The Persistence of Constraints

by Russ Roberts on March 23, 2006

in Inequality

I was on the Diane Rehm Show earlier today talking about inequality—you can listen to by going here. The highlight is toward the very end when Diane Rehm announces that I don’t believe inequality exists, just a slight misreading of what I had been saying.

One of the challenges of playing the contrarian in this kind of debate is how easy it is to bring in other factors that have nothing to do with the debate but are in the vicinity. One of those is that there are poor people. So if you deny the importance of inequality as a pressing social problem, you are inevitably confronted by suggesting you don’t care about poor people. The two issues are related, but analytically distinct.

The other tangential issue that comes up is that the middle class is having a hard time. It came up on the show a few times—the idea that people have to go into debt to buy a nice house or to make ends meet.

The implication is that the economy isn’t working well. After all, if it were working well, then people could just get by with what they have. It’s tempting to counter with the point that going into debt is usually a sign of outgo exceending inflo and rather than borrowing, maybe people should spend less. Borrowing to live a lifestyle you can’t afford tells us more about the people doing the borrowing than it does about the economy.

But I think that misses a much deeper point, a point I first saw made by Thomas Sowell but I can’t remember where. The point was that people always want more than they have.  Always. It has nothing to do with the material age we live in. It has nothing to do with whether the economy is working well. Inevitably, our desires outstrip our resources.

Why is the middle class struggling so much today? The middle class always struggles in the sense that the people in the middle class would like more than they have. So do the people at the bottom and the top. If we all could be content with the small houses that people had in 1950 or even 1970, houses with fewer square feet, houses with fewer bathrooms, houses with fewer bedrooms, houses without an office or guest room, houses with modest kitchens and smaller dens and smaller televisions in those dens, then yes, we’d all have a lot less strife in our life. If the middle class were merely content with living as the upper middle class did in 1950, the middle class could relax and be content.

But relaxing and settling for less is not how most of us are made, rich or poor. The Talmud asks: who is wealthy? And the answer is: he who is content with his lot. Few reach that level, not because they are financial failures but rather because of their natures.

The same is true for how "busy" we are. Of course, we’re busy. Of course, we fill up our lives and schedules with more and more. Most of us don’t cut off the bottoms of our shoes and learn to play the flute. There isn’t enough time to go around. There are only 24 hours a day and we all die. We want to have as much life as we can.

The fact that we all feel busy and that we feel the pressure of financial issues has nothing to do with our economy and everything to do with our nature. Religion is a much better place to search for a cure for that ill than economic policy.

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{ 37 comments }

Hit The Bid March 23, 2006 at 9:15 pm

"people always want more than they have"…are you seriously making an argument based on penis envy?

Swimmy March 23, 2006 at 9:23 pm

It's no wonder that the world's most (in)famous socialist proclaimed religion to be the opiate of the masses.

I had a sociology professor my freshman year who taught, "Capitalism gives the freedom of choice. Socialism gives freedom from want."

I'll withhold comment.

johngaltline March 23, 2006 at 9:53 pm

"If the middle class were merely content with living as the upper middle class did in 1950, the middle class could relax and be content."

Give up the central A/C, the cellphones, the DVD, cable, diswasher, microwave oven. Buy a push-mower, string up a clothesline and trade your car for something without airbags and computers. Toss out the antibiotics in medicine cabinet, and get some coca cola syrup and milk of magnesia instead.

One family member could probably pay for it all with just 25, maybe as little as 20 hrs a week at work.

save_the_rustbelt March 23, 2006 at 9:58 pm

For a really intelligent discussion of our current economic transition and related issues Prof. Blinder's new article is quite enlightening.

Ray March 23, 2006 at 10:56 pm

Amazing how simple it seems to some, but how utterly difficult it is for so many to grasp.

I think Sowell wrote that in his "Basic Economics."

JohnDewey March 24, 2006 at 5:26 am

I agree with Professor Roberts that the middle class as a whole is much better off than 35 years ago. But perhaps those who are now complaining have seen a decline in their relative position, or maybe even in their absolute income level.

It seems to me that some groups are doing far better than others. Salaries for nurses and schoolteachers have finally reached levels of other professionals. At the same time, high-paying union jobs in manufacturing and construction are drying up. For me, that makes sense. The market should value skills of nurses and teachers far more than those of easily replaceable, semi-skilled factory workers. But I can understand why the latter are complaining and the former are not.

If a Democrat were in the White House, would the mainstream media still focus on the plight of blue collar workers? Or would they point to the gains that some groups such as women and minorities have achieved? I think we hear so much about the troubles of the middle calss because that message supports the liberal agenda.

Neal Phenes March 24, 2006 at 8:04 am

George Reisman just wrote a piece about Production vs. Consumption where he explained:

"In the nineteenth century, economists identified the fundamental problem of economic life as how to expand production. Implicitly or explicitly, they perceived the base both of economic activity and economic theory in the fact that man’s life and well-being depend on the production of wealth. Man’s nature makes him need wealth; his most elementary judgments make him desire it; the problem, they held, is to produce it. Economic theory, therefore, could take for granted the desire to consume, and focus on the ways and means by which production might be increased."

The essay analyzes the contra position of the Keynesians who focus on controlling (as if the actually could) consumption.

Half Sigma March 24, 2006 at 9:15 am

The high cost of houses right now puts an unfair burden on young people who don't own one and who don't have rich parents to help them buy one.

The housing problem could be fixed by relazing zoning law.

When I was a kid, my father bought a house with a job that didn't even require him to have a college education and my mother wasn't working.

Now I could never have afforded that same house when I was his age even though I had a graduate degree.

johngaltline March 24, 2006 at 9:30 am

Since that burden exists for the rich as well, it seems pretty fair to me.

I think you're confusing "unfair" with "the exclusion principle."

Randy March 24, 2006 at 9:35 am

"Desire is the very essence of man"

Baruch Spinoza

John Dewey March 24, 2006 at 10:10 am

Half Sigma,

I agree that land restrictions caused the affordability problem. But I don't think any groups was treated unfairly, unless we count Republicans living in a Smart Growth states.

Over at Wendell Cox's site, one can learn that decreasing affordability is correlated with Smart Growth restrictions:

http://tinyurl.com/g3zzd

A more recent study at his Demographia site shows that housing in many U.S. cities remains affordable:

http://tinyurl.com/kv4a3

Most of those affordable cities seem to be in Red States, which may be unattractive to liberals. But we don't want them moving in and screwing up things anyway.

Tom March 24, 2006 at 10:26 am

"The high cost of houses right now "

While this happens, home ownership reaches new record levels.

For Immediate Release
Office of the Press Secretary
March 15, 2004

The overall U.S. homeownership rate set a new record of 68.6% in the fourth quarter — its highest level ever. Since the President announced his initiative in June 2002, the Census estimates an increase of 1.53 million minority homeowners. In the fourth quarter of 2003, data was released showing that — for the first time ever — the majority of minority households are now homeowners. The minority homeownership rate set a new quarterly record of 50.6%, up 1.3 percentage points from the third quarter.

4th Q2005 up to 69% vs 1990 64%

Perry March 24, 2006 at 10:48 am

John,

For a MUCH better explanation of what zoning does to housing costs, read Glaeser and Gyorko's study on it. It suggests that housing costs should have some relation to the cost of building, but that in certain urban areas the ratio skews out of control mainly due to zoning and other regulations that artificially drive up the cost of building.

http://post.economics.harvard.edu/hier/2002papers/HIER1948.pdf#search='glaeser%20zoning'

Cox always seems to me like a status quo apologist to me. Sometimes driving at the right conclusions but for all the wrong reasons..

John Dewey March 24, 2006 at 10:49 am

Tom,

That is good news. It may be due to low interest rates and demographics. Middle-aged boomers are now more likely to own homes than when they were younger. The last of the boomers were only 26 years old in 1990. More than half were under 35.

Timothy March 24, 2006 at 10:56 am

There's a reason that Houston has over 5 million people and is still cheap to live in: practically no zoning laws.

John P. March 24, 2006 at 11:01 am

As the old saying goes, he would have what he hath not should do what he doth not.

John Dewey March 24, 2006 at 11:24 am

Timothy,

I'm sure Houston's lack of zoning was a factor. Does it explain all the cities that enjoy low cost housing? I'm not sure about zoning laws in the City of Dallas, but I know my suburban community and most others in North Texas do have restrictive laws. I've read that Fort Worth also strictly controls land use.

My brother builds houses in both Houston and Dallas suburbs. I think his prices for comparable houses are not too far apart. The red tape is a bigger headache for him in North Texas. But that's relative, of course. I doubt that he'd try to build homes in California or Oregon.

John Pertz March 24, 2006 at 11:53 am

I am still amazed that income inequality is not greater when one considers the absolutely abysmal state of public secondary education in this country. To violently commit the indigent to such a remarkably wretched process of socialization is a crime against humanity in my opinion. It is with great horror that I listen to such people, as the guests on that show, who fain concern for the underclass and on the other hand are unwilling to inspect their own faith and realize that the source of their complaint is their very own doctrine. This is the essence of a society made sick by politics.

Hit The Bid March 24, 2006 at 1:13 pm

Hyperbole=

"To violently commit the indigent to such a remarkably wretched process of socialization is a crime against humanity"

How is anyone supposed to take you seriously when you say that?

Furhter..I bet you think the central tenet of Buddism is every man for himself no?

Half Sigma March 24, 2006 at 1:41 pm

"March 15, 2004 The overall U.S. homeownership rate set a new record of 68.6% in the fourth quarter — its highest level ever."

Record ownership with record high prices probably indicates a bubble, which is good news for people who don't own a house because maybe it means the prices will go down. And very bad news for those who bought their first house at inflated high prices.

Whatever the case, young people who don't own anything are faced with much higher costs than their parents. And to make matters worse, students are graduating college with more debt than ever.

What has changed since? (1) Zoning restrictions increase the cost of housing; (2) cost of education has been rising at a rate faster than the rate of inflation for a long time. And Americans are overeducated with more people going to college than need to be there.

The end result is that baby boomers who bought a house a long time ago are in great shape while young people are screwed.

Dan March 24, 2006 at 1:42 pm

John Dewey writes: "Most of those affordable cities seem to be in Red States, which may be unattractive to liberals. But we don't want them moving in and screwing up things anyway."

The two most affordable areas are in the deep blue state of New York, Buffalo-Niagara (where I live) & Rochester NY. It's great telling recruits that we're located in the most affordable place in the country (about 1/6 the cost of the least affordable). Though of course I usually keep silent on the reason why we're so affordable: high property and income taxes, regulations and unionization drives reduces job growth and drives people away.

Dan

Jake Winship March 24, 2006 at 2:13 pm

Furhter..I bet you think the central tenet of Buddism is every man for himself no?

Of course – the monks used to chant it before they went into battle!

John Pertz March 24, 2006 at 3:06 pm

Hit the bid:

So you are saying that public schools in inner cities are functional?

Ok then I urge you to read these two definitions.

Rational-Consistent with or based on reason; logical

Religon-A cause, principle, or activity pursued with zeal or conscientious devotion.

I think the great majority of people would find you to be a person of faith rather than rationality if you answer yes to my first question.

Exactly what was hyperbolic about my post? Is it true that poor childeren are not given the option about whether or not they have to attend a poor performing public school. In the vast majority of cases they are not and are forced through threat of violence to be socialized by the state. Where am I deviating from the truth or beind absurd?

John Dewey March 24, 2006 at 3:31 pm

Half Sigma,

Are young people really worse off than their parents were 25 or 30 years ago? Perhaps your measures of housing affordability and education costs paint only a partial picture.

In 1980, the interest on my mortgage was 11%. The unemployment rate was 7.2%, and reached nearly 10.8% by 1982. In 1980 and 1981, gasoline prices, adjusted for inflation, were higher than today's levels. Inflation averaged 12% in those years. For those old enough or frugal enough to be investors, the combination of a decade of flat markets and raging inflation wiped out half our savings. I don't think we boomers had an easy environment when we started. Maybe the challenges were different, but the world wasn't handed to us.

rmark March 24, 2006 at 3:32 pm

Thoureau's "Walden", circa 1857, chapters 1 and 2, covers simple living quite nicely.

rmark March 24, 2006 at 3:48 pm

Note also Thoreua tended to cheat a little -meals out with friends, borrowed the land, etc. But, hey, he's the philosopher.

Hit The Bid March 24, 2006 at 4:02 pm

Pertz..failing public schools are a very complicated topic–ending the cycle of poverty and education are very linked I think and maybe if we cut some of the bloated military budget and put a real effort into shoring up the INFRASTRUCTURE for poor, inner city schools they could become a beacon of learning they once were…I just think its wrong to applaud the act of pulling bricks out from under the entire structure…public education is the right idea, we just need to better address the problems.

-(now might be the time for you to go with the old "don't throw money at the problem")

growing up as a poor black man in the south, my public school was tough but white flight didn't help. Now this version of "smart flight" is no help either.

Half Sigma March 24, 2006 at 4:53 pm

"Are young people really worse off than their parents were 25 or 30 years ago?… In 1980 [lots of economic indicators sucked]"

1980 was actually a great time to be graduating from college. The S&P 500 was at it's low point in March of 1980, and then began an historic 20 year run. Investors today will not have that kind of luck.

However, I was actually thinking of my parents who are much older, buying their house in 1968.

John Dewey March 24, 2006 at 5:46 pm

Half Sigma,

Hindsight is special, isn't it? One can simply observe 20 years of progress and proclaim "Wow! They surely were lucky to be starting out back then."

I can assure you that 1980 did not feel wonderful for U.S. workers. It was particularly difficult for my friends who were laid off in the next two years.

You are probably correct that the 1980 to 2000 boom will not be soon repeated. It wasn't luck that made those years great. I wouldn't be so arrogant as to call us the Greatest Generation, but we did make that boom happen. It wasn't just demographics. The challenge was to use all that unleashed computer power, all the newly discovered financial leverage, and all those innovative management ideas. It was kick the world in the butt time, and we came through.

IMO, whether the next 25 years resembles the past 25 depends on the generation behind the boomers. If they chicken out and hide behind a protectionist wall, the economy will stagnate.

I received my B.S. long before 1980, by the way. I used 1980-1982 to make my point because it was the economic low point for most boomers.

John Pertz March 24, 2006 at 6:18 pm

"public education is the right idea, we just need to better address the problems"

Public School or Private School, I could care less, they are just means to an end. All that you and I should be worrying about in this conversation is whether or not the poor have access to good education. The answer is a demonstrative and simple NO. Private schools have the right incentive structure. Public schools in Europe are very very functional. However, the type of reform that would be neccesary is impossible when you consider U.S style politics and the interests which they are beholden too. So with that suggestion out of the window the only reasonable solution is to abolish failing schools and replace them with either vouchers or charter schools. Sadly, the poor will keep falling behind due to the intrenched interests which ultimately derive their source of income from the failing of the childeren. I am talking about teachers unions and school boards.

Russell Nelson March 25, 2006 at 1:21 am

Hit the Bid: "public education is the right idea". No, it's not. The trouble with public education is that it's mandatory. The brain cannot learn when it is under stress; there is no way to make imprisonment unstressful. In theory and in practice, public education cannot be reformed without changing its basic premise. And as soon as you make public education optional for the students, you break down its raisin d'ried grape.

Fazeer March 25, 2006 at 12:10 pm

I think it is quite normal for people to desire more than what they actually have. It is the choice of your society not to put limits on income inequality (by limiting redistribution) and this gives people the incentive to try to move up an extended ladder. In Scandinavia, on the other hand, where 50% of income earned is taxed, personal debt is quite low (and so are personal aspirations), because there is much reliance on the state for the provision of many goods and services (health, education, and even housing). But I doubt many Americans would like such a setting, although Scandinavians are very proud of their social contract.
I like in the small, little known island of Mauritius, and we have a similar problem, on which I have written something:
http://fazeer.wordpress.com/2006/02/25/social-comparison/

Slocum March 25, 2006 at 2:43 pm

"When I was a kid, my father bought a house with a job that didn't even require him to have a college education and my mother wasn't working."

"Now I could never have afforded that same house when I was his age even though I had a graduate degree."

But that phenomenon applies to particular locations, not the country as a whole. Of course there are places where housing prices have risen much more rapidly than household incomes, but there are vast regions of the country where that is not the case at all.

Overall, compared to the 1960s, a greater percentage of Americans own their own homes AND the homes they own are, on average, much larger and more luxurious AND the average family is smaller so the number of sq feet per person has grown even faster than the houses themselves. See, for example:

http://www.prb.org/AmeristatTemplate.cfm?Section=MarriageandFamily&template=/ContentManagement/ContentDisplay.cfm&ContentID=8289

Tom March 27, 2006 at 9:36 am

"Record ownership with record high prices probably indicates a bubble,"

High prices may indicate a bubble (though only in some communities), but record ownership would indicate housing is affordable.

Half Sigma March 27, 2006 at 12:23 pm

"homes they own are, on average, much larger and more luxurious "

You can compare the EXACT SAME HOUSE over the course of 35 years, the price has gone up and up even though the house in question has become older and older.

And people may say "but prices have hardly gone up much in Wyoming" which is doesn't say much because hardly anyone lives in Wyoming.

The most populated places in the country like California, Florida, the big cities in the northeast, those places have seen very big house inflation and that accounts for the bulk of U.S. population.

John Dewey March 27, 2006 at 1:04 pm

I don't know, Half Sigma. I'm not sure the bulk of the population lives in places where housing prices have skyrocketed.

Texas has a larger population than New York or Florida, but housing prices only increased 7% in Dallas last year, and 8% in Houston. That's still higher than inflation, but only because the state lagged the rest of the nation for a few years and is now catching up. My house north of Dallas has only risen 15% in seven years, and that's fairly typical.

Other populous areas have not been hit with huge price increases. Ohio is the 7th largest state in population, but housing prices there have been flat. Prices in Minneapolis-St Paul were only up 4.5% last year. Kansas City, Omaha, and Tulsa may not be exciting places, but housing prices there are very reasonable and not increasing rapidly.

All housing in the eastern states has not risen to stratospheric levels. The median price in both Syracuse and Rochester is $112K. In Pittsburgh it's only $114K. Philadelphia is a little higher at $215K, but I think that's still in the range of many two-income families living there.

Median housing prices, with 2005 growth, can be found at:

http://tinyurl.com/7akrf

Scott March 27, 2006 at 6:21 pm

Half Sigma, even the EXACT SAME HOUSE doesn't necessarily mean a direct comparison of housing costs, you're forgetting that the land it is on, not necessarily the phyical building, makes up a large portion of the value. In some (many) cities a house that was in a new community near the edge of a city many decades ago is now in a well established community close to downtown. It's also why the exact same physical structure in two different cities can have values that are hundreds of thousands of dollars different. So, to compare the house/land that your parents purchased many years ago to what their value is today isn't necessarily a direct comparison.

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