Friday, December 28, 2007

The Economist on the changing nature of equality

This is brilliant. The whole article is worth reading but this section illustrates the point they're driving at:

"You can see this levelling at work in markets for transport and appliances. You no longer need be a Vanderbilt to own a refrigerator or a car. Refrigerators are now all but universal in America, even though refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls “a monument to food preservation”, costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none. Similarly, more than 70% of Americans under the official poverty line own at least one car. And the distance between driving a used Hyundai Elantra and a new Jaguar XJ is well nigh undetectable compared with the difference between motoring and hiking through the muck. The vast spread of prices often distracts from a narrowing range of experience."

Combine this with the fact that the new income inequality is driven by differentials in skills, as set out brilliantly by Becker, and it should become clear that very different policies are in order. The Economist's arguments suggest that we can take a long-term approach to relieving poverty - there is not a driving need for relief right now. Becker's suggest that improving human capital can bring the poor out of poverty - there is not some other problem keeping the poor from improving their condition.

All that suggests that creating the social and institutional conditions for the poor to improve their human capital is the right way forward. Those who see benefit spending as the way to end poverty should think again.


Anonymous said...

I’m far from convinced that these ‘brilliant’ articles actually look at the full picture but rather seek to justify the increasing differential between the richest & the poorest.

Firstly the poorest do not drive Hyundai’s or any other car, they walk or take public. If they have a refrigerator they will pay more for the electricity to run it as their electricity will invariably be metered. Their life expectancy will be tens of years less than the higher earners. As they struggle out of poverty they will still pay for being poor, taxing and insuring their car will cost more as will watching the television as these will be paid in instalments. Their council tax will be set on the value of their property and not their ability to pay – a problem seriously affecting pensioners.

Educating these people will not sort out any of those issues – educating economists, businesses and governments in morality may.

As for education, this is largely a myth. What education can do is create social mobility giving more equality of opportunity, what it doesn’t do is create more jobs. What is the point of 50% of the population having degrees if only 20% of the jobs need them? What happens to those debt ridden people who have a degree but cannot get employment that pays enough to clear that debt? Will employers pay more for more menial tasks because they have better qualifications? In fact when the workforce requires higher levels of compensation (through either expectation or cost of living) the work is moved to other ‘cheaper’ countries. Education may well make this worse as salary expectations rise.

The problem isn’t the skills differential, the problem is that companies will not pay reasonable wages to jobs that require little or no skill.

The Wal Mart benefits are also dual edged – yes clothes are cheaper, because the jobs involved in making them have been moved to the Far Eat depriving people of employment. Food is cheaper because migrant workers have been used to harvest the food as cheap labour, again depriving local people of work. So yes they buy things at a lower cost – but the price paid is their jobs.

This is where the unfettered economics of capitalism fails. Everyone knows the cost of everything but the value of nothing. Suppose people paid more for (for example) clothing on the guarantee that they are made locally, the benefit in having more people employed, paying taxes etc. should be economically advantageous – it provides employment without greater educational requirements.

As it stands people want so pay as little as possible for some things so that they can afford to drive home in their 4X4, switch on their 50” plasma screen television and watch people getting their homes washed away down the Ganges in High Definition as the sea levels rise inexorably. That is the reality of your ‘brilliant’ articles.

The Economist's arguments suggest that we can take a long-term approach to relieving poverty - there is not a driving need for relief right now. – That’s because they aren’t poor (just morally bankrupt).

Matthew Sinclair said...

AndyW, there are a lot of completely unjustified statements in that comment.

For a start, on the value of education you've completely ignored the evidence that a rising skills premium is driving inequality. Becker looks at the changing incomes of educated and uneducated people and explains inequality clearly as a result of the differential changing.

Unless you have some evidence that is untrue (can rebut Becker's argument) then all of your rhetoric about the uselessness of skills is meaningless rhetoric. Skills move you from the low to the high paid bracket.

You then spend a while arguing for some kind of voluntary protectionism. While you want the satisfaction of being concerned about the fate of those living by the Ganges you find the idea of buying products they have made abhorrent. You appear to be wedded to a fixed-pie understanding of global incomes which implies goods bought from abroad must remove 'jobs' here. That is not the case.