Thursday, April 27, 2006

The intellectual bankruptcy of the left, part I

(Updated: I forgot to include a link to Hertz's homepage.)

This will be the first of at least a few, possibly several entries about how the left (whether they call themselves socialists, liberals, "social democrats" or progressives) has lost -- or did it ever have? -- the capacity for intelligent, logical and honest thought.

Tonight I came across more typical socialist tripe in the Washington Post:
America's rags-to-riches dream an illusion: study

WASHINGTON (Reuters) - America may still think of itself as the land of opportunity, but the chances of living a rags-to-riches life are a lot lower than elsewhere in the world, according to a new study published on Wednesday.

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University.

By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said.

"In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.
So there you have it. A socialist organization sponsored the study, not for any objective analysis, but to advance its agenda. And if you check out Hertz's "Politics and Current Events" page at his site, you'll see that not only has he filled it with links to avowed socialist organizations, the flag shows that he's another Kerry supporter who just can't get over 2004. So let's be clear that the guy has an agenda, and that his study was hardly to determine actual truth.

Still, let's assume Hertz's numbers are true and turn his assertions around. A child born into a "poor" family has a 99% chance of not becoming "rich" as an adult. But a child born into a "rich" family has a very high 78% chance of not being rich when grown up. Putting it another way, let's say I have a 1% chance of driving a golf ball 350 yards, but Tiger Woods has a 22% chance. So he is 22 times more likely to succeed, yet he himself will fail four out of five times.

Gary Becker wrote in 1986, "Almost all the earnings advantages or disadvantages of ancestors are wiped out in three generations." Raising Hertz's 22% figure to the third power, we see that parents might be rich, but there's only a 1% chance that the wealth will continue uninterrupted through their great-grandchildren. The effect on each generation is cumulative, not additive, because we're assuming, in accordance with Hertz's calculations, that all generations stay "rich" (and not just that one generation falls from "rich" and then the next regains "rich" status). That's actually frightening, for it shows the U.S. has plenty of economic mobility in both directions. In other words, being born into a rich family is hardly the guarantee that Hertz and other "Rich is evil!" types insinuate.
He also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe.

"Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said.

"In the United States this would be 22 percent; in Denmark it would be two percent," he said.
One of Hertz's fallacies is comparing apples and oranges. For one, the United States is the world's single economic superpower, with an extremely diverse population, and it cannot be properly compared with a relatively concentrated section of Europe. Why not compare the U.S. with Bosnia and Herzegovina, or perhaps a single Swiss canton? How about Manhattan with Denmark? It's absurd to compare the average of a large group with some of the hand-picked best of another.

Second, comparing quintiles or percentage-based population segments is meaningless when the scales are different. The United States has a far higher income and wealth ceiling than any other nation in the world. Combined with its large population, that makes it hard to qualify as "rich" in relative terms, though in absolute terms you can still be better off than elsewhere. The Wall Street Journal noted in 2004 that the United States' standard of living is so far ahead of Europe that most of Europe is below the American average. And if you want to talk about per capita GDP, the EU as a whole is barely ahead of...Arkansas. If the EU's average is 100, then Italy and Germany are just average, France is 105, and the U.S. average is 139!

I don't know the exact income level to be in the U.S. top 5%, but for the last few years, the top 1% income bracket has started at about $300K per year. I seem to recall that as of a couple of years ago, the top 10% started at $75K. Now, the wealthier European nations are more homogenous in income than the U.S., but there are fewer "rich" Europeans as a percentage of the population. Since most Europeans are about equal to American middle class at best, it's easier in Europe to be in the top 10%, 5% or even 1%. That's like improving my chances of winning a footrace by getting rid of the top few competitors, or shortening the distance yet measuring by the original length. It doesn't make me any better.

And even when you look at Europe's rich, it's disappointing. Europe's population exceeds that of the United States, yet the former doesn't have many more millionaires than the United States (and the gap is closing because of good growth in the U.S. and slow growth in Europe), even after adjusting for the Euro's strength. Also, European millionaires' total asset wealth isn't much greater than American millionaires'. Europe does have greater income equality, but that's only to its detriment. Never in history has reducing the number of "rich people" helped the lower classes become truly wealthier. If anything, the poor and middle class are left worse off, because there is less wealth for the rich to spread around the economy -- on goods and services that lower-income people provide.
The research was based on a panel of over 4,000 children, whose parents' income were observed in 1968, and whose income as adults was reviewed again in 1995, 1996, 1997 and 1999.
Hertz's next fallacy is one of timing. Income can vary from year to year, and not just with the children, but the parents too. What if the parents' incomes increased since 1968 (and they likely would)? Then again, considering Hertz's biases, why should we expect him to acknowledge a great deal of mobility within a generation?
The survey did not include immigrants, who were not captured in the original data pool. Millions of immigrants work in the U.S, many illegally, earnings much higher salaries than they could get back home.
And the only proper way to compare them would be against their earnings "back home." Also, as has been pointed out many times, why do so many want to come to the United States instead of Europe? Doesn't that tell us which is the real land of opportunity?
Several other experts invited to review his work endorsed the general findings, although they were reticent about accompanying policy recommendations.
They "endorsed the general findings," meaning they agreed with the facts according to the methodology. That's like agreeing with Hertz that two plus two equals four, but disagreeing with his belief that two plus two "ought" to equal five, and that government should enact legislation making it so. Going by strict logic, I'll agree with someone with a flawed ruler that "Yes, that reads 5 mm by your measurement," with the implied caveat that we're not addressing the problems with his standard of measurement.
"This debunks the myth of America as the land of opportunity, but it doesn't tell us what to do to fix it," said Bhashkar Mazumder, a senior economist at the Federal Reserve Bank of Cleveland who has researched this field.
For some reason, I don't think Mazumder's forefathers came over on the Mayflower. I'd guess his family has been in the U.S. for a few generations at most. Take a look at his bio, and tell me that he isn't living the American dream himself, in contradiction to his claim?
Recent studies have highlighted growing income inequality in the United States, but Americans remain highly optimistic about the odds for economic improvement in their own lifetime.

A survey for the New York Times last year found that 80 percent of those polled believed that it was possible to start out poor, work hard and become rich, compared with less than 60 percent back in 1983.
The reason people believe that is because they see it all the time. They know that they might not reach the top 5%, let alone 1%, but they can still earn a good living. The truth is that the poor are not getting poorer, and though the rich are getting richer, the middle class are becoming richer themselves. Look at all the technology today which still isn't cheap, like iPods and the latest cell phones, and how many middle- and working-class youth have them. Poor families today can afford basic cable TV and DVD players, and they now worry more about obesity and its health risks than having enough to eat.
This contradiction, implying that while people think they are going to make it, the reality is very different, has been seized by critics of President Bush to pound the White House over tax cuts they say favor the rich.
Just what is this supposed to mean? Because some people cannot live up to their unreachable dreams, others who are successful should be brought down to everyone else's level?
Hertz examined channels transmitting income across generations and identified education as the single largest factor, explaining 30 percent of the income-correlation, in an argument to boost public access to universities.
I wonder where Hertz has been for the last few decades. It's easier than ever to be accepted by most colleges, because many are admitting just about anyone, particularly the poor. Why not, when they can get government grants, meaning more money for the school? Even higher-quality schools are dumbing down their entrance requirements for some applicants, all in the name of a "diverse" campus.

For example, one of my economics classmates at SUNY Purchase was annoying to the point of infamy. At best he was a dunce; some of us even wondered if he was mildly retarded. He always asked unintelligent questions: invariably rambling, often about something 20 minutes earlier, sometimes irrelevant. He never did well on exams, yet professors apparently passed him with low Cs, enough so he could get the credit. To what end? So he could get a degree to give him some sense of self-esteem, though that cheapens the value of a degree for the rest of us?

But even he got into college, admittedly just a state school, but he still got accepted. So what's the excuse for everyone else who can't get accepted somewhere? Why does Hertz think we need to "boost public access to universities"?
Breaking the survey down by race spotlighted this as the next most powerful force to explain why the poor stay poor.

On average, 47 percent of poor families remain poor. But within this, 32 percent of whites stay poor while the figure for blacks is 63 percent.

It works the other way as well, with only 3 percent of blacks making it from the bottom quarter of the income ladder to the top quarter, versus 14 percent of whites.

"Part of the reason mobility is so low in America is that race still makes a difference in economic life," he said.
Race does matter, but not because of any alleged racism. The "war on poverty" only created a new plantation and a new type of slavery for black Americans. Only after we completely destroy the welfare state will blacks no longer be enticed by the ease of depending on government handouts. Then they can see and seize the opportunities around them. The "War on Drugs" also does not help, luring young black men into crime-filled, often short-lived lives that government has made profitable.

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Blogger Uwe Hayek said...

I live in Belgium and because of my scientific/technologically oriented intrests, I hadn't done much thinking about politics or economics then. I admired the first Apple computer and anything that had to do with it almost as a religion. Guys that started in a garage and made this wonderful product, the Apple ][, then even got rich, it all seemed very right to me.

I tried do to something of a kind in Belgium, but found it hard to get anything done. Everything conspired against entrepreneurs, high taxes, absurd regulation, no available money to invest or disposable income at the public to buy your idea/product/invention.
Quite logically, since freely moving money got completely taxed away.

Belgium has always been in a sort of economic malaise, since they adopted Value Added Tax, for instance sales tax on perfume was 33%, and the top tax bracket being of 90% for for "filthy rich" that earned more than 100.000$ a year, back then in 1970.

So I started attending political conventions, attacking socialists, and promoting freedom, I eventually read F. Hayek, and took his name as a nick.

At one time I attented such a meeting (around 1984) and one of the top dog socialists, said something about Apple computer starting in a garage, and it being a fable. It had to start with big money, rags to richess is just an impossibility, as every good socialist knows and tries to prove.

When you are born in a "class" the socialists claim, you remain in that class : "look at England, it is even worse there than it is here".

And if course, they meant that is was worse in England due to free market/capitalist/Thatcherism, as opposed to "some socialism applies", in Belgium.

I was always in some way abhorred by the idea that intellectuals are forced to do menial jobs, like civil engineers working as cleaners or operating cash registers at supermarkets. People with capacities that are "held back" by the establishment, because they are not from the right parents, did not seem right to me.

This was still happening in Belgium, and socialists were always proud that someone from a poor family could get higher education and land some high position at the university or government, thanks to the social measures, government grants to promising students, had worked.

This seemed much less applicable in England, were the class divisions were much sharper, education seemed to have less effect on class migration.

After a lot of observation, I saw that the sharp class divide in England, was actually due to England having very upwardly mobile policies, for the last 200 years. It worked much like a refinery, where the fractions are separated, but this time more at intellectual densities.

One ends up with a society with sharp class divides, not because there is no upward mobility, but just because of long term, many generational upward mobility.

Uwe Hayek.

Friday, May 09, 2008 8:23:00 AM  

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