… A vast majority of Swedes believe that they are poorer, relative to others, than they actually are. This is true across groups, but younger, poorer, less cognitively able and less educated individuals have perceptions that are further from reality.
To put it more bluntly, people pushing an agenda for income redistribution will have better luck if their target market is young, dumb, and ignorant.
Then the authors try a little social engineering:
… We conduct an experiment by randomly informing a subsample about their true relative income position. Respondents who learn that they are richer than they thought demand less redistribution and increase their support for the Conservative party.
Their evidence of this is based on before and after responses to survey questions, not actual voting records.
FWIW: This mirrors discussions I have around my house with the vXboy and vXgirl. They think we’re poor. I try and explain that spending all your money and having nothing extra left is not the same thing as poor. I also try and emphasize that they need to think a lot more about careers that make a decent amount of money … since they have no idea how far along the income distribution they actually are.
Most of this piece isn’t explicitly about macroeconomics. But it gets at the point that one of the things that makes thinking about macroeconomics and policy so hard is the breathless negativity which politicians the legacy media condition us with.
We thrive on diversity — diversity of skills, diversity of interests, diversity of lifestyles, diversity of religious and political outlooks, diversity of culinary and artistic tastes, diversity of lifestyles, and, lest we forget, diversity of income. Capitalists need workers and workers need capitalists. A wealthy factory owner won’t stay wealthy for long if here’s nobody to work the assembly lines. A middle-class assembly line worker won’t be middle-class for long if there’s nobody building factories.
I’ll add that I find it problematic that the typical person who’s concerned about income inequality at the household level isn’t concerned about income inequality at the government level. Why isn’t it a problem if some municipal governments are rich and some are poor? Why some county governments are rich and some are poor? Why some state governments are rich and some are poor? Why the federal government is rich and the state governments are poor?
I live in Utah, and it bugs me that my government is so much poorer than the government of California. Why won’t someone tax the government of California and transfer the proceeds to the government of Utah. There’s so many things around here that could be done with the extra dough.
No one makes claims like that because reducing (tax) income diversity between state governments is patently silly. I suggest this exercise is a good filter for thinking about whether schemes to reduce income diversity across households are silly too.
GDP has always been flawed. It’s missing home production, and underground production, and leisure, and the flow of environmental services.
But, our hope has always been that what it’s missing is roughly in proportion to what it measures. If this is true, then GDP is still a good measure of overall value.
Except for consumer surplus. GDP has always missed consumer surplus, And this didn’t seem to matter much … until the internet started turning lots of measurable GDP into not-so-measurable consumer surplus.
Think about a music file that you obtain for something less than its retail price. The value to you is the same, but almost all of that value is now surplus instead of revenue for the music industry. This means GDP actually falls when you pirate a song.
And yet the well-being that GDP is supposed to measure actually goes up when society pirates songs. The reason is that as price falls, we move down along the demand curve. Yes, we’re reducing measurable revenue to the industry, but we’re increasing the triangle of consumer surplus in two dimensions: both the price we would pay but no longer do, and the number of people who find it in their interest to obtain and enjoy the song at the lower price.
N.B. I do recognize that there is a broken window fallacy that’s also involved with pirating music, but that’s not my concern here.
Anyway, I think I’ve got you convinced that there’s something new going on with consumer surplus. Now consider this video. This is a serious short film, and I’m sure the creators thought nothing of what it says for macroeconomics.
Did the two girls get something of value? Yes, I think it’s obvious they did. Does it enter into GDP? Of course not. That’s problem one.
But there’s a second bigger problem. How did they produce that value?
Hmmm. Let’s play macroeconomist. The girls combined labor, capital and technology to create value. What’s the labor? I suppose it’s the girls’ time (posing, clicking, tagging, texting, and harvesting the enjoyment that follows) and the time Kirsten Dunst is actually being photographed.* But what about the rest? The phones and the internet are capital. Now, there’s technology involved in both of those too, but it’s sort of boring for my purposes because it’s extant technology.
But what about Kirsten Dunst? Is there more to her than labor? If so, is she capital or technology? I think she’s a little bit of both, perhaps even quite a bit of both, since she’s a lot more important to producing this bit of value than anything else.
She’s definitely capital in that she’s productive, and her productivity will depreciate if not cared for. A name will help with this idea; how about “Dunstware”. I think it is fair to say that an actress like this would be very concerned about the potentially rapid depreciation of her Dunstware.
But she’s also technology: a productive, non-rivalrous idea, that can be used repeatedly without being consumed. Call this “Dunstfulness”. This picks up the idea that you’re never going to be in a photo with Kirsten Dunst unless she brings her Dunstfulness with her; photoshopping is still possible, but then it’s really a form of technological spillover in which someone can use Dunstfulness without necessarily having permission to do so.
That’s mind blowing. Could you, just a few minutes ago, have conceived of a person’s … personness … as a form of technology?†
It’s get’s better. Dunstfulness is a technology for which there are network externalities that aren’t even based on production. Consider a theorem. Yes, it has network externalities because it can be used repeatedly to create new value. Dunstfulness is better than that: she can repeatedly create value (in the girls’ friends) without be used at all.
So, Dunstfulness is a technology that should be measured with our national wealth. And, it’s capable of helping to produce something valuable that should be measured in our GDP.
Further, our GDP, which does measure all the production values that go into creating Dunstware, and is clearly not going to measure the long-term investment made in creating Dunstfulness. And yet, no doubt, a lot of people along the line involved in that no doubt envisioned their work as an investment in Dunstware or Dunstfulness.
* Can we even use the word “photographed” for what happens in the video?
Unfortunately, politically these solutions do not seem possible at this juncture. Note that because of the way the comparative dynamics work, the efficacy of each of these solutions diminishes as we move into the future.
This is ridiculous. Consider the two largest items.
The biggest is indexing payments to the CPI minus 1%. Macroeconomists know that the CPI overstates price inflation, by something in the range of 1%. So, we’ve already been giving seniors a gift every month by indexing to just the CPI.
To draw an analogy, this is like having your parents pay for your gas, and every time the price per gallon goes up by a nickel, they give you a dime to cover it. Last I checked, keeping the change as a habit, and then bitching about it if your parents threaten to ask for it back is something most of outgrew a long time ago.
The second biggest is raising the retirement age immediately (to compensate for it not being raised earlier), and then indexing it to increasing life expectancy in the future. Without doing this, with every passing month we’re offering new retirees funding for a longer expected retirement with each passing month … without them having contributed extra to the system with a longer career.
An analogy for this might be giving a football team 5 downs, or a baseball hitter 4 strikes … after the game has started. Again, excepting things like the Colorado Buffaloes 1990 co-championship, this is something that most people would find unacceptable in others.
This is a quote from 1950!!! I’ve broken it into pieces:
The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.
I think the above is the central problem of teaching principles of macroeconomics.
Then there’s trade:
What point is there in propagating sound economic principles if the electorate is set to have the country run on the principle that the objective in trade is to get rid of as much as possible and get as little as possible in return, if they will not see that imports are either paid for by exports, as a method of purchasing the imported goods more efficiently, or else are received for nothing …
The simple and effective truth that you export your own time to your employer is easy to get across to people. The implication that exports are not desirable in and of themselves is not.
Or how about employment?
… Or if they hold that economy consists in having as many workers as possible assigned to a given task instead of the fewest who are able to perform it?
All of these examples show us something that may be worse than the obvious point that sometimes a majority can be tyrannical:
It reflects a state of mind, a mode of reasoning, even more discouraging than blindness through self-interest.
That’s good. The bugbear of economics — that it’s all about blind self-interest — isn’t quite as bad as the notion that some peoples’ thinking is so muddied that they are biased against things that may even be in their self-interest.
To control for the weirdness of the real world, they did this as a lab experiment. In these experiments, subjects enter for free and play for real money that is proportional to their performance.
They simulated taxes. Subjects got to keep the after-tax money they earned.
They did this with the same people in two environments: one in which taxes were simpler (had less rules to follow) and one in which they were more complex (had more rules to follow). The subjects’ outcomes would be the same across the two environments if they were able to follow all the rules.
They found that subjects behavior was closer to optimal when the tax system was simpler. Basically, subjects left money on the table when the tax system was too complex.
It gets worse. Then they added an identical rule to each tax system — making each setup a little more complex — and had the subjects play again. Now, put on your thinking caps: in the simpler system, the marginal increase in complexity from an identical change will plausibly be larger. What they did was actually go from 2 to 3 tax rules, and from 22 to 23 tax rules, so this seems like a plausible conclusion. What they found was that performance went down under both systems, which isn’t very surprising. What is surprising is that they found that 1) performance got “more worse” (I know that sounds kludgy) with the complex system, 2) poorer performance was concentrated in the people who performed worse before the change, and 3) the measured decision-making time of those people didn’t change much.
The authors conclude from this that they were able to isolate subjects who found the complex system to be beyond their cognitive ability, and that when confronted with a rule change that made that problem worse, these people shut down and ignored the change.
This is a strong case that a complex tax system discriminates against people on the lower end of the intelligence spectrum.
That’s a bombshell: politicians, in collusion with bureaucrats, accountants and lawyers, may have set up systems that discriminate against people who aren’t as smart as they are.
Keep this research in mind the next time someone tells you that a flat tax system is bad, or that a progressive tax system is better.
BTW: In perusing the reference list, I conclude that the strain of literature these authors are targeting is liberal rather than conservative: it falls in the Elizabeth Warren, Cass Sunstein orbit of the Democratic party.
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