Monday, February 11, 2008

Economics really is the "Dismal Science"

or at least leads to dismal reasoning:

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.
I spent the weekend thinking this was some kind of "Modest Proposal," largely on the basis of these paragragphs:

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings. The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.
I really thought this was a joke. The real comparison between people who spend roughly 1/2 of their income on consumer goods, and those who spend twice their income on such goods, is the fact that both buy lots of consumer goods? So "poor people" sell off assets, which allow them to spend well beyond their means, on consumer goods (apparently). Or they just flip houses and cars in order to buy more houses and cars? Or more DVD's, videogames, and computer software? Am I getting this right? And retirees' "long-term financial status" is subject to dramatic improvement? Really?

Because the Dow Jones is gonna hit 30,000 someday soon, I suppose.

Of course, none of the income of the poor, apparently, goes to either taxes or savings. How can it, if they are spending twice what they earn on consumer goods. And this model, we are drily told, is sustainable because...well, we aren't told. But apparently the "poor" have an endless supply of houses and cars to sell, insurance policies which, when redeemed, stand ready to be redeemed again, bank accounts which magically re-fill themselves to supply this doubling of income just so it can be spent on consumer goods, and, of course, secuirities. People with incomes less than $10,000.00 a year obviously own lots of securities.

Surely this is a joke.

But the authors of this article work for the Federal Reserve Bank in Dallas, not an institution known for it's dry wit and satirical outlook. And they end their argument with this modest proposal:

Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.
I keep looking for the hint of a smile there, a wink, a nod, something to indicate the joke. But I can't find it. Can we go back to talking about morality in economics, now? Please?

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