causes of income inequality, economics, equality

The Causes of Wealth Inequality (32): How Inheritance Not Only Perpetuates But Also Aggravates Inequality

Inherited wealth – the value of all assets (real estate + financial assets - financial liabilities) transmitted at death or through inter-vivos gifts - has become more important over time. Thomas Piketty estimates that

the annual inheritance flow was about 20%-25% of national income around 1900-1910. It then gradually fell to less than 10% in the 1920s-1930s, and to less than 5% in the 1950s. It has been rising regularly since then, with an acceleration of the trend during the past 20 years, and according to the latest data point (2008), it is now close to 15%. (source, source)

The drop between the 1920s and 1950s was caused by the Great Depression and WWII, two events that destroyed a lot of wealth.

Inheritance has always been an important cause of the persistence of wealth inequality. I guess that goes without saying. Capital is unevenly distributed in most populations, and will remain so to the extent that it can stay in the same families. It’s more interesting to look at the mechanisms through which inheritance could, under some circumstances, aggravate inequality. What are those circumstances? Here are some:

  1. Birth rates. People in developed countries have fewer children than they used to, and the children they have survive into adulthood at higher rates. As a result, those children inherit a larger part of their parents wealth. If numerous siblings no longer have to split their inheritance among themselves, the effect of inheritance on wealth inequality becomes stronger. Piketty as well has made this point in a recent talk.
  2. Higher house prices. Housing has become more expensive. This incites people to save more so as to allow their children to buy a house, which has a ripple effect across generations: the biggest savers are those who enjoyed an inheritance because if you’ve inherited a house or the money to buy one it’s easier to save than when you have to rent or pay a mortgage. And if you can save, your children will inherit. And so on.
  3. Inheritance taxes have been reduced in most countries.
  4. Slow economic growth in most developed countries means that the wealth produced in those countries is smaller compared to the wealth inherited.

Not all of these circumstances can be brought under human control. Perhaps an inheritance tax – the dreaded “death tax” – is a realistic option. I mean, if even Nozick could get behind that, you would need to be an outright fundamentalist about property rights  in order to oppose it.

For increases in the inheritance tax to happen, however, we will need to start thinking differently. When David Cameron, for instance, promised to raise the threshold for inheritance tax to £1m he did so because he believes that people who work hard, save money, and bequeath it to their offspring are somehow doing the noble thing. But while it may be noble to work hard and save, it’s far from noble to live off of an inheritance and its often huge returns. Hard work for one results in an unproductive lifestyle for its beneficiaries. If you want to promote work and productivity, by all means impose a death tax. And if you want the best for your children, it may be tempting to give them cash or other assets, but beware that this will be self-defeating beyond a certain amount.

More posts in this series are here.

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economics, equality, income inequality

Income Inequality (30): A Primer on Inequality and Economic Growth

Countries that are more equal in income terms are also richer:

income inequality and gdp

(source)

But how about the relationship between inequality and economic growth? The classic causal story, based on work by Simon Kuznets,

Kuznets curve

Kuznets curve

maintains that there’s an inverted U-shaped relationship over long periods of economic development. As emerging economies grow they initially become less equal as the few with high financial endowments profit off of their ownership of key productive resources, like land. Then, as industrialization evolves, much more of the population has the chance to participate in higher value-added work which reduces inequality. (source)

In this argument, growth determines inequality: first growth drives inequality up, and then it gradually reduces it.

However, this Kuznetsian view has come under fire recently. Thomas Piketty for instance, in his “Capital in the Twenty-First Century“, has criticized Kuznets’ view that inequality will eventually stabilize and subside on its own given increasing growth. According to Piketty, increasing wealth concentration is a likely outcome for the foreseeable future. Kuznets findings were based on a historical anomaly. And indeed, the lines in this graph do not turn downwards to form an inverted U-shape:

gdp-vs-gini

(source)

Which is why it’s perhaps better to look at the causation in another way: maybe inequality or equality determine growth rather than vice versa. For example, there’s this study arguing that high income inequality is likely to inhibit growth, especially in developing countries:

gdp per capita growth and gini developing countries

gdp per capita growth and gini rich countries

(source)

Inequality inhibits growth, especially in developing countries, because

high income inequality can discourage the evolution of the economic and political institutions associated with accountable government (which in turn enable a market environment conducive to investment and growth); and … high income inequality can undermine the civic and social life that sustains effective collective decision-making, especially in multi-ethnic settings. (source)

This study comes to a similar conclusion. It argues that, in general, more inequality endangers the sustainability of growth. Long consistent spells of economic growth are correlated with low levels of income inequality:

income inequality and gdp growth

(source)

A growth spell in this graph is a period of at least five years that begins with an unusual increase in the growth rate and ends with an unusual drop in growth.

It may seem counterintuitive that inequality is strongly associated with less sustained growth. After all, some inequality is essential to the effective functioning of a market economy and the incentives needed for investment and growth … But too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity. … [S]ocieties with more equal income distributions have more durable growth. … [A] 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. (source)

Some additional support for this view: redistributive policies – which are anti-inequality policies – don’t actually harm growth:

inequality

(source, source)

Redistribution doesn’t help either, according to this graph, but maybe it counteracts the negative effect of inequality on growth given that it counteracts inequality. In that sense, it does help.

More posts on income inequality are here.

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causes of poverty, economics, poverty

The Causes of Poverty (79): Poverty Traps

BrickWallLounge_Blog

(source)

Many among us will experience short spans of poverty at some stages in our lives. I lose my job or my unemployment benefits, I have a catastrophic but transitory health problem, an extreme weather event destroys my crop, or an economic crisis forces me to declare bankruptcy. As a result, I have to live off my savings or my parents and friends will have to lend me money. Still, in time I find another job; my health improves as I benefit from cheap healthcare (perhaps provided or subsidized by the government); the weather returns to normal and I can resume my profitable farming activity; or I can start a new business under the protection of bankruptcy laws that don’t burden me with debt.

However, I may also be what’s called a “structurally” poor person, meaning that I’m poor for most if not the whole of my life. Perhaps I was even born into poverty. The reason may be that I find myself in a “poverty trap”, a self-reinforcing mechanism which causes poverty to persist. In other words, I’m poor because I’m poor. And because I’m poor I’ll always be poor. I’ll die without ever having had an “adequate” standard of living, all the while passing on my poverty to my descendants.

Here are some examples of poverty traps:

  • I have a job, but the wage is low. As with many low wage jobs, I have almost no control over my work schedule. That means I can’t take on a second job and I can’t send my kids to child care. I have to spend time, money, effort and other people’s good will to take care of my kids. My job is physically hard and so I tend to have some health problems. My life is relatively expensive and it’s hard to find a better job. My salary doesn’t really cover my spending needs, hence I’m poor.
  • I can’t afford to pay the security deposit for a rental apartment, so I’m stuck in an expensive motel or I have to live with my parents who can barely afford their own survival. I also don’t have a refrigerator or a microwave, so I have to buy more expensive food. I have to wash my clothes by hand because… you guessed it. This takes a lot of time, time that I can’t spend on wage labor.
  • I don’t have tap water or heating because those aren’t things that people have where I’m from. I use wood for fuel like everyone else. The result is deforestation, soil degradation, lower crop yields and yet more poverty. My children have to help me – which is why I have a lot of them – to the detriment of their education. My kids will probably inherit my poverty because of this.
  • A lot of the things I’m forced to do because I’m poor are illegal. The lights of my car broke down, and I got a fine. I should have made the financial sacrifice and get them replaced, but I gambled on not being caught. I couldn’t pay the fine and my car was repossessed. Now I have to take public transport but can’t pay for that either. So I often get a fine for that as well. I know some homeless people who get a fine just for being homeless.
  • My calorie intake is too low to give me the strength to work. The quality of work I’m able to offer is inadequate for obtaining the food I require, and the food I do get isn’t enough to allow me to deliver quality work. My productivity is low, my earnings are low, and ultimately I can’t even keep a job or work the farm. My low calorie intake levels lead to health problems. My inadequate housing makes those problems even worse. My ill health, caused by my poverty, makes my poverty worse. I’m more likely to catch a disease, and also less likely to recover from it.
  • Like many poor people I have a low credit rating, making it difficult to get credit. The credit I do get is very expensive, which sort of defeats the point. Now, I do need the credit because I don’t have any savings. People say that I exhibit a high discount rate, that I’m too present-oriented and that I’m unable to delay gratification. Instead of borrowing money at high interest rates as a means to satisfy my unrealistic consumption desires, I should moderate myself and save for the future. But I’m present-oriented because I live in an environment in which I can’t trust people. Better to consume what I have than to save it and lose it later.
  • People also say that my issues with gratification extend to my sex life. I was indeed a teenage mother, and my education suffered as a result. This in turn affected my job prospects and my income. But this wasn’t just stupidity on my part. Being a mother gave meaning to my life. Other meaningful options just didn’t seem realistic.

So, there you have it. I think a lot of these stories are very real, and the problems that poor people face are often self-reinforcing. Of course, I don’t want to deny human agency. There are people who, even in the face of the worst possible circumstances, can fight their way out of poverty traps. So “trap” may be too strong a word. Individual responsibility still plays a role. Yet, let’s not forget that a poverty trap is sometimes intergenerational, as I’ve said before. Some children are born into a trap, and you can’t insist on responsibility and agency when we’re talking about children. A child growing up in a poor family may suffer in its early development. Undernourishment for instance can have a lasting impact on learning ability and earnings as an adult. Children of the poor are perhaps even more affected than the parents because the latter need a minimum calorie intake to work. They have to eat first. If they choose not to eat first, they will only make the poverty of the household worse.

Just to be clear: I’m not talking about an entire economy or country being stuck in a poverty trap. If you were expecting a post about that, I’m sorry I’ve wasted your time. I’m not wading into the treacherous debate about the necessity of large foreign aid injections to break the cycle of poor nations that can’t save enough to finance investment necessary to growth.

This post seems to be going on forever, so I’ll limit myself to a description of the problem. The solution – how to get out of poverty traps – is a topic for another day.

More on poverty traps here and here. More posts in this series are here.

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activism, housing, human rights images

Protest and the City

Protests don’t have to be mass protests. Individual actions like this one can be very high profile. Or you can go subtle, like this:

A small Ukrainian flag in the middle of Red Square, Moscow

A small Ukrainian flag in the middle of Red Square, Moscow

(source)

However, I think it’s fair to say that mass protests are usually more effective, not necessarily in the sense of achieving the stated ends but in the sense of achieving something. Hence the recent spate of massively popular urban demonstrations. Maidan, Tahrir, Taksim… The list goes on and on. Someone counted the number of protests during the last couple of years and there’s indeed a steady increase:

number of protests

37 of the 834 events counted had one million or more protesters!

Analysis of these protests often focuses on the role of social media, but just as interesting and somewhat forgotten is the role of urban planning and architecture. Most mass protests take place in and around central squares of large cities and it’s easy to see why these are favorite protest spots:

  • Public squares allow large numbers of people, sometimes very large numbers to congregate at the same spot. Centrally located in capital cities, they typically have many access routes. They are also Schelling Points (“a solution that people will tend to use in the absence of communication, because it seems natural, special or relevant to them”).
  • There’s often some kind of symbolic meaning to these places (maybe they’re named after national heros). They tend to be close to the institutions of power, which isn’t merely symbolic: it’s those institutions that are claimed to be responsible for the grievances of the masses and that need to hear the message.
  • Large numbers of people are also more difficult for security forces to attack, in the sense that an attack would be very visible and public and therefore potentially embarrassing – at least for those rulers who aren’t beyond embarrassment. The importance of large numbers of protesters doesn’t lie in the fact that the police or the military have a larger force against them – they usually have the means disperse even very large groups of people and a sense of safety in numbers is therefore mostly illusory among protesters. The problem with dispersing large groups is that it doesn’t look good on TV.
  • The ease of TV coverage is itself a reason for holding mass protests in large open spaces in capital cities (reporters often don’t venture outside of the capital). Protesters need to be seen together and when they take over central squares in capital cities – places that are normally buzzing with economic activity – then the world takes notice. The choice of location enhances the impact of protests.
  • And finally, large groups enhance the intensity of the protest through solidarity, mimicry etc. Physical unity translates into intellectual unity, and physical unity is easier in large open spaces.

A particular urban setting – intentionally designed or grown over the course of history – can promote the occurrence and intensity of mass protests. It’s no surprise therefore that the urban planners of dictators try to design cities in such a way that potential protesters are discouraged. Focal points such as large squares are not designed away – a dictator needs them for the theatre of power – but they are policed and fenced. Small streets that could be used by protesters to escape and barricade are demolished and replaced by wide avenues:

December 5, 2011 in Nay Pyi Taw, Myanmar. Nay Pyi Taw is the capitol city of Myanmar, formally in Yangon until the Burmese government created a new secluded capitol closed off from much of the world until recently. (Photo by Paula Bronstein /Getty Images)

December 5, 2011 in Nay Pyi Taw, Myanmar. Nay Pyi Taw is the capitol city of Myanmar, formally in Yangon until the Burmese government created a new secluded capitol closed off from much of the world until recently. (Photo by Paula Bronstein /Getty Images)

These avenues can then be used to send in the troops if need be. For example, Beijing’s avenues were instrumental in the attack on Tiananmen square.

The model of pro-autocratic urban design is of course the rebuilding of Paris in the 1850s and 1860s. Baron Haussmann turned a medieval city full of narrow streets into a rational, centralized, geometrically ordered system with grand boulevards that would be both harder to barricade and easier for troops to march through. The hope was that this would stop the revolutionary fervor in France. Here’s a before/after image of 19th century Paris:

Before and after the renovation of the Bastille area

Before and after the renovation of the Bastille area

All dictators ever since have tried to replicate this model, if necessary by way of the construction from scratch of new capital cities in the middle of nowhere. If international embarrassment becomes less painful than a fall from power, the central squares and large avenues can be used to crush dissent. In Tiananmen the crushing took place by way of tanks, but usually the means are less extreme:

A protestor is hit by water sprayed from a water cannon during clashes in Taksim Square, Istanbul, Turkey, 11 June 2013. Police used water cannons and tear gas as they moved into Istanbul's Taksim Square, where two weeks of protests have been held, as some demonstrators threw rocks and Molotov cocktails.

A protestor is hit by water sprayed from a water cannon during clashes in Taksim Square, Istanbul, Turkey, 11 June 2013. Police used water cannons and tear gas as they moved into Istanbul’s Taksim Square, where two weeks of protests have been held, as some demonstrators threw rocks and Molotov cocktails. Photo: KERIM OKTEN/EPA

(source)
Photos of a woman in a red summer dress, being sprayed with teargas by a masked policeman, has become a symbol for Turkey's protesters.

Photos of a woman in a red summer dress, being sprayed with teargas by a masked policeman, has become a symbol for Turkey’s protesters.

(source)
Teargas at Tahrir Square

Teargas at Tahrir Square

(source)

So you have your classic double edged sword: large open spaces can facilitate protest, but also the reaction of the state.

Some bonus pictures of the Majdan protests in Kiev:

Majdan, before and after

Majdan, before and after

Majdan, before and after

Majdan, before and after

(source)
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economics, measuring poverty, poverty, statistics

Measuring Poverty (16): The Capabilities Approach and the Unstraightening of the Poverty Line

Fun_is_not_a_straight_line_by_jinchilla

(source)

We usually define poverty as a level of income or financial assets below a certain “poverty line”. This poverty line is set, often implicitly, at a level that is supposed to make the difference between decent survival and a life unworthy of human beings. The line is typically a single line, identical across all individuals – or even across nations. The best example is the $1 a day line. This is a single, universal line, adjusted only for purchasing power parity. Many national poverty lines are also fixed and identical for all citizens.

The problems with these fixed and uniform lines have been noticed by many, notably by Amartya Sen. According to Sen – and he’s right I think – being poor means being unable to achieve certain minimally satisfactory states of being and doing, for example the state of being sufficiently nourished, of being mobile, of being free of disease and ignorance, of being sheltered against the forces of nature etc. Poverty is about what people are or are not able to do and about who they are able to be. Poverty is capability-deprivation.

A poverty line only makes sense if it’s set at an amount of money, income or resources that is sufficient to guarantee the required capabilities. A first problem: it’s not at all clear that existing poverty lines are indeed set at a level sufficient to guarantee this. $1 a day in particular seems low, intuitively. Of course there are pragmatic reasons to set the line at a low level (one has to make priorities in life and help the worst off first). But then you’ll have a hard time calling it a poverty line, given the definition of poverty as the inability to achieve certain minimally satisfactory states of being and doing. Call it a survival line instead.

A second, and more serious problem arises from the fact that poverty lines are fixed and uniform. People, however, are obviously not uniform. Different people require different things in order to achieve the same capabilities. A pregnant women or a young mother needs more nutritional resources than the average person in order to achieve the state of being sufficiently nourished. A physically handicapped person needs more resources to achieve the capability of being mobile. If you focus on the average person – which is what you do with a uniform poverty line – then you’ll fail to identify some as being poor, while erroneously identifying others as being poor. And the environment also plays a role. A person living in unsanitary conditions may be forced to drink infected water. This affects his or her calorie absorption, implying a larger than average amount of food necessary to be sufficiently nourished. Cold weather means more effort to protect against the environment. And so on.

Identical capabilities require different levels of resources or income. A single, fixed poverty line obscures this reality. The only good poverty line is individually specific. However, that’s completely impractical. Differentiation across demographic groups, regions, occupations, lifecycle etc. might be more feasible, but at the cost of simplicity. Be that as it may. I would already be happy with increased awareness that there is indeed a problem. Talk of a “line” reduces this awareness, but I’m realistic enough to understand the appeal of something as simple as a line.

More posts in this series are here.

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causes of income inequality, economics, equality, work

The Causes of Wealth Inequality (31): Automation and the Hollowing Out of the Labor Market

Conventional wisdom has it that automation comes at the expense of low-skilled jobs and aggravates income inequality because of labor displacement at the bottom of the income distribution. It turns out that this is a bit too conventional, and not only because it runs afoul of the lump of labor fallacy (machines need to be built and people can go on and do other things). Mid-level jobs are also hit by automation, and perhaps even more than jobs at the bottom of the skill continuum. This has been called the “hollowing out” of the labor market:

hollowing out

(source)

This hollowing out, caused in part by automation, in turns causes an increase in income inequality. This is mere arithmetic: if the middle drops, then the extremes become relatively more important and inequality rises. Ryan Avent puts it well:

Work published in 2006 by David Autor, Lawrence Katz, and Melissa Kearney argued that employment and wage growth in America have “polarised” in recent decades, a conclusion that has been reinforced by subsequent research. Employment in high- and low-skill positions has risen substantially relative to middle-skill jobs. The resulting employment distribution generates a distribution of wages that is similarly polarised and more unequal than that which prevailed prior to this period. (source)

Why does technological automation focus mainly on middle skill levels?

Daron Acemoglu and Mr Autor pioneered a “task approach” to labour markets. Tasks can be completed by either labour or capital. The more routine a task is, the more susceptible it is to automation. But whether or not a task is automated depends upon the relative supply—and the real wage—of workers of various skill levels. Subsequent work has shown that automation and trade are responsible for displacement of routine tasks previously done by middle-skill workers, in both manufacturing and clerical or service activities, leading to polarisation of local and national labour markets.  (source)

Technological automation focuses mainly on middle skill levels because it’s relatively easy at that level, easier sometimes than at the extremes of high and low skilled tasks. “Easier” here means both technologically easier and more cost effective. Highly skilled tasks, such as teaching a philosophy course, are difficult for machines to do because they are complex (although we do sometimes see high-skilled jobs being automated, such as legal research for example). In the case of low-skilled tasks, some of these are surprisingly hard to automate, as in the case of truck driving or toilet cleaning. Even low-skilled jobs that aren’t technically hard to automate aren’t always automated because the pay-off may be too low – people doing those jobs are poorly paid so developing expensive machines to do it for them isn’t worth the trouble.

Henry Ford

Henry Ford

And then there’s the added worry that displacement of many low-skilled workers would create a permanent underclass unable to participate in the economy – unable, in other words, to buy the goods and services produced by machines. There’s a famous anecdote about Henry Ford mocking a labor union president in one of his factories, saying it wouldn’t be easy to get the robots to pay their union dues. To which the union president responded that Ford wasn’t going to get the robots to buy his cars.

The hollowing out of the labor market, driven by mid-level automation, has therefore a direct effect on income inequality, but it also a few indirect effects. For example, automation means lower production costs, and the savings or the added value go primarily to shareholders through capital gains and stock appreciation. Since stock ownership and capital income are concentrated among those already better off, income inequality is further increased.

If technology decreases the relative importance of human labor in a particular production process, the owners of capital equipment will be able to capture a bigger share of income from the goods and services produced. (source)

Another indirect effect: increasing automation of manufacturing jobs pushes unionization rates down, which in turn decreases bargaining power among low-skilled workers. This, in the end, aggravates inequality yet again.

More posts in this series are here.

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discrimination, equality, health, moral dilemmas

Moral Dilemma (24): Gender, Longevity and Healthcare

old couple

(source)

Given equal healthcare, women on average tend to live longer than men. You can see this as an injustice. Living a long and healthy life is clearly something that is generally considered to be good. Men have not chosen to be born as men. And neither have women. So why should men be burdened with such an unearned disadvantage? Compare this to a disability: people born with disability rightly have a claim to compensation or remediation. Hence, wouldn’t it be right to give men more medical attention than women to counteract – as far as possible – the natural masculine handicap? Or would giving women less medical attention than men be a case of discrimination?

Thanks for voting. By the way, I have some other dilemmas here for which I also would appreciate your vote. I repeat my promise that one day I’ll publish an analysis of the results of the votes for all those dilemmas. Just waiting for a bit more response.

More moral dilemmas are here.

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economics, work

We Need to Start Working Differently

iwdrm_modern_times_1935

Unemployment, starvation, war and unrequited love are probably more important and more urgent concerns, but the almost complete lack of serious thinking about the nature of work never ceases to amaze me. Most of us work and we spend a considerable portion of our lives doing our work, and yet how many of us do a job only because we need the paycheck? Far too often, work is a toil, not always a physical toil for us Westerners but a psychological one, because we work in systems we don’t understand, let alone control, or because we contribute an insignificant, boring, detailed part of a larger process we don’t really care about. We go to work, not to produce, be creative or self-develop, but simply to make a living, to have some cash, and in a few cases to have prestige, status, power or some other good external to the production process in which we engage or the product to which we contribute.

Work is not connected to who we are or wish to become. Who does not dream of another life? The statistics about job satisfaction and job motivation are depressing:

job satisfaction

Work should be about creativity, excellence, development and self-expression rather than wages, survival and status. How do we get there? That will be tough, but giving workers more control of their factories or businesses and increasing automation of the uninteresting parts of work would be a good start. Even if many of us – in the West at least – are no longer machine appendices in the style of Chaplin’s “Modern Times”, we’re often still tied to routine jobs that are part of a system the purpose of which is obscure to us or leaves us indifferent. Our contribution is not insignificant – or we wouldn’t get paid – and yet we are replaceable. The larger purpose of it all escapes us or doesn’t matter.

We shouldn’t forget that the division of labor into fragmented tasks in a highly hierarchical organization – and “organization” here also means markets (a taxi cab’s ride is just as much his boss) – is probably not so much a requirement of modern markets or production technologies but rather the consequence of a very specific way of viewing work relationships, namely relationships between highly qualified “managers” and simple executors. Other ways of working are possible and should be promoted.

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causes of poverty, economics, poverty

The Causes of Poverty (78): High Discount Rates and Lack of Delayed Gratification

grasshopper & ants

(source)

You talk to conservatives about the reasons why poor people are poor, and chances are that the discussion turns to lack of self-control, high discount rates and inability to delay gratification. “High discount rates” means that things in the present or near future are viewed as having a higher payoff than things in the distant future. If you have a high discount rate, you focus on immediate gratification. This in turn shows up in low savings rates, high debt, obesity, teen pregnancy, drug use, high drop out rates, low school attendance and other vices supposedly common among the poor.

Some even argue that differences between people in the apparent levels of self-control, discount rates or time preferences – which is all the same thing – appear at a very early age and are therefore probably innate. The famous marshmallow test will then get a favorable citation: you give kids a marshmallow and tell them they can either eat it now or, if they wait a few minutes, have two marshmallows. Kids who wait do better later in life.

However, recent studies have suggested that the marshmallow test does not, in fact, reveal innate (in)ability. The environment in which tests such as these take place determines to a large extent the levels of self-control revealed through them. Whether or not people are capable of delayed gratification depends not on their abilities but on their assessment of the reliability of the world around them. When the world is not worthy of trust, the best course of action is often to live for today.

This attitude towards the world and the future is probably internalized from a young age onward, which makes it hard to change. What it takes is to offer young children a reliable environment allowing them to develop levels of trust which will in turn yield low discount rates and the ability to delay gratification later in life. But in order to do that we’ll need to reduce parental poverty. Claims about lack of self-control as a cause of poverty then have things completely backward. Rather than a cause we’re dealing with an effect of poverty.

More posts in this series are here.

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causes of poverty, economics, poverty

The Causes of Poverty (77): The Lottery of Birth and the Country You Live In

mcdonalds-vegetarian-india-2

McDonalds in India

(source)

Charles Kenny explains to what extent the country you live in affects your livelihood:

[P]overty in Africa and Asia isn’t the result of something about individual Kenyans and Pakistanis, it is instead something about Kenya and Pakistan. Individuals the world over have the same drives and capacities, but the societies and places in which they live present radically different opportunities to turn that drive into wealth, health, and well-being.

That’s clear from evidence compiled by Princeton economist Orley Ashenfelter for the National Bureau of Economic Research. He looks at the wages earned by staff working at McDonald’s franchises around the world and compares what they earn to the cost of a Big Mac in that same franchise. The Big Mac is a standard product, and the way it is made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet McDonald’s employees worldwide earn dramatically different amounts in terms of Big Macs per hour.

In the United States, a McDonald’s employee earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India, an employee earns $.46 an hour. The average Indian Big Mac (made of chicken, which is cheaper than beef) costs only $1.29. Still, the employee earns only one-third of a Big Mac for each hour worked. Same job, same skills—and yet Indian workers at McDonald’s earn one-seventh the real hourly wage of a US employee. There’s a huge “place premium” to working in the United States rather than India.

The place premium affects more than just low-end service jobs. Economist Michael Clemens, a colleague of mine at the Center for Global Development, studied a group of Indians working in an India-based international software firm who applied for a temporary work visa to the United States to do the same work in the same firm, just on the other side of the Pacific Ocean. Some of them then won the lottery by which visas were issued, while others lost. The winning workers, who were still in the same firm and still doing the same type of job on the same projects, suddenly saw dramatic differences in their pay.

The ones who moved to the United States started earning double what their colleagues back in India were earning (adjusted for purchasing power). They were earning more not because they were different from the colleagues they left behind—selection was not based on education, talent, or drive but was entirely random. And once they returned to India, they went back to earning pretty much the same as their colleagues who had never left. They briefly earned more in the United States simply because they were in the United States rather than India. (source)

Some more numbers:

place premium

(source; how much more workers in the U.S. make compared to identical workers in developing countries, e.g. Nigerians and Yemenis stand to gain upwards of 10 times as much from moving to the U.S.)

The place premium is a strong argument in favor of reducing migration restrictions: it doesn’t seem just that people’s income is determined by the good or bad luck of having been born somewhere, and the use of force to keep people in their country of birth only aggravates the injustice. However, by the same logic we can also argue for a more generous welfare state: it’s not just your country of birth that affects your income. Your parents, social class, genetic endowment, health prospects, looks etc. are also a lottery that affects your income and good fortune.

More posts in this series are here.

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