Let's Go Googling

by Russ Roberts on October 10, 2006

in Data, Standard of Living

In the comments to this recent post, there’s a thoughtful debate among Cafe Hayek readers about the state of our standard of living. One reader, Joan, makes the following argument:

The fact that we are having a discussion about whether or not we are
better off is proof the the economy has not been performing well. In
1980 no one questioned we were better off than in 1950, that 1950 was
better than 1920 or 1920 was better than 1890.

There have been some interesting responses to Joan’s claim, but I want to make a different point.

It is very difficult to know from casual observation how the overall economy is performing or what is happening to inequality or to the standard of living of the average American over time. When unemployment was 25%, as it was in 1933, I suspect most people had an idea of how bad things were. But when unemploment is 4.5% and the economy is growing, your casual observations are inevitably tainted by your circle of friends, your neighborhood, your city, your region. You have no idea how people are doing overall. You may not even have an honest assessment of your own situation relative to your past or your parents.

The level of inequality in the national economy is not a palpable, perceivable, noticeable phenomenon. Changes in that level are particularly difficult to notice or perceive.
The only reason people think inequality is growing is because of
articles in newspapers reporting on government data and research using
that data. Those data are flawed but more importantly, how those numbers are interpreted are flawed.

For example, the claims being made about the amount of money going
to the top 1% or top 10% often implicitly assume that the people in the
top 1% are the same people a decade later. So if the share going to the
top 1% climbs, the implication is that the top 1% are corralling more
of the money for themselves using the Fed or tax policy or brainwaves
or crushing unions or some other nefarious strategy.

But they are
not the same people. If the economy is growing dramatically and if
there are opportunities for entrepreneurs, a few people are going to be
much much better off than they were before. They will be catapulted
from the bottom or the middle of the distribution into the top 1% or
the top .1%. When the founders of Google created Google they became
extremely wealthy. But they were only able to do that by pleasing
others, by getting others to use their service. Before Google was
successful, they weren’t in the top 1%. They were students, first, then
struggling entrepreneurs. They were catapulted into the top 1% out of
nowhere.

Because of their success and the success of others like them, they
displaced other in the top 1%. But by doing so, they didn’t make any
one poorer. The resulting "inequality" has no meaning, really, at least
not in the sense in which the worriers about inequality mean the term.
It’s not like they suddenly got more money and people at the bottom got
less. Another way to say it is that people at the bottom got a smaller
share of a bigger pie. So they can easily be better off. Isn’t that what we really care about? Improving people’s lives?

Why would we ever be alarmed or concerned about this kind of growth in so-called inequality?

And we would never be aware of it in the absence of misinterpreted
government data. And that would be good. We wouldn’t be missing
anything.

Instead of being focused on outcomes, outcomes that are prone to
misinterpretation and manipulation by self-interested parties, we
should focus on the the fairness of the rules. If you go to college and
study something serious, do you do well in America? Do the rich put up
barriers to success that prevent hard-working, intelligent non-rich
people from succeeding? Instead of showing me government statistics,
show me rules or institutions that prevent people from escaping poverty.

One alleged such institutional change is the decline in unions. But the
decline in unions wasn’t the result of a conspiracy. It’s an endogenous
change caused by the transformation in the kind of jobs we do.
Unionization has been declining steadily during times of growing
measured inequality and times of a more stable distribution of income.
In most American occupations, the lack of unions means nothing. Workers
don’t need unions to keep their wages high. So show me something else
that rich Americans are doing to keep the poor, poor. I don’t see it.

Those who complain about inequality fail to understand that the level
of inequality in America is an emergent phenomenon. It is not intended
or designed by anyone. It is the result of millions of decisions made
by millions of Americans. "Fixing" it is not a matter of tweaking this
policy or that. And if I am right about the importance of entrepreneurs
and others who benefit from a growing economy, growing "inequality" is the result of a growing economy rather than a social problem.

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