Writing in yesterday’s Wall Street Jounal, Phil Gramm and Michael Solon summarize the findings of the important new paper, in the current issue of the Southern Economic Journal, by Philip Armour, Richard V. Burkhauser, and Jeffrey Larrimore - a paper that exposes several fundamental problems with the Piketty-Saez data on income inequality in the United States.  Some slices from Gramm and Solon:

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

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Quotation of the Day…

by Don Boudreaux on November 13, 2014

in Hayek, Man of System

… is from page 147 of the 1976 Vol. II (“The Mirage of Social Justice”) of F.A. Hayek’s Law, Legislation, and Liberty:

It should be realized, however, that the ideals of socialism (or of ‘social justice’) which … prove so attractive, do not really offer a new moral but merely appeal to instincts inherited from an earlier type of society.  They are an atavism, a vain attempt to impose upon the Open Society the morals of the tribal society which, if it prevails, must not only destroy the Great Society but would also greatly threaten the survival of the large numbers to which some three hundred years of a market order have enabled mankind to grow.

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…. is from page 50 of the first edition of Harold Winter’s 2005 book, Trade-Offs:

Actually, it is easy to identify several benefits of smoking, the most important of which is that smokers enjoy doing it.  The more daunting task is to argue that there are no benefits to an activity that hundreds of millions of people throughout the world undertake daily.

Economists – and especially those who are influenced by the Austrian tradition – take quite seriously the subjectivity of human preferences.  Jones ought not presume that he is a better judge of what is ‘best’ for Smith than is Smith.  This reality does not mean that Smith is an especially good judge of what is good for himself.  Rather, it means that, under nearly all circumstances, Jones is so unlikely to be better than Smith at knowing what is ‘best’ for Smith that Jones has no business butting into Smith’s business if the only point of doing so is to improve Smith’s well-being.  The relative weights that Smith attaches to the various costs and benefits of some activity (say, smoking) and the different variables that Smith regards as relevant costs and benefits of that activity likely differ from the relative weights that Jones attaches to those various costs and benefits and from the set of effects that Jones regards as relevant costs and benefits.

In short, people should mind their own business.

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Russ Roberts on Adam Smith

by Don Boudreaux on November 11, 2014

in Adam Smith, Civil Society, Video

In this quarter-hour-long video, Russ sits down with my former student – and Cato’s Director of Multimedia – Caleb Brown to discuss Russ’s latest book, How Adam Smith Can Change Your Life.

See also here.

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Quotation of the Day…

by Don Boudreaux on November 11, 2014

in Civil Society, Seen and Unseen

… is from page 46 of my colleague Tyler Cowen’s 2007 book, Discover Your Inner Economist:

One of the least-heralded virtues of capitalism is how it blends and melds different kinds and mixes of rewards and penalties.  Capitalism is not just dollars, dollars, and more dollars.  It is also the best system for mobilizing intrinsic motivations towards the greater good of mankind. And that includes allowing people a sense of control.

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Coase Theorem In Action

by Don Boudreaux on November 11, 2014

in Civil Society, Cooperation, Video

One way to deal with life’s annoyances is to poke a gun in the annoying person’s face and order him or her to do as you (rather than as he or she) pleases – or, what is the same thing, to outsource your gun-pointing and diktating to a specialist in that field.  Another, completely different way is peaceful commerce.  (HT Jon Murphy)

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Asking Again an Obvious Question

by Don Boudreaux on November 10, 2014

in Other People's Money, Politics

Here’s a letter to the Washington Post:

Your report “Left struggled to move voters with Koch attacks and other big-money messages” (Nov. 10) prompts a question: why are the people who clamor most loudly to get other people’s money out of politics also the ones who clamor most loudly to get politics into other people’s money?

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Quotation of the Day…

by Don Boudreaux on November 10, 2014

in Hubris and humility, Reality Is Not Optional

… is from page 16 of Angus Deaton’s 2013 book, The Great Escape:

The need to do something tends to trump the need to understand what needs to be done.

Yes.  And typically, in my view, an understanding of what needs to be done reveals that, in fact, there’s nothing that government can do to ‘solve’ the problem at hand.  The existence of a problem – which frequently is simply the reality of unavoidable trade-offs – does not imply the existence of a ‘solution.’

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Bryan Caplan remembers Gordon Tullock.

Richard Ebeling explains why Israel Kirzner should win a Nobel Prize in Economics.  (HT Pete Boettke)

Norbert Michel destroys some myths about financial-market regulation and deregulation.

Writing in Time, Nick Gillespie reflects on the GOP’s electoral victory in 2014…. while writing in the Washington Post, George Will reflects on the Democrats’ hope to retain the White House in 2016.

My Mercatus Center colleague Veronique de Rugy tells a spooky tale of special-interest politics.

Bart Hinkle highlights some instances of government waste.

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The Mystery of the Mundane

by Don Boudreaux on November 10, 2014

in Everyday Life, Seen and Unseen

I quote, with her kind permission, Mikayla Novak‘s e-mail to me of this morning; Mikayla is a Senior Fellow with Australia’s excellent Institute of Public Affairs (links added):

Your piece reminded me of my time at MPS [Mont Pelerin Society meetings in] Prague 2012, when I asked the taxi driver taking me to the hotel about life under communism and the benefits of the post-communism economy.

I asked the driver what has been the most advantageous thing about the end of communism in former Czechoslovakia. His reply, “I can buy any brand of yoghurt I want!”

This struck me as a most profound answer, not only because it lent great weight to the importance of economic freedom in people’s lives but because it gave even greater power to what we often refer to as “the mystery of the mundane.”

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