’ve all had a moment while talking on the phone in the car where we tell the person on the other end “I have to go I’m driving in traffic.” Obviously one is saying “my risk of an accident is going up as a result of this distraction and increased traffic.” In addition, we may not pick up certain calls we deem to be insignificant while driving. As individuals, we do a subconscious cost/benefit analysis that generally leads to desirable behavior.

Drivers know the dangers of riding in motor vehicles and their demand to reduce risk while driving has spawned many great innovations in driver safety. Though the government has mandated such protection measures as seat belts in cars, many safety features have been supplied as a result of demand for safety; for instance airbags. In retrospect, I believe the market would have provided seat belts in every car today without government intervention. Demand for safety would have caused automobile producers to install them.

Distractions will always be present when driving. The cost would be too high to completely eradicate all of them. The best way to lessen these distractions and risk is to allow the market to develop technology and innovate. Arrays of safety increasing inventions have been developed as a result of pure supply and demand. Bluetooth technology allows individuals to communicate hands free. The other day a friend told me the ipod now has an adaptor for the steering wheel so music listeners don’t have to wheel through song after song while driving. Another invention I recently saw, was automated breaking that judges the distance and braking speed of the car in front of you, and brakes accordingly.

In July 2007 the National Highway Traffic Safety Administration and the National Center for Statistics and Analysis released the results of their National Occupant Protection Use Survey (NOPUS), which found that in 2006, 5 percent of drivers used hand-held cell phones, down from 6 percent in 2005, the first decline since the survey began tracking hand-held cell phone use in 2000. The decline in use occurred in a number of driver categories, including female drivers (down from 8 to 6 percent), drivers in the Midwest (down from 8 to 4 percent), drivers age 25 to 69 (down from 6 to 4 percent), drivers of passenger cars (down from 6 to 4 percent) to name but a few. NOPUS is a probability-based observational survey. (Data on driver cell-phone use were collected at random stop signs or stoplights only while vehicles were stopped and only during daylight hours.) This survey by no means proves anything concrete because of the significant amount of time it leaves out, but it does suggest that individual choice and technology are reducing careless driving.

Whether it is cell phones, seat belts, or food, the government does not need to intervene in the individual liberty of personal choice. In most instances the government is not trying to evil and control all of our decisions. In many cases, bureaucrats and politicians have good intentions of protecting people. However, these paternalist laws do more harm than good and they restrict our liberty. Laws such as these set a precedent for government intervention in our everyday lives. If Trans Fat oil is causing health problems and must be outlawed, will we soon be ticketed for sitting down too long and not being active enough? And if cell phones are too distracting in cars, will children soon be forbidden to ride in cars with their parents because of all of their commotion? To sum it up, these kinds of laws are philosophically inconsistent and economically inefficient.