A Partisan Nonpartisan Blog: Cutting Through Confusion Since 2012
I found Noah’s argument in his post “Japanese Poverty: Who’s to Blame” intriguing. For comparison, see what Bill Dickens has to say about the poor in the U.S. in “Bill Dickens on Helping the Poor.”
This op/ed by Nicholas Kristof is a classic that Greg Mankiw links to. I use it in my class to make two points:
A number of policies recommended by those who say they care about the poor have the common element of saying, in effect:
If you can’t or won’t create a good job, don’t create a job at all.
For some people, a “bad job” is a lifeline. And if we insist that only good jobs should exist, they will have no job.
I think there is another element behind opposition to sweatshops. When people in poor countries are suffering before the arrival of an American company in their backyard, that hideous suffering from poverty is out of sight for us in America. But as soon as the American company arrives to give the opportunity of taking what look like bad jobs to us, if they choose to, the somewhat lesser suffering of their poverty after taking the “bad job” seems like the fault of the American company for not making the jobs nicer. In fact the company has helped them, but we only see the suffering from poverty after, not the hideous suffering from worse poverty before.
One factor that can make it easier to blame the American company for the suffering left after providing the job is that some of the corporate executives involved in setting up and running the new factory in a poor country may, in fact, be uncaring, unfeeling people (though I doubt this is true anywhere near as often as people suppose). But even if many of the corporate executives involved in setting up and running the new factory are uncaring, unfeeling people, it doesn’t change the fact that, by their actions of setting up and running the factory, they have made people’s lives better. They could have made people’s lives better still if they had taken a bigger fraction of their personal earnings and donated it to helping the poor than they actually did, but that is something that can be said for almost every American.
One policy change that could increase what Americans do to help the desperately poor in other countries is the program of “public contributions” I recommend in my post “No Tax Increase Without Recompense.” That program of public contributions would dramatically increase the amount of assistance American give to the desperately poor in other countries. Government-funded foreign aid is very unpopular–and often is relatively ineffective because much of it is channeled through corrupt foreign governments. But many individuals (with whatever money they have set aside to donate to good causes) are attracted by the idea of helping the desperately poor.
Economists use utility functions to represent many aspects of people’s preferences. Even when an economic model has been simplified to (in some sense) have only one good–let’s call it “consumption”–the curved, concave shape of a utility function like the one above can be used to represent any of the following:
If there are two goods–lets call them “consumption” and “leisure,” the curved, concave shape of the part of the utility function that depends on consumption can be used to represent how the need to work to be able to afford more consumption changes as the amount of consumption one is doing already increases–whether that increase in consumption occurs from the passage of time or because of luck. I mention the many things that concave utility functions are used to represent because it is not at all clear that the utility function one should use to represent one of these things should look the same as the utility function one should use to represent another. In this post, I want to focus on just one thing a concave utility function can be used to represent: how people feel about inequality.
I want to emphasize that finding a good utility function to represent how people feel about inequality requires asking about people how they feel about the situation of the rich and the poor. There is no guarantee, for example, that you could ask about someone’s attitudes toward risk and get a good read on how they feel about inequality.
Yoshiro Tsutsui, Fumio Ohtake (both of the University of Osaka) and I arranged to collect data on a rider to the February, 2005 University of Michigan Survey of Consumers that asked directly about people’s feelings about the situation of the rich and the poor. The sample was the same sample as that used for the University of Michigan Consumer Confidence numbers–a sample intended to be representative of the adult U.S. population. This post gives a preview of some of the results from an academic paper we are working on, ably assisted by Daniel Reck and Fudong Zhang. It follows up on what I said about the poor and the rich in my first post “What is a Supply-Side Liberal?” In this post, I am taking the overall philosophical perspective is that of Utilitarianism, as developed by modern welfare economics using a social welfare function.
Yoshiro, Fumio and I wanted to ask questions that got at the key issues while minimizing reactions based in a shallow way on political ideology. To the extent these questions are about redistribution, the intent is to get at only the benefits of redistribution, as distinct from the costs of redistribution (say through tax distortions).
We began by asking
It is often said that one thousand dollars is worth more to a poor family than to a rich family. Do you agree?
90% of all respondents agreed. Then we went on to ask questions to probe how much more $1000 is worth to a poor family than a rich family. I won’t give the whole sequence of questions here. Let me just choose two questions that are especially revealing about what the typical adult American thinks. When we asked
Think of two families like yours, one with half the income of your family, the other with the same income as your family. Which would make a bigger difference, one thousand dollars to the family with half your family’s income or four thousand dollars to the family with an income like yours?
66% of all respondents thought the $1000 to the poorer family with half the income would make a bigger difference than $4000 to the richer family. (Everyone who had disagreed from the outset with the idea that $1000 is worth more to a poor family than to a rich family was counted as thinking the $4000 to the rich family would make a bigger difference.) When we asked
Think of two families like yours, one with half the income of your family, the other with the same income as your family. Which would make a bigger difference, one thousand dollars to the family with half your family’s income or eight thousand dollars to the family with an income like yours?
66% of all respondents though the $8000 to the richer family would make a bigger difference than $1000 to the poorer family with half the income. Focusing on the middle opinion, I read this evidence as saying that the median adult American thinks that $1000 to a poorer family with half the income would have about the same impact on that family’s life as an amount of money somewhere between $4000 and $8000 to the richer family. Stretching the interpretation a little more, I am going to take the utilitarian perspective and talk about this median view as “inequality aversion” and as an indication that most people think there would be some benefit to redistribution, though the costs might sometimes–or even often–outweigh the benefits. I do think that view represents the views of those in the middle of the political spectrum.
How can we represent these views in an inequality-aversion utility function? To make the numbers a little easier, let me lowball the degree of inequality aversion a little, and act as if $1000 to the poorer family with half the income had exactly the same life-impact as $4000 to the richer family. Let me also simplify by assuming that those ratios hold regardless of the initial income level. With those simplifications, some moderately advanced mathematics implies that the utility function must be of the form
U© = A - B/C
where A and B are some positive numbers and C is the level of consumption spending of an individual or family of a given size. The reason A and B are not determined is that we need some yardstick. It is easy to forget, but almost all measurement requires the choice of some arbitrary yardstick. The exact length of an Earth day is an accident of how our solar system formed and the geological era we are in, but we used it to develop units of time. Similarly, a kilometer was originally intended to by a 1/40,000 of the circumference of the Earth. In addition to the size of units of measurement, we also often need arbitrary starting points. Our measures of longitude start at 0 at Greenwich, England, which has to do with historical accidents of geopolitical and scientific power and influence at the time the system of latitude and longitude was chosen.
Fortunately, no economic logic depends on the values of A and B. The value of A doesn’t matter because for economic decisions because in any decision it is the comparison of how well-off one is under two or more possible situations that matters. When comparing any pair of options, the difference in utility between those two choices will leave “A” cancelled out. This is analogous to the fact that the path from Ann Arbor to the Detroit Metro Airport would be the same even if, in an egocentric change, Ann Arbor were the starting point for longitude instead of Greenwich, England. And the path from Ann Arbor to the Detroit Metro Airport would also be the same if Kabul, Afghanistan were the starting point for longitude. The value of B doesn’t matter because using one value of B rather than another is like the choice to measure distances in miles rather than kilometers, or in inches rather than yards. The real-world answers are going to come out the same.
For convenience–and only for convenience, since it doesn’t matter–I have chosen A=0 and B=1 for the graph at the top of this post. It may seem odd that utility is then always negative for this functional form, but utility being represented by a negative number is literally meaningless except in relation to what 0 utility means. With A=0, a utility of zero is material bliss–the maximum utility possible. So negative utility simply means that one has fallen short of material bliss.
Marginal utility is the slope of the utility function. It tells how much extra utility there is from a little more consumption. Even before choosing A=0 and B = 1, we can say that marginal utility here is
Marginal Utility = U’© = B/[C squared]
Notice how A has already dropped out. After choosing B=1, marginal utility becomes
Marginal Utility = U’© = 1/[C squared]
This means that doubling consumption C will reduce marginal utility to one quarter of what it would have been at the lower level of consumption, so $4000 at that higher level of consumption means only as much as $1000 at a consumption level half as big. What this shows is only that the utility function (with its associated slope, marginal utility) is doing OK at representing what we designed the utility function to represent: $1000 to a poorer family with half the income meaning the same as $4000 to a richer family.
It is my contention that bringing the discipline of mathematics to discussions of redistribution is useful in informing the debate about redistribution. Let me give just one example. Looking at the utility function at the top of the post, the slope shows how much a little extra money means to someone at each level of consumption. The difference between the slope at different levels of consumption shows how much benefit there is from redistributing from a richer to a poorer individual or family–a benefit that then needs to be weighed against the costs–for example costs to freedom from the compulsion of taxes, or costs from people’s efforts to evade and avoid taxes. If one thinks of a consumption of 1 as representing the middle class, a consumption of 4 as representing the rich and a consumption of ¼ as representing the poor, one can see that there is a much bigger difference in the slope for the poor minus the slope for the middle class than the difference in the slope for the middle class minus the slope for the rich. So with a utility function that has the slope depend inversely on the square of consumption as here, there are much bigger gains from redistributing dollars from the middle class to the poor than there are from redistributing dollars from the rich to the middle class.
In my post “Rich, Poor and Middle-Class” I wrote
I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich—not so much for themselves, though their welfare counts too—but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class—and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery.
In his correspondence with Bryan Caplan, Bill Dickens gives a good picture of what government efforts to help the poor currently look like. The distinction between the suffering of the poor and the struggling of the middle class is clear in Bill’s description. Bill is arguing against Bryan’s desire to reduce support for the poor. He argues persuasively that since the Clinton-era Welfare Reforms, government efforts to help the poor have been appropriate.
Note that because of the nature of the argument with Bryan, Bill does not address here the question of whether more should be done to help the poor. There are two terms in what Bill writes that may need some explanation: “memes” and “leaky bucket.” Here is a link for “memes.” I didn’t find a good link for “leaky bucket." "Leaky bucket” is a metaphor economists use for the idea that a government policy intended to help the poor often has unintended side effects: (1) the poor acting in ways that make it more likely that they will get help and (2) those who are better off acting in ways that make it more likely that they won’t be asked to help.
Since Bill’s argument is long, let me give you some of the highlights of what Bill writes to Bryan:
So this is the crux of it. You subscribe to two central right-wing memes: government coddles the poor and won’t make them face the tough choices everyone else does, and welfare recipients are overwhelmingly lazy and undeserving. Anyone with firsthand experience dealing with a wide range of the poor or those receiving government assistant (with the later being only a small subset of the former) knows these two things to be false.
Overwhelmingly those on public assistance were full of regret and/or a sense of hopelessness that they are fated to their condition. They know they should have worked harder in school, they know they should be working to support their family, they know it would be better if their children’s father was there to help support their kids. There is no shortage of hectoring from society, welfare caseworkers, family members, and the media. Consider that even before the passage of TANF most women on welfare worked at least some during every year (on or off the books). Most welfare mothers are not drug abusers or alcoholics (when they have been tested only a tiny fraction fail). A lot had their children with a husband or boyfriend they had hoped to marry. A lot of the AFDC caseload cycled on and off welfare as people made repeated attempts to return to work (attempts that were often stymied by lack of adequate child care - one of the most common reasons for returning to welfare was being fired by a low wage employer for missing work when child care arrangements fell through).
Over and over when I talk to people about government income support programs I’m told that they have no objection to giving money to the truly needy, but that they don’t like supporting lazy bums who don’t like to work. When I tell them that overwhelmingly government support goes to families (usually single women) with children they don’t believe me.
Now let’s consider the case of a bucket that was probably too leaky and needed to be replaced. As you know I was converted by my experience with Clinton’s welfare reform task force to the belief that AFDC needed to be time limited. Over and over I heard young women tell me that they didn’t think much about having a baby because that is what people in their world did. “You get to be 16, you get yourself a baby and you get yourself a check and an apartment.” AFDC as a career choice was a serious problem back then. But even as we went around preparing the welfare reform we heard over-and-over again that the word was out that welfare was going away and you were going to have to do something else now. Starting in the early 90s - long before TANF actually limited benefits to 2 years - AFDC caseloads started dropping and ultimately dropped enormously.
People know they make bad decisions. They often know when they are making them that they are bad. Telling them that they are being stupid isn’t news to them. Find ways to change the system to help them make better decisions and I’m all with you. Take money away from children because their mothers and fathers made bad choices I’m very disappointed. Overlook all the people who are receiving aid not because of bad choices, but bad luck and I’m more than disappointed - I’m angry.
… I’m not “outraged” by people who don’t want to pay taxes to support the government transfer system. A few of them may be selfish and/or racist jerks. There are few enough of them that I could care less. I believe that most people with that view are misinformed about who gets government transfers, how the programs are administered, the amount of the benefits, and how much of their taxes go to such programs. I think the vast majority of people, if they knew the facts, would not object to paying taxes for the system.
To me, given what I know, what Bill says has the ring of truth to it. But I would be interested in any evidence anyone has that contradicts what Bill says, especially anything that contradicts the passages I have quoted.
