Tag Archives: fallacy

Other People’s Money

KrugmanPaul Krugman has a new post titled, “why do you care how much other people work?”  This suggests it’s mean spirited to begrudge your neighbor a shorter work week, and the post is meant to back that up with some economics.

On even numbered days, though, Prof. Krugman holds forth like Robin Hood on the topic of income inequality.  Jeremiah wants to know, “why do you care how much other people make?”  Isn’t that the same idea?

Complaints about income inequality generally assume that the rich get rich by taking resources from the poor.  This is the zero sum fallacy.  Some rich people, individually, do get rich by exploiting others.  At a macro level, though, a rising tide lifts all boats.

On the other hand, if your neighbor cuts back his hours because he’s receiving a health care subsidy from the government, you are paying for that.  This one is a zero sum game.  The flaw in Krugman’s reasoning is here:

By withdrawing their labor, subsidized workers reduce the overall size of the economic pie … however, they also take a smaller share of the economic pie, because they earn less in wages and salaries.

The subsidized workers take the same share or more of the economic pie as previously, because they’re receiving – wait for it – a subsidy!  The professor’s sums are off by the very quantity he’s trying to explain.

How is it possible that a trained, professional economist touts a zero sum argument where it doesn’t apply, and denies one where it does?  That’s not ignorance.  It’s propaganda.

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Bad Math Roundup

SowellDr. Thomas Sowell is cited here, debunking the “one percent” myth, and we have finally found a pop culture reference for the enduring class fallacy.  In the 1979 movie, Breaking Away, the townie played by Dennis Quaid laments that, while he is an aging loser – the college kids are forever young!

That’s right, the local college is populated by an enduring class of attractive, carefree kids, who are always aged 18 to 22.  It’s easy to see why he resents them.

Next up, we have this gloom and doom piece from the NBER.  The author lops 0.5% off American GDP growth because it accrues to – you guessed it – the one percent.  Said portion doesn’t count because it’s not going to real Americans.  Never mind the conventional socialist idea that GDP roams around loose, to be “captured” by the rich.  This is bad math because it voids his use of the historical figures.  The author must now back out tainted GDP from all his other calculations.

Finally, just to make three, we have Charles Hugh Smith’s excellent series on pooled risk in America.  In part two, he debunks the popular delusion that the state has an infinite capacity to mutualize risk – and by extension, debt.  No one should have such a delusion, though, because the population sharing the risk is the same population that is exposed.

The proper denomination for national risk, or national debt, is per capita.  America may be a large pool, but we have no more risk tolerance per capita than, say, Germany.  In any case, Jeremiah doubts that the spongers and enablers actually have this delusion.  They are just going to stuff their pockets until the dollar collapses.  Get it in yuan, boys.

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Thank You, BIS

On June 20, Jeremiah documented some of the distortions caused by global monetary easing.  Adding one more to the list, we have found hedge funds borrowing cheap dollars and lending in Europe – distorting the foreign exchange rate.  On June 23, the Bank for International Settlements advised central banks to start work on an exit strategy.

Of course, the Keynesians are unimpressed.  Here is the Financial Times, and here is Paul Krugman.  They are correct about aggregate demand, a touchstone of Keynesian policy, but they overlook the time element.  This is an example of the synchronic fallacy.  At any point in time, Dr. Krugman can say “not now,” and cite aggregate demand – but the time has been “not now” for four years.  If not now, when?

The fact is that monetary policy can only go so far, and it is now dangerously overextended.  Just look at the bizarre side effects.  The real work must be done by fiscal policy, and governments have had four years to do it.  Keynesian frustration is better directed at national policy makers, not the central banks.

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Trickle Down Economics

CoverIt is time for another lesson in basic economics – which, by the way, is the title of Dr. Sowell’s book.  Today we expose the fallacy behind the “trickle down” theory.

This is a powerful metaphor, because we can easily imagine wealth flowing from some source on high, like a mountain spring. The rich have elbowed their way up to the source.  From where we are, we can’t even see it.  We don’t know that they are, in fact, creating the wealth.

Believe it or not, the people who run the factories and sign the paychecks are creating new wealth in the economy.  When Henry Ford made automobiles widely available, he opened up a new capability which translated into real wealth.  The same goes for Howard Hughes, Steve Jobs and, on a smaller scale, Earl down the street at  Earl’s Tool & Die.

Jeremiah is writing for those who were raised to believe that there is a fixed amount of wealth.  This is called zero sum thinking, where one man’s gain is another’s loss.  Consider this – planet Earth now supports billions of people, most of them adequately fed, and many with a standard of living once reserved for royalty.  Louis XIV never had an iPhone.

We take advancing technology for granted, and we don’t see it for what it is – people creating new wealth on the planet.  True, not all wealth is created fresh.  Some is indeed the result of exploitation.  We’ll close this one with a riddle.  What is the biggest entity you can think of that does not create any wealth, but only moves it around, and consumes much in the process?

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Treating the Symptoms

If you were only concerned with the here-and-now, you could fix inequality in America simply by taking from those who have, and giving to those in need.  Policy that treats a problem without attention to its history is synchronic,  meaning “point in time.”

Sound policy does not merely react to a problem.  It finds what caused the problem, and fixes that.  “Teach a man to fish,” as the proverb says.  It also looks forward, anticipating consequences – especially the unintended ones.

In this example, we find causes like inherited wealth and unequal access to education.  These are things that prevent America from being a pure meritocracy.  We have solutions, too, like progressive tax rates, the inheritance tax, and public schools.

Before deciding to tear down our free enterprise system because it’s “rigged,” we might give a thought to un-rigging it.  Our public schools, for instance, are not up to snuff.

“Education policies play a key role in explaining observed differences in intergenerational social mobility.”

The side effect of redistribution is that it misallocates capital.  To an economist, this means that the government is not an efficient investor of the public’s money.  To Jeremiah, it means they will “allocate” it right into their own pockets.

Redistribution has other pitfalls, like capital flight – which has already started – but corruption is the big worry.  This is a fact proven throughout history.  Government will “rob from the rich,” and then they forget that other part.

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The One-Percent Fallacy

Mark Twain said, “there are lies, damned lies, and statistics.”  Those with training in statistics are alert to its many deceptions – as are the spin doctors.  The populist rage against the top 1% income bracket is an especially dangerous fallacy.   It gives the impression that the 1% are a specific group of people hogging all the income.  In fact, any survey will have a top 1%, and a top 10%, and a bottom 10%.  You will find different people in these categories every time you run the survey.

Our favorite economist, Dr. Thomas Sowell, calls this the “enduring class” fallacy.  In fact, someone in the top 1% this year probably wasn’t there last year – and probably won’t last two years.  This churn among all income levels is called social mobility, and it’s what makes America the “land of opportunity.”

The enduring class fallacy dovetails with the zero-sum fallacy, which Dr. Sowell has debunked elsewhere:

“There is a lot of anger and it’s for a very good reason,” Wolff said. “If all of the income gain goes to the top, there’s not much left to go to the rest of the people.”

Unbelievably, the fellow quoted above is an economist.  This idea is just ridiculous.  No one has actually believed it since, maybe, Mao – and it’s likely the Marxists only use it for recruiting.  It seems appropriate to cite an iconic Democrat in rebuttal:

As they say on my own Cape Cod, a rising tide lifts all the boats.  And a partnership, by definition, serves both partners, without domination or unfair advantage.

It was lovely to hear that, with “pahtnership,” in the original Boston accent.  In fairness, social mobility in America is not what it used to be.  The OECD found that Scandinavia now has better mobility, and so did the Institute for Labor.  Both studies found that it is hard for Americans to climb out of the bottom quintile, due to poor public education.  That’s what we should be protesting.

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Zero-Sum Thinking

Thomas Sowell’s latest article is here.  Sowell writes that lower tax rates can paradoxically increase tax revenue, by stimulating economic growth.  He cites both John F. Kennedy, a Democrat, and Ronald Reagan.  Kennedy famously stimulated growth by cutting taxes, declaring that “a rising tide lifts all boats.”  Especially interesting is Sowell’s observation about the zero-sum mentality:

Those with a zero-sum conception of the economy often show little or no interest in the factors affecting the creation of additional wealth — as distinguished from their preoccupation with the distribution of the current level of wealth.

This echoes Jeremiah’s analogy to the fall of Rome.  But don’t take his word for it.  Read Professor Sowell.

See also:  Books by Thomas Sowell

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