Economics, politics and inequality

A number of my friends have posted in facebook in agreement with this article from The Economist, “To be relevant, economists need to take politics into account.” so I will post to contradict it. This article or its title is misleading if not wrong because:

(1) It is saying that economists writing about plain economics are not relevant, so to make them relevant, they must write about economics + politics + sociology + anthropology + history + genderology + …?

(2) Consider a simple demand-supply price equilibrium theory. A big storm damaged crops in a major food producing region that substantially supplies food in M.Manila, so the supply goes down, the price goes up since demand remains the same. No need for politics, history, anthro, sociology, gender, etc. to inject into the analysis to make it relevant.

Now comes politics, government imposes price control on food items supplied by other regions not affected by that big storm “to protect the poor.” Things become awful, formal supply goes down, turns to “black market” supply. It is politics inserted into normal economic phenomena that distort things. And people think economists should always factor in politics, history, etc. in an otherwise simple situation. Lousy.

(3) Economists who comment on political issues — politics around the world, political ramifications of federalism and parliamentarism, revamp of the constitution, etc. — then they must insert politics, history, etc. in their analysis.

Consider this paper, “Economics versus Politics: Pitfalls of

Policy Advice” by Daron Acemoglu and James A. Robinson, Journal of Economic Perspectives—Volume 27, Number 2—Spring 2013. http://economics.mit.edu/files/10403

“Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will affect the distribution of income and rents in society…” (last par. of the paper)

Can people, economists “remove market failures”? Wow. Only central planners would think that way. Consider these:

  1. Mr. X and his friends demand a 500 GB USB that is sold for only P1,000. Demand is there but supply is zero, so market failure.
  1. Mr. Y and his friends supply a rice variety that is said to cure 10 types of common diseases and sold at P800/kilo, no one buys their rice. Supply is there but demand is zero, so market failure.

Anyone, anytime and anywhere can create a market failure, as shown by 2 examples above. Some guys like economists (and politicians, etc.) think they can stop or remove that? Wow.

On inequality, it’s part of nature, it’s good. Otherwise people will work only few hours a day and demand that their pay, their house, healthcare, etc should be at least 1/5 that of the privileges enjoyed by Bill Gates and Henry Sy or John Gokongwei, etc. to have equality in society. The world has progressed because of respecting inequality, not forcing equality like socialist countries.

Now consider this drama by Oxfam and many other groups, institutions like the UN. https://www.oxfam.org/…/just-8-men-own-same-wealth-half

ineq

Ok, the incomes and wealth of Bill Gates, Zuckerberg, etc. have expanded up to the troposphere, did they make people’s lives, our lives, poorer and lousier? Do we have lousy and despicable lives because Zuckerberg got richer each year because of facebook?

No. On the contrary, we enjoy more comfortable, more convenient lives because of the inventions of these super rich people. If people think that Zuckerberg et al are creating a more despicable world because of their inventions and companies, they better opt out of fb, youtube, google, iphone, etc because everytime they use those things, they contribute to further enrichment of these super super rich people.

The world enjoys more comfort, more welfare because of the innovations made by these super-efficient, super-ambitious and super-rich people. Soon people will be working only 4 or 3 days a week and still get high pay because of rising productivity (and rising inequality) introduced by those super-efficient people. We should support the expansion of more super rich people instead of demonizing them. The politics of envy is only for the envious, like Oxfam and the UN 🙂

The only way to stop rising inequality is via dictatorship. Put a gun on people’s heads and tell them to stop being too innovative, too inventive, too revolutionary in business, to stop and limit excellence.

Central planners would clap this scenario. They get huge pay and various political perks doing all types of social engineering to force equality in the world.

More on Oxfam, inequality and a lamborghini

A friend commented on my critique of the Oxfam paper and said that it is not only Oxfam that questions rising inequality, there are also some reference to the  Credit Suisse report, the last Davos conference saying that inequality as “deepening”, and Piketty says the same thing.

My main issue here is against bad math. The numerator, world’s top billionaires (numbers from Forbes) is cumulative wealth of the top 80, or top 100, etc. rich individuals, accumulated after 4, 5, 7 decades. But denominator is wealth of a country for 1 year. Numerator will be bloated while denominator is relatively understated, that is why people get quotients like 40% or 60% of GDP, etc.

To compare apples to apples, it should be:

[wealth of top 10 (or top 80, or top 100, etc.) accumulated over 40 years] / [national wealth (or GDP size) accumulated over 40 years].

What Oxfam and others lousily did is:

[wealth of top 10 (or top 80, or top 100, etc.) accumulated over X years] / [national wealth (or GDP size) of only 1 year]

That is why the numerator is bloated, the denominator is controlled. Lousy math.

Here’s an analogy. People take the cumulative wealth of the CEO of a company with 200 employees, the value of his houses, cars, investments, other properties, things that he acquired over the past 40 years as an ordinary employee, then a junior officer until he became a CEO of that same company. That’s the numerator, it’s big because it’s accumulated wealth over 40 years.

Then people get that company’s gross sales for one year. This method of bloated numerator over denominator = “scandalous inequality” is simply lousy math.

The gross debt/GDP ratio can be comparable because a responsible government would aspire to pay back or retire some debts in period of no economic and financial turmoil or crisis, so the ratio should flatline or even decline after sometime. But most or majority of governments are outright irresponsible, spend-spend-spend, borrow-tax-borrow is their endless motto, thus the ratio keeps rising.
———–

See photo 1 below. Many people say having those tall and flashy skyscrapers in Makati is scandalous or even criminal because there are so many squatters left behind. Are they correct in saying this?

ineq

No. Why?

  1. In the first place, there should be no squatters in this part of the river, Pasig river. That area should have no structures because that is a river bank, prone to flooding and the people living on those structures contribute to more solid wastes directly dumped to the river.
  1. Assuming that all laws (on private property, public property, environmental protection, etc.) are waived and the squatters are justified to live in that river bank. Those structures will greatly improve as the residents there have property rights to the area, there is no threat of being demolished, so they will aspire to build more stable structures.

———–

See photo 2 below. Some people say that society should demonize this, that government should tax ostentatious goods 500%, 2,000% or more as an “equating factor”. Are they correct in saying this?

ineq2

No. That is another politics of envy, the thinking that no one in this country should drive a lambo, a ferrari, etc. because there are “so many” poor people. Better if everyone is riding a motorcycle or tricycle, there will be equality? Equally poor?

In a country of 102 M people, only a few dozen of Lambo and Ferrari? There should be hundreds. There should be more rich and super rich people here.

A position in government is often a trap. Rational people become irrational, easily infected by a welfarist, populist, and even socialist thinking. Inequality is wrong so there should be forced equality. Pull down the rich and efficient and subsidize the lazy or irresponsible. Like people who do not want to work, or they work 6 days a week but also drink and party 6 nights a week and have zero savings.

“Trickle down” philosophy is actually from a statist or “worship the state” philosophy. The biggest entity in society is the state and its national and local agencies and bureaucracies. From the state, subsidies and welfare and the moon and the stars will trickle down to the masses.

A friend commented that “To improve I believe we all need to be Smart. Being able to get by with just a “job” is not enough. People don’t realize that in a few years computers will replace us. I struggle to figure out which job a computer won’t do better in the future.”

Right, and many jobs that are done by less skilled workers — laundry, street sweeping, kitchen dish washing, rice planting and harvesting, cashiers in MRT stations, etc. — will be done by machines. And many anti-rich, anti-capitalism, anti-globalization, anti-many things will cry out loud in the streets to further raise the government-dictated minimum wage. And this will result in an unintended consequent of more unskilled people who will no longer be hired because the mandatory wages + mandatory social contributions have become higher while those skills are replaceable by machines.

World inequality, Oxfam and bad mathematics

* This is my article in BusinessWorld last February 09, 2016.

01

There are two ways to exaggerate and sensationalize national or global income inequality. One is to compare the wealth of the top 10 or top 50 richest individuals and families per country using Forbes’ Billionaires data as numerator, with the gross domestic product (GDP) size of that country as denominator. The other is to use country wealth using household balance sheet (HBS) for one year as denominator.

(A)

Sum of wealth of top 10 (or 50) richest individuals in a country

———————————————————————— = inequality share

Gross domestic product (GDP) of a country, latest year

And

(B)

Sum of wealth of top 10 (or 50) richest individuals in a country

————————————————————————- = inequality share

Estimated country wealth using household balance sheet (HBS)

Both computations are using wrong mathematics. Why?

Simple, the numerator is cumulative wealth or wealth accumulated over a period of many years (earnings, savings, investments, reinvestments) while the denominator is GDP size for only one year, or estimated country wealth for only one year.

Or the numerator is sum of wealth over many years for individuals while the denominator is sum of wealth produced in just one year in one country. The GDP for instance is the value of flow of goods and services produced in one year, not the cumulative production of goods and services for many decades.

Oxfam has produced a sensational report published in January 2016, Wealth: Having It All and Wanting More.

It claims, among others, that:

“By 2016, the top 1% of people in the world will have more wealth than the bottom 99%, and 80 people now have the same wealth as the bottom half of the world’s population, down from 388 in 2010.”

If the data and math are correct, that is indeed a revolting statement. But Oxfam used faulty math in equation (b) to make that false statement. It used data from Forbes Billionaires for its numerator, and Credit Suisse’s (CS) Global Wealth Databook 2015 for the denominator.

Credit Suisse computed country wealth using household balance sheet (HBS), but only 48 countries have such data.

Of the 48, only 17 have complete data, the other 31 countries cover only financial assets and debts. Then three countries have household survey data where wealth levels can be calculated. These 51 countries (48 + 3) cover 66% of the global population and 96% of total global wealth, estimated to be $263.24 trillion in 2014.

For the other 160 countries that lack direct data, CS used econometric techniques to generate estimates of the level of wealth. Thus, for many countries, the quality of wealth data is labeled by CS itself in Table 2.1 as either “poor” or “very poor.”

On the super-rich, let us take the case of the 5 richest person in the world from Forbes Billionaires report. (See table)

02

Notice that ALL five of them made their fortune on their own, did not inherit huge money from their parents. It is mainly a case of hard work, efficiency, and luck.

But Oxfam gave the impression that those wealth accumulated through four to seven decades of savings and reinvestments are comparable to national and global wealth flow in one year.

So because Oxfam made wrong math and wrong assumptions, it proposes wrong and questionable proposals to fight high inequality. Below are five of their nine proposals, my comments are indicated by:

  1. Governments should end extreme inequality by 2030, create national inequality commissions.

Meaning the bulk of the fruits of efficiency, hard work and innovation should go to governments, the UN, other central planning agencies. Get more money from the super rich and distribute to the poor, with huge pay, allowances and perks to the central planners, policy makers, consultants and administrators of a massive global wealth redistribution.

  1. Increase minimum wages towards living wages; and close the gap with skyrocketing executive, move towards a highest-to-median pay ratio of 20:1.

Meaning as entrepreneurs grapple with rising labor cost for the skilled workers, the unskilled will hardly be hired and unemployment will rise.

  1. Share the tax burden fairly, shift taxation from labor and consumption towards wealth, capital and income from these assets.

Meaning cut the income tax of workers, cut GST and VAT rates, good. Shift taxes to ownership of companies, houses, cars, private jets, yachts.

  1. Close international tax loopholes, a new global governance body for tax matters, stop the use of tax havens.

Meaning there should be no more tax competition, only tax harmonization and uniformity; create a new global tax bureaucracy that will bully economies that charge very low taxes.

  1. Implement a universal social protection floor, basic income security through universal child benefits, unemployment benefits and pensions.

Governments should expand public spending including giving benefits to people who do not want to work, or are hired but frequently fired due to laziness and irresponsibility.

People should avoid that lousy computational approaches shown above.

To get a more realistic picture of inequality, they may use this approach,

(C)

Sum of wealth of top 10 (or 50) richest individuals in a country

————————————————————————— = inequality share

Sum of GDP (or HBS) of a country over X number of years

Finally, Oxfam is silent on the more important function of government, that of enforcing the rule of law and protecting private property.

A poor person may have free education up to college for the kids, free health care and medicines, free or highly-subsidized housing, monthly cash transfer, and allowance from the state, and so on. Fine.

Of what use are these if the kids can be easily abducted and sexually abused if not murdered, if the small investments like a tricycle or farm animals or tractor can easily be stolen, if a small piece of land purchased can be easily land grabbed?

Protection of private property rights, protection of people’s right to life against bullies, rapists, and murderers, is a more important function of government, not having endless subsidies and welfarism funded by endless taxation, driven by the politics of envy.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers, and a Fellow of the South East Asia Network for Development (SEANET) and Stratbase Albert del Rosario Institute (ADRi).

 

minimalgovernment@gmail.com