Thursday, November 17, 2011

Fallacy of the Rich Getting Richer and the Poor Getting Poorer - Part 4

Mark J. Perry quotes Milton Friedman on the fixed pie fallacy (also known as the fixed quantity of wealth fallacy and the zero-sum fallacy):

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

Warren Buffett does not become "richer" contingent upon the rest of us becoming poorer, just as the U.S. does not benefit by imposing tariffs on foreign goods. Professor Perry elaborates.

In terms of globalization and international trade, we see the “economic fallacy of the fixed pie” in operation all the time, just listen to Lou Dobbs on CNN every night. Many people think that China or Japan are somehow benefiting at our expense because of trade, or because of a current account deficit with those countries. Many people think that the gains from globalization somehow lift up the standard of living in China or India, by bringing down the standard of living in the USA; or that the gain in wages in other countries comes at the expense of a decline in American workers’ wages, etc.

But all of those beliefs are all based on the fixed pie fallacy. There is NOT a fixed, static amount of wealth or wages in the world, which is what the fixed pie fallacy assumes.

Stand back from economics and trade and think instead about life expectancy or literacy. There is certainly not a fixed amount of “life expectancy” in the world, nor is there a fixed amount of “literacy.” It is certainly possible for the life expectancy or literacy rates in 0ther countries to INCREASE, without DECREASING life expectancy or literacy in the US! That is, advances in life expectancy or literacy in China do NOT come at the expense of the US, because there is NOT a fixed amount, and the most likely outcome is that advances will continue to take place in BOTH countries.

Likewise, since there is not a fixed amount of wealth or prosperity in the world, globalization and trade will benefit BOTH the U.S and China.

Thursday, November 3, 2011

Fallacy of the Rich Getting Richer and the Poor Getting Poorer - Part 3

CBO Report Shows Rich Got Richer, As Did Most Americans

Some highlights from this (surprisingly) objective editorial:

The skyrocketing earnings of the very wealthiest get the headlines, but the vast middle of U.S. workers didn’t do too badly either over the study period: the 21st through 80th percentiles saw their inflation-adjusted incomes rise about 40 percent, and even the very poorest 20 percent had an 18 percent increase in real dollars. Mean household income, not including government transfers, rose by 62 percent; median income by 35 percent. (Many other studies have shown a slowing of middle- class earnings growth over the last decade; the CBO report doesn’t cover the years since the economic crisis of 2008.)

The data do much to contradict claims that America has become a permanently stratified society. A Treasury Department report on income mobility found that half the taxpayers in the bottom 20 percent in 1996 moved to a higher bracket by 2005. As one moves through life, one moves through earnings groups: 74 percent of people in the top 20 percent of households are in their peak earnings years, between ages 35 and 64; fewer than half the people in households in the bottom 40 percent are.

In sum, the vast increase in the wage gap may not be fair or good, but it isn’t arbitrary. And it’s certainly not a conspiracy of the so-called 1 percent.

The CBO report is a far more complicated and promising document than the conventional wisdom holds. Americans did move apart -- but it’s worth remembering that most of us moved up, too.