Statistics, Lies, Inequality, and Haters

So, my recent rant about Sanders and Trump and haters attracted some disagreement. There are no surprises in that; if you think Sanders is swell, you are going to be unhappy if someone bluntly observes he is a hater. Being a hater is so unattractive ... though I find myself wondering if some Trump supporters might not wear the label proudly.

One critique particularly deserves some response, since this particular critique treats statistics as facts. Now, when it is not inconvenient for our argument, we all know that statistics are lies. But we all need (me too, BTW) to be reminded on a regular basis that statistics are lies even when they support our heartfelt wishes and beliefs. The current era of Big Data has made it shockingly easy to confuse statistics with facts, and so many of the current hot politico-economic arguments are powered by this confusion that indeed these lies threaten our entire society.

Anyway, the lead in the response was:

"He most definitely isn't pushing constituents to hate the top 1%, more so the system that is in place that allows for such a massive inequality in wealth.

The top one-tenth of one percent (.1) owns almost as much wealth as the bottom 90 percent of Americans, and when nearly 60% of new income since the 2008 financial crisis has gone to the top 1% of earners, many of whom were responsible for the crisis to begin with, there's obviously a problem with the system. ".

There are a delicious number of assertions and presumptions hidden in this. I was going to list them all and thump them one at a time. But it turns out there are too many. I cannot thump them all without being a bore.

Let us begin anyway.

Does Sanders Hate the Rich?

Now, right off the bat, let us be honest with each other. I wrote the previous piece to be short and bold rather than careful and meticulous. To carefully determine whether Bernie is really a hater, one must first define the term "hater". And since most people would never admit to being haters, we need to go for a definition based, not on claims of innocence, but rather on behavior ... and in the case of politicians running for office, promised behavior.

I am not going to try for a full definition of all ways to be a hater. I am just going to define a subset of behaviors and promised behaviors that seem to me to fit the bill. But first I'd like to define an economic term, the Pareto Improvement Principle. To quote Wikipedia,

"The Pareto improvement principle, named after the Italian economist Vilfredo Pareto, states that a social, economic or income change is good if it makes one or more people better off without making anyone else worse off."

Let me illustrate this principle with a classic American true story. Two brothers from Poland immigrate to the USA. They look around during the summer and notice that all the people are sweltering and burning their hands on their steering wheels when they get into their cars. So they cut a piece of cardboard so it fits in the windshield, and fold it so they can toss it in the back of the car when not in use. The auto sun shield is born. They patent it and license it.

Everybody who buys a sun shield is better off. Everyone who doesn't buy a sun shield is unharmed. And the brothers become millionaires.

Now, the basic Socialist creed asserts that, without exception, greater wealth like this is evil because the brothers have increased inequality, and must be deprived of their extra wealth. But I can see no justification for such an assertion except for the basic greed, jealousy, and envy of the socialist who believes it. So I define one form of behavior that demonstrates hate is, "if someone does well by doing good, and you demand that they be punished for it, you are a hater." You are free to reject this definition, of course, but it seems pretty reasonable to me. As an avowed Socialist, Bernie necessarily meets the definition. Don't worry, though, I'm sure Bernie will deny it :-)

Lies, Damned Lies, and Statistics

"Less than 1% of the people hold as much wealth as 90%". Ok, let's talk about statistics as a form of black comedy.

This statistic seems like a pretty simple computation, right? Hard to imagine anything wrong with it, correct? Hmmmm...

One problem is many assets are held for people so indirectly that the statisticians cannot find them. Pension funds are an example. There are trillions of dollars in pension funds in the USA, held by organizations as lump sums that cannot be attributed to individuals. CalTrans, the pension fund for the state of California, is one I happen to be familiar with. They hold such vast assets that all of Wall Street fears their muscle. That wealth is to be distributed to california state employees as they retire. That money, at the end of the day, belongs to middle class people. But it is not included in the wealth measure for those people. The same is true for the pension funds for the UAW workers in the car industry, and for hundreds, probably thousands, of other such organizations. If you included all those pension funds in the computation, you would find the disposition of wealth significantly shifted in favor of the middle class.

But that is all chump change.

The big story on wealth distribution is the government's own pyramid scheme, commonly known as Social Security. Let us consider for a moment an alternate USA, changed decades ago in just one little detail, to see what I mean:

Suppose that, when the government invented Social Security, instead of forcing people to give the money to the government for safekeeping (oh my, it is so hard to say that with a straight face), the government had required that each person set up a personal retirement fund wherein that individual's Social Security taxes would be placed. That personal retirement fund would invest in any of several hundred diversified asset management systems -- the specific system selected by the individual, changeable by the individual at any time.

Had this been done, the retirement savings would have belonged to the individuals, not the state. There would be no arguments about how the state should distribute the benefits to the family members under different circumstances, no fights over whether your spouse could collect upon your death even if your spouse happened to be the same sex -- the money is your money, you specify who gets how much of it at your death in your will, just like your other assets.

This would have massively decentralized power. The people would no longer have had to thank the government for giving back to them the money that they had earned in the first place. The government would not be in a position to spend every social security surplus every year on the War Against Drugs (which the government is of course losing), the War Against Terror (which maybe they are breaking even on), and the War to Make Medical Care So Expensive Even A Government Monopoly Looks No Worse (one of the few wars the government is waging with great success). The government would no longer have internal fights over whether Social Security should be "on-book" or "off-book" on the national budget (the answer after the fight always is, "whichever one makes our budget look less awful"). And in such a system, we would see that the bulk of the nation's assets belong to the middle class, not the rich.

Now, that version of America did not come into existence. Instead we have Social Security, where the government takes all our money and "invests" it into the government's own treasury bonds, much the same way General Motors used to invest all the UAW workers pension funds into GM stock until the union figured out the scam. We are fortunate indeed that our life savings are not backed by factories and mines and vehicles and other assets, but rather are backed by "the full faith and credit of the United States". What a good deal. Hmmm...

You have two choices here. You can believe that perhaps we would be better off if we owned our own assets rather than having the government own them for us, in which case you also believe that we should replace social security with a pension scheme immediately, thus causing a more effective transition to a society wherein the middle class owns most of the assets; this would work far better than any other action Bernie could take. Even making rich people poor would not be as effective as making the middle class wealthy by simply allowing them to retain the wealth they had already earned.

Or you can believe that Social Security is a sweet deal, in which case you have to believe that the Social Security assets -- not just the ones still on the books despite government siphoning, but the theoretical ones needed to generate the revenues for all our retirements -- are real, and conclude that we have already solved this problem, and the bulk of the assets of the US are held by the middle class.

Alas, you do have a third choice. You can choose to believe your heartfelt desires about what the facts should be and disregard the big truth, that Statistics are Lies. This is more comfortable, but leads to questionable voting behavior.

And You Are Correct! Somewhat

"nearly 60% of new income since the 2008 financial crisis has gone to the top 1% of earners". Hmmm...I'm not sure where this number comes from, but one thing is certainly true: since the crash, the part of the economy that improved the most and the fastest has been the stock market. Rich people own more stocks than middle class people, so they've gained more than everybody else. Even this needs to be leavened because of the aforementioned statistics lie: the other group that has benefitted tremendously from the stock recovery is the pension funds, which needed that improvement to avoid bankruptcy, so they could continue to pay those middle class retirement checks. Had the market not recovered, the news stories about people on fixed incomes suddenly having no income would be grisly.

So even though I am skeptical of the 60% number (which does not include the pension assets, and would be noticeably lower if they were included), I agree! Let us put aside the fact that the rich also lost the most in the crash, and so had the farthest to go to recover (hard to believe, right? But true). Bernanke's artificial boosting of the stock market re-created a lot of inequality that was eliminated in the crash (if we just had enough crashes without recoveries, we could solve this darn inequality problem!). And since that boost recovered the rich people faster than it recovered the poor, it actually made the inequality even worse during the (still ongoing) recovery. The artificial stock boost should never have been allowed ... should it? Was it a mistake to allow the government, as embodied in the will of Ben Bernanke, to manipulate the currency to help the poor, if the consequence was helping the rich noticeably more? Hmmm...

Alas, I sympathize with Ben Bernanke's actions. After much study and hard thinking, I have concluded that Ben probably did keep us from having another Great Depression, which would have been far far worse than the Great Recession. It is easy to say he should not have printed trillions of dollars and driven the stock market to near bubble prices, creating record new levels of inequality along the way, but the other effects of his intervention probably saved us from a serious horror show. And I have no suggestion as to what he should have done that would have been better.

Bernanke's multi-trillion dollar run of the printing press goosed the stock market, set a bottom on the real estate crash, and slowed the rise of unemployment. An ideal intervention would have pumped jobs more and pumped the stock market less. But it was better than what the ignorant folks of 1929 did (to be fair, we know a lot more now than we knew in 1929, one would hope we would do better).

The correct answer to this problem is to remake the economy into a post-Keynesian system. Economies that follow the Keynesian model necessarily boom and bust. The bust destroys lives. We should move to a economy no longer controlled by the horrors of Keynesian economics, a new system in which a falling economy does not disincentivize new hiring. But that is a whole different topic, out of scope here.

Forgive me for a side note on the shockingly broken concept of "one-percenters". You should be careful with your internal vision of who it is that is in the top 1%. Lots of one-percenters are transient. I myself was a 1-percenter for 1 year, the year I sold my stock options. The year after I hit that pinnacle, I hit a new bottom, and qualified for unemployment. Punishing people who are cashing out after decades of hard work and heartbreak as their startup companies failed does not, perhaps, punish the people you most love to hate. Nor does punishing retirees who are selling their california houses to move into smaller cheaper houses in Arizona serve you well -- and such a house sale is another way to become a 1-percenter for 1 year. Fear not, though, these are the ones you will punish most successfully with new special taxes: people who make a million dollars every year will hire tax lawyers who are far smarter than Congress, while a guy who is selling his house or his business will not realize until too late that the government is going to snatch all his money, and get smashed.

Anyway, no matter who wins the next election, the forces needed to fix some of these problems are already engaged. I am saddened and amused by people who think that wages should be increasing when the unemployment rate is still high: anyone who is familiar with the law of supply and demand knows better (and supply and demand really is a Law, you cannot escape it, no matter how much you and your favorite politician may want to deny it -- you cannot fool mother nature, and you cannot fool the law of supply and demand. Just when you think you tricked it, it bites you on the carotid). Only now that unemployment is reasonably under control can a thoughtful person expect wages to rise, as labor becomes more valuable. The next president is going to be able to take credit for solving the flat wage problem, even if he does nothing. Even better for the black comedy aspects of government, even if the next president does something actively harmful, as they have all promised to do, they will be able to take credit for fixing it. The American economy will stagger on despite them.

The Precise Meaning of the Word Many

"many of whom were responsible for the crisis to begin with". Hmmm... "Many" is a multisplendored word. I'm going to use it myself in a moment. But let us think about this for a moment. There are over 10 million millionaires in the USA (dang, I have not lived up to my potential). How many of them were highly-leveraged financiers on wall street? Well, the most typical profile of a millionaire in the USA is someone who owned his own store, saved his money all his life, and sold the store and retired. Hardly the image of the evil stock manipulator. And let us be clear that lots of unsung and unmentioned wall street financiers did not contribute to the crash. I personally know people who got out of the CDO business when they became convinced it was a scam, even though the profit opportunities were enormous, can you honestly tell me you would have said no to the opportunity the way they did? And of course Warren Buffet explicitly warned the nation they had nuclear economic bombs, and directed his people to get out of those games. Nor were the people central in the movie "Big Short" responsible for the crash, they tried very hard to tell us, by putting their money where their mouths were, that we were hurtling toward Ground Zero for Toxic Debt. I'd guess the number of highly leveraged wall street financiers who made big bucks actually powering the crash is in the low thousands at most. On the one hand, that does qualify as "many" by some measure. But it also qualifies as "one in a thousand, a tiny fraction". And those kind of financiers have been defanged for the next decade or so by the comically overcomplicated sledge hammer of the Dodd-Frank bill, which has enough good provisions hidden in its folds to work ok for a while. Of course, the best way to defang big leverage gamers is to wipe out the rules and regulations generated by the government to induce bubbles that lure leverage and yield crashes ... argh, that is out of scope too. Good regulation, as distinct from bad regulation and harmful regulation and no regulation, requires a deep understanding of incentive engineering and game theory, and a preference for rewards rather than punishments. Alas, regulation is done by amateurs at this time.

"there's obviously a problem with the system" ... Or Not

So, I'd hope that you would agree that if the bulk of the inequality is the result of activities following the Pareto Improvement Principle, these statistics would not supply prima facie evidence of something wrong even if the statistics were not lies. Inequality can be the result of an evil system in which the power brokers have driven the wealth of the hardworking poor into the hands of the corrupt owners, like Russia. But it can also be the result of a vibrant dynamic economy that creates whole new industries and employs hundreds of thousands of people in new kinds of jobs never before imagined, and makes a few people really rich as the reward for having created such benefits (Google, Facebook, Oracle, Microsoft, PayPal, SpaceX, CNN, Fed Ex, the list goes on and on of undertakings that have done far more good than harm and made someone rich in the bargain). I would like to think this would give one pause about the wisdom of following a politics of punishment (see how good I am? I didn't call it hate :-).

And about those government subsidies of Walmart

I have already ranted too long. But I cannot help one more observation. Another point made was,

"the United States government pays nearly $100 billion annually in corporate welfare to subsidize low wages ... people do not make enough to support their family's needs with food, rent, car payment, etc., and in the end are forced to accept assistance in the form of food stamps and other government subsidies to the tune of $900,000 per Supercenter in order to survive at their current employment. This all at the same time as the company amassed nearly $500 billion in net sales in 2015. If that doesn't do anything to illustrate a corrupt system in favor of top earners, I'm not sure what will"

So, $500B sounds like a great headline number. Surely, if you make $500B, you can make all your employees rich. But this is another lie. A company that brought in $500B but spent $499.99B to earn it, and had 500,000 employees, would not be in any position to make a rich payday for its employees. The truth is marvelously more complicated than that headline number. And the claim that government benefits are a subsidy for Walmart, not the individuals, is clearly bogus if you think about it for a minute: would you feel more comfortable with those welfare benefits if you imposed a $15/hour minimum wage law and Walmart replaced all the employees with machines? Clearly, in that circumstance the benefits, which would continue, would be for the individuals, not Walmart, but perhaps the recipients would not be as happy about the new clarity as you would expect them to be.

But let us presume you intend to force Walmart to pay as much as they can afford without going bankrupt or replacing all the workers. I'd love to hear how you are going to use a government sledge hammer to achieve such a refined outcome, but let us assume your wisdom is greater than that of all the wisdom of all the human societies so far founded combined. To get the money to pay these new wages, Walmart can strip the money from one of two alternate groups:

So, to improve the lives of the Walmart workers, are you going to punish the pensioners on fixed incomes, or are you going to punish the really poor? I just want you to be clear in your own mind about which group you hate more.

Becoming more philosophical for a moment, let us be clear: the greatest good you can ever do for the truly poor is not to give a few of them jobs, or to give a few of them a salary increase. The best thing you can do for them is drive prices lower, which makes everything in all their lives easier. The fact that the Great Regulatory Minds of the Government's Keepers of the Keynesian Economic System consider lower prices to be evil harbingers of deflation, and work ever vigilantly to force us into an inflationary spiral, is an infuriating demonstration of what is really deeply broken in the whole 20th Century western economic model we still suffer beneath.

Hopefully the real answer is clear. You have to stop thinking in terms of punishment. A strong steady economy makes labor scarce and drives up wages without harming the pensioners or the really poor. A strong economy makes everyone better off. Making an economy that is reliably strong is extraordinarily hard. It is not for the squeamish, and it sure isn't for amateurs. Which is why we are in greater danger every time we allow the politicians to grasp more power to interfere. But making a strong economy that rewards success is the strategy that actually works. Celebrate the new industries that make new billionaires ... and tens of thousands of new jobs. Treat them as a national treasure. Do not eat them. Because this is your seed corn. And we all know what happens when you eat the seed corn. Don't we?