Thursday, December 31, 2015

Actually, free markets aren't efficient in theory, either

Image: If we don't get the biggest pie, then what's the point? (source)

The fundamental assumption of free market capitalism is that the free market can provide goods more efficiently than the government, or any other system. If the government interferes in the free market--even with the best of intentions--it will only make things worse. Rent controls cause a housing shortage; price controls cause oversupplies; minimum wage laws increase unemployment. The further we get away from a pure free market, the worse the inefficiencies and unintended consequences. It may be necessary to assist the less fortunate sometimes, but government should interfere as little as possible in order to avoid making things worse. Interference will certainly do harm; it could easily do more harm than good.

A more technical way of expressing this free-market-is-always-best ethos is to say that the free market will naturally reach an efficient equilibrium. An equilibrium of prices will ensure efficient allocation goods to all members of society. It may not be the most socially just distribution, but it will certainly be the most efficient distribution that can possibly be attained. Making the distribution more just--that is, making each person's slice of the pie closer to equal--will result in less pie overall. We can have a full pie with very unequal pieces; we can have a smaller pie with less unequal pieces; but we can't have a full pie with less unequal pieces. In other words, there is a trade-off between equity (or fairness) and efficiency. Increasing equity necessarily results in less efficiency.

Pushed to its limits, this idea is actually a liberating, social justice imperative. With a free market ensuring the most efficient outcome, the pie becomes so big that even with very inequitable slices, the poor are still better off. Even with a very unequally-cut pie, free market capitalism creates such an enormous pie that even the poor have a bigger slice than they could ever hope for in any other pie, no matter how egalitarian the slices are cut. Sure, a market might produce winners and losers, but when the pie is big enough, even the losers are better off.

This idea--that government programs which increase equity are necessary less efficient--underpins bipartisan social policy adventures such as school choice vouchers and privatizing social security. The idea is that--because markets are so efficient--any (real or otherwise) problems with anything can be improved by making them function more like free markets.

Obviously, if the equity-efficiency trade-off exists, we are essentially arguing over values. I may prioritize equity over efficiency while someone else may prioritize efficiency over equity, and there is no right answer, per se. But that the equity-efficiency trade-off exists is utterly fundamental to free market capitalism. Without that trade-off, free market capitalism makes no sense. If free market capitalism doesn't produce the biggest pie, then what's the point? If free market capitalism can't produce the biggest pie, why should we tolerate the incredible inequities it creates?

George Orwell and Karl Marx don't want your iPhone: communism, capital, and private possessions

Image: Street art inspired by George Orwell's Animal Farm (source)

Animal Farm
The novel Animal Farm by George Orwell is remembered as a cautionary tale against the inevitable problems of leftism. In Animal Farm, the farm animals--led by the pigs Snowball and Napoleon--rebel against their drunk and incompetent farmer, eventually prevailing and setting up a farm where all the animals are better off. The animals all learn to read and write, and plans are in the works for all the animals' stalls to have electricity and running water. In order to realize these admirable goals, the animals agree to give up all their possessions so they can be used to benefit the entire farm, and the animals all work hard to contribute to the common good. But Napoleon is able to drive away Snowball, and rather than continuing with the egalitarian projects, Napoleon starts using the community's wealth to improve the condition of the pigs. As a result, the quality of life of the rest of the animals declines until they are far worse off than before the revolution, and--unbeknownst to the animals other than the pigs--some of the animals are even assassinated in order to improve the power and wealth of the pigs. The pigs eventually obtain so many special privileges at the expense of the other animals that they become indistinguishable from the oppressive farmers, and the golden rule of the revolution: "All animals are equal" becomes "All animals are equal, but some animals are more equal than others."

It is impossible to argue that the scenario in Animal Farm isn't more or less what happened in the Soviet Union, Cuba, and Ethiopia. In the name of the common good, a privileged few were able to exploit the rest of society. And this scenario was certainly played out to a horrific level in Cambodia. Yet Orwell could not possibly have intended his work to be a cautionary against leftism generally. Ironically, Orwell considered himself a socialist--and not one of those Scandinavian social democrats who call themselves socialists but actually seek to create a more humane form of capitalism--Orwell was a true socialist who believed that private ownership of capital should be abolished. He traveled to Spain to fight alongside the socialists in the Spanish Civil War, where he was wounded, nearly fatally.

The book's resemblance to the actual history of Soviet-style communism is no coincidence. Orwell wrote Animal Farm as a critique of Soviet-style communism generally and Joseph Stalin in particular. Ironically--given the way the novel is remembered today--Orwell felt compelled to write Animal Farm to counteract the fact that Joseph Stalin was held in very high regard in capitalist Great Britain in the early- to mid-1940's. Orwell believed that Stalinism should be spurned due to its Reign of Terror and dictatorship, even if the Soviet Union was an ally against the Nazis.

Many often assume that communism necessarily demands an Animal Farm-style collectivization of wealth, and the inevitable seizing of society's wealth by the powerful--as if that's even different from our capitalist world where 1% of people own half of all world wealth and half the world lives in abject deprivation, or the United States where the richest 1% controls over a third of all wealth, the richest 10% control over three quarters of all wealth, and the richest 0.1% are about as wealthy as the poorest 90%. Yet Orwell is not alone on the left in his views on collectivization. Karl Marx himself was careful to make the distinction between productive capital and personal possessions, since personal possessions cannot be used to exploit people, but capital can. Your house, mementos from a deceased loved one, family heirlooms, books, pets, smartphone, etc--all of these things are not capital because they cannot be used to exploit people. I'm with Karl and George on this one. If your iPhone makes you happy, keep it, because you can't use it to exploit people.

Comparing the quality of child care services of Finland and the United States

I've spilled much ink on how social democracy is a far more efficient welfare system than one that relies on the private market. Again, when aggregate (private plus public) welfare spending is about the same in the United States as the social democracies, it's clear that social democracy is a far more efficient use of resources.

But this perspective overlooks how much better social democratic welfare services are compared to private market services in the United States. Here, I highlight child care in Finland as an example, but the same analysis could be repeated for nursing homes or other areas of social welfare.

By law, all Finnish children have a right to child care services their family can afford, but even the wealthiest parents are only charged a couple hundred dollars per month. Sara Mead describes the high quality of these services:
Publicly funded kindergartens and preschool in Finland are of quite high-quality, with quality standards roughly on par with those universal pre-k advocates seek for publicly funded pre-k programs in the United States. Kindergartens must have at least one adult for every seven children over age three, for every four children under age three, or for every two one-year-olds (infants under age one are rarely enrolled in kindergartens because Finland offers generous parental leave supports for parents in their child’s first year of life).
To ensure high quality care, there are strict credentialing standards for workers:
One out of every three adults working in kindergartens holds a bachelor’s degree as a certified kindergarten teacher (in effect, the lead teacher in each classroom). The other two adults must hold credentials as “licensed practical nurses,” a vocational degree that is roughly equivalent to a high school diploma with specialized education and training to work with young children.
Finnish child care centers must strictly adhere to a set cirriculum, which also helps to ensure high quality care:
Kindergartens must adhere to the National Curriculum Guidelines for Early Childhood Education and Care in Finland—comprehensive standards for child care environments and activities that address the developmental needs of the whole child—and with more detailed early childhood plans that each municipality must create to implement the national curriculum guidelines. These guidelines are aligned with the National Core Curriculum for Preschool Education in Finland, which is in turn aligned with the National Core Curriculum for Basic Education. These class size, teacher qualifications, and curriculum standards make the programs offered by Finnish kindergartens higher in quality than those offered by many state pre-k programs and Head Start centers in the United States.
Compare this to the American child care system (emphasis added):
In Texas, a person only needs a high school qualification or equivalent to operate a home day care. (That includes online degrees.)...Caregivers are also required to attend a state-sanctioned education session. According to a trainer, Tata had wandered in and out of the classroom, put her head down on the table, and spent much of the time texting. But since the law only requires applicants to show up, Tata had satisfied the requirement.
By national standards, Texas child care regulations are typical—better than average in some respects, worse in others. That is to say, they are painfully minimal. “You know, when we walk into some of these places, they’re meeting the letter of the standards,” Lahmeyer says. “But it’s like a warehouse for children. You know it when, as the inspector, you are the most interesting thing the kids have seen all day. They attach themselves to you and are trying to engage because there’s nothing else going on for them.”
Like most states, Texas inspects child care centers at least once a year, but only has the manpower to visit home day cares every two. Even egregious violations don’t always lead to shutdowns. Sometimes, that’s because parents, lacking alternatives, fight to keep notorious places open. An inspector named Carol McGinnis told me she’d recently visited a center in “total disarray,” with “feces smeared on the walls.” Nevertheless, if the agency closed it, McGinnis expected some parents would resist, because it was one of the few places offering care on weekends.
On other occasions, the process of closing a day care can be torturous. Lahmeyer recalled one place that racked up repeated violations over two years before a judge would shut it down. “I can tell you there’s a fair number [of cases] that we lost because the judge decided, No child’s died yet, so they stay open,” Lahmeyer says...I asked McGinnis how many of the area’s providers she’d trust with her own child. She answered promptly: “Twenty percent.”

Saturday, December 26, 2015

"Neutrality" in statistics: comparing the Palma inequality ratios of the United States with the social democracies

Image: Palma ratios--a measure of inequality--of selected countries (ordered by Palma v.3, source)

As the graph at the top of the page shows, the social democracies (marked with red squares) have lower inequality as measured by Palma ratios compared to the liberal countries, including the United States (marked with blue squares). My goal here is to argue that the social democracies really are better and limiting inequality, and since the Palma ratio is rarely used and the Gini coefficient has become the standard measure of inequality, the rest of this post is about why the Palma ratio is a better measure of inequality than the Gini.

I wrote previously about Gini coefficients and Palma ratios as measures of inequality. At that time, I noticed a nonsense conclusion someone had made: based on the fact that the pre-tax pre-transfer Gini coefficients of the United States and the social democracies are approximately equal, this writer had concluded that taxes and transfers were the only reason why the social democracies had less inequality than the United States.

Even at a glance, this simply cannot be correct. McDonald's workers in Denmark, for example, make three times the hourly wage of McDonald's workers in the United States. There's simply no way that pre-tax pre-transfer inequality can possibly be similar. Indeed--as I pointed out then--the richest 1% in the United States take home 18% of all pre-tax income, but the richest 1% in Denmark take home just 4%. Clearly, the Gini coefficients are wrong; pre-tax, pre-transfer inequality is not similar between the United States and Denmark.

This matters greatly from a social policy perspective. Taxes and transfers may indeed be effective policies for limiting inequality, but they're not the only effective policies. As I pointed out at the time, full employment is probably a more powerful tool against inequality than taxes and transfers, and I argued that inequality was too complex to capture with a single number, though the Palma ratio was probably the best option for a single measure of inequality.

Alex Cobham and Andy Sumner penned a review of the evidence against the Gini coefficient and in support of the Palma ratio. Before diving into their review, some background on inequality measures is necessary.

The Lorenz curve is simply a graph of the distribution of the wealth of a country. As you can see, perfect inequality would yeild a straight line, whereas any inequality bends the line downwards:

Greater inequality will result in a line that deviates further from the perfectly straight line running diagonally across the graph, but the Lorenz curve can also visually illustrate where inequality occurs. For example, take these hypothetical Lorenz curves:

We can see that inequality in the country represented by the green line is primarily due to the poor being very poor. The green line deviates most from the straight diagonal at the bottom of the income distribution; since the line rises so little for the first 30% of the population, it's clear that the bottom 30% are very poor relative to the standards of this country. And since the line is relatively straight after 30%, the richest 70% are fairly income equal to each other; inequality is thus caused by deprivation of the poorest 30%.

The red line, however, is nearly straight for the first 85% of the population. Since this line is so straight, it indicates that the bottom 85% are pretty equal in their share of national income. The abrupt turn upwards of the red line indicates that the richest 15% are far richer than the poorest 85%.

Finally, the country represented by the blue curve--because it does not bend as far away from the straight diagonal--has less inequality than the countries represented by the green and red lines.

As this hypothetical example shows, comparing Lorenz curves can be very valuable as Lorenz curves visually display both the magnitude of inequality and well as the points in the income distribution where inequality occurs.

Cobham and Sumner explain the limitations of the Gini coefficient:
Atkinson (1973) demonstrates just why this matters, and how it ensures that the Gini is far from a ‘neutral’ measure of inequality. He first highlights that, in comparing two countries where the Lorenz curves do not intersect, we can say--and the Gini will suffice to do so--that the country with the curve closer to the line of complete equality is more equal than the other. When Lorenz curves cross, however, things become less clear.

Atkinson presents the case of the United Kingdom and West Germany, for which the Lorenz curves then crossed at around 50% of the population. The income share of the lowest-income 50% is higher (closer to the 45-degree line) in West Germany, while that of the highest-income 50% is closer to the line in the UK--but the Gini coefficient shows the UK to be less unequal. Atkinson concludes:
Summary measures such as the Gini coefficient are often presented as purely 'scientific', but in fact they explicitly embody values about a desirable distribution of income (p.66).

Tuesday, December 22, 2015

Falling through the cracks of the American welfare system

Image: On this map, the darkened counties in Mississippi are some of the poorest counties in the entire United States. These counties were not served by Obamacare health insurance subsidies. (source)

A look back at three of the worst examples I have ever encountered of neoliberal welfare programs letting eligible individuals fall through the cracks.

First, a 2013 warning about Obamacare in Mississippi (emphasis added):
No insurer is offering to sell plans through the federal health law’s marketplaces in 36 of the state’s 82 counties, including some of the poorest parts of the Delta region, said Mississippi Insurance Commissioner Mike Chaney.
As a result, 54,000 people who may qualify for subsidized coverage would be unable to get it, estimates the Center for Mississippi Health Policy, a nonpartisan research group.
Many make a living picking soybeans, working on tree farms or in fast food restaurants, earning too little to buy coverage on their own.
“That’s the place where it’s most needed,” said Roy Mitchell, executive director of the Mississippi Health Advocacy Program. “There’s a high uninsured population there. One of the highest infant mortality rates in the country is in that area.["]
Second, a 2001 study of the Child Care and Development Fund--a program that is supposed to pay for child care for young children so their parents can go to work (emphasis in original):
Based on recently released and revised data from the U.S. Department of Health and Human Services (HHS), CLASP estimates that states served about 14 percent of federally-eligible children (approximately 1 out of 7) in FY 2000.
You did not misread that: CCDF was so poorly funded that 86% of eligible children did not receive benefits.

Tuesday, December 15, 2015

When communism means free markets and capitalism means central planning

Image (left to right): Josip Broz Tito (President of Communist Yugoslavia), United States President Nixon, Pelagija Broz (Tito's wife), and Pat Nixon (Nixon's wife) en route to a 1971 Presidential dinner hosted by Nixon in Tito's honor. (source)

This post is meant to address one of the most common misconceptions about what, exactly, are communism and capitalism. It is nearly universally assumed (even by those whose job it is to write about social policy) that communism means a centrally planned economy and capitalism means a free market economy, but this is totally false. Communism and capitalism can exist--and have existed--in a free market or centrally planned economy. Indeed--as we will see below--the Yugoslavian Communists believed that communism should exist in a libertarian free market paradise, where government "withered away" to nothing and everyone was supposed to get their social welfare services (like health care) from their employer. If you couldn't get health insurance from an employer, you were on your own--there was no government program to provide medical care as a last resort, because the government had "whithered away" entirely. To these libertarian communists, the government was not even supposed to build roads and other infrastructure. The Yugoslavian Communists believed that this was the most faithful plan to bring about Karl Marx's vision of a communist worker's paradise, and for several decades following World War II, this type of free market communism existed in Yugoslavia.

It's equally preposterous that capitalism is synonymous with free markets; capitalism and central planning have gone together well throughout history, as we shall see below.

Communism and capitalism have nothing to do with the structure of markets and everything to do with ownership. To see what this means, let's take a very simplified example, then we'll apply it to real world examples like former Yugoslavia.

Monday, December 14, 2015

Comparing poverty rates (absolute and relative) of the United States to the social democracies

Image: Relative poverty is confusing for most Americans. (source)

I've got a series of posts on relative poverty that I started in 2013 but never published. The reason I moved them to the back burner is that my goal here is persuasion, and Americans simply don't care about relative poverty. They should--relative poverty kills--but it's a somewhat complicated argument.

Second, and more importantly, I'm interested in comparing the United States to the social democracies, and the data don't match up. I assumed it was impossible to do a comparison of poverty because the United States uses an absolute poverty measure, while the rest of the developed world uses relative poverty and does not keep data on absolute poverty (I found some data on absolute levels of income for this post, but it's not on poverty).

So while I couldn't compare absolute poverty rates, I could compare relative poverty rates (because those data do exist for the United States), but nobody cares about relative poverty in the United States.

In short, I gave up on comparing the poverty rates of the United States versus other countries.

Fortunately, Dylan Matthews highlighted the complicated research that translated income data for several European countries into absolute poverty rates using the absolute poverty line of the United States.
It actually is possible to use the Luxembourg Income Study database to estimate more precisely how many people live under the US poverty in America versus Finland. If you use the granular microdata and follow the same procedures in looking at the US as in looking at other countries, you can come up with a fair comparison...Stockholm University's Markus Jäntti, a senior scholar with the Luxembourg Income Study, did just that kind of number crunching for me. Using the same poverty line as Petrilli and Wright, he found that the absolute poverty rate in the US in 2010 was about 10 percent, and in Finland it was about 4.5 percent. Finland's rate wasn't slightly lower — it was more than halved compared with the US.
Jäntti and Gornick also produced numbers for a wider range of countries in a 2011 paper. They used data from 2004, which included not just Finland but all four major Nordic nations. And they found that poverty rates in those countries — as measured using the US poverty line — were much lower than in the US. Child poverty in particular was much lower: 11.8 percent in the US, and a mere 1.9 percent in Denmark.