"Poverty is a choice"

That seems to be the conclusion of Charles Murray, a scholar of the libertarian American Enterprise Institute and author of the controversial book, Coming Apart which looks at the growing divide among white Americans from 1960 to 1910.

After asserting in the Bell Curve a book he co-authored with Richard Hernstein that it was their inherent lack of intelligence or IQ more precisely that reduced African Americans to the bottom of the social and economic ladder, he now claims that poverty among white Americans is a result of the decline of civic culture, a result of changing preferences rather than structural policy imbalances.

Back in 1994, the unknown civil rights lawyer Barrack Obama, as a guest commentator at NPR spoke plainly regarding Murray's work then, that

He's interested in pushing a very particular policy agenda ... With one finger out to the political wind, Mr. Murray has apparently decided that white America is ready for a return to good old-fashioned racism so long as it's artfully packaged and can admit for exceptions like Colin Powell.

It doesn't seem as though there is a role for government either in closing the divide between upper middle class white Americans and their blue collar counterparts. According to Murray, the cure for this malady is for the wealthy "to drop their nonjudgmentalism and start preaching what they're practicing" (a case for cultural imperialism?). Perhaps, in Murray's policy brief, they deserve in exchange for exercising such noblesse oblige or civic duty tax cuts on top of the ones they already receive (?).

The person who could model this kind of behavior the best among the candidates is Mitt Romney. The introduction of the book comes at an opportune time as he recently stumbled over the issue of income inequality and as many independents within the party (blue collar teaparty Republicans) cast a suspicious eye at the 'Washington/Wall Street establishment' that he seems to represent. The 'non-Romney' candidates, Newt Gingrich, Rick Santorum and Ron Paul have all railed against these 'fat cats' and sought to capture the protest vote.

It turns out, these so-called elites share many of the religious and cultural preferences as the party base according to Murray (upper middle class whites more frequently go to church, marry and stay married for longer). Of course the recent research on happiness and income explains why that may be. In the end, Murray may have tried to establish a false causation here.

Given the stagnation of income and productivity in America, the 'choice' faced by ordinary Americans isn't the same as the one they faced in the 1950s when GDP and employment were rising. Consequently, people don't 'choose' to become poor because they have lost their work ethos; the lack of a work ethos comes as a result of people being poor or unemployed for an extended period of time.

Does anyone deserve to be poor?

The Nobel winning economist, Gary Becker, whose work on human capital I deeply admire writes a piece called Deserving and Undeserving Inequality in the blog which he shares with Richard Posner. In it he distinguishes between good inequality (deserved) and bad inequality (undeserved) saying

The great majority of people in different cultures do not object to someone who has made lots of money when they have superior abilities and talents, and they work hard at producing what are considered useful goods or services.

The meritocratic society with upward and downward social mobility would be in Becker’s view the most acceptable form. In this just society, the cream always rises to the top. He cites actors like Tom Hanks and Jennifer Anniston, entrepreneurs like Bill Gates and Steve Jobs, and skilled professionals like transplant surgeons who have grown rich by applying their exemplary talents and skills.

In contrast, Becker poses the problem society seems to have with hedge fund managers who make use of arbitrage (momentary bargains unnoticed by the market) to make huge sums of money. He lumps them together with speculators, Russian oligarchs and monopolists who enrich themselves through unfair, uncompetitive means (the latter two through government fiat).

Becker of course uses human capital theory as his framework for addressing this issue. Under its framework, individuals who acquire knowledge and skill through education and training (one cannot gain it any other way as it cannot be inherited or passed on) deservedly earn private returns in the form of higher incomes over the remainder of their working lives.

A meritocratic society should in Becker’s view reward the investments made by individuals in themselves and not rely on some other criteria. Elitism, the polar opposite of meritocracy rewards individuals for investing in other things (social standing or being raised on the right side of the tracks, marrying into the right family, etc).

It all sounds rational and justified, which is why Becker says “the great majority of people in different cultures” accept the legitimacy of a certain form of inequality. The wisdom of crowds is evident, until we start to consider the actual “merit” of the argument.

Economic, behavioral and neuro scientific research has demonstrated for instance that when it comes to employment, so many other factors aside from talent and intelligence determine the outcome of a hire/fire decision. Tall, handsome, Caucasian males for instance tend to earn more than their peers of equal and (as labor economist Daniel Hamermesh demonstrates) of even higher educational attainments.

If you are a plump woman working alongside office waifs, then you are more likely to be laid off during an economic downturn compared to your skinny female counterparts. In fact, studies in the US and replicated in other parts of the world show that job applicants could even be screened out simply because their names sound ethnically diverse (those with names such as ‘Tamika’ for instance got less callbacks from recruiters compared to those who had typically Anglo-Saxxon names like ‘Sally’).

The ‘good-bad’ dichotomy looks awefully strained at this point.

Reflecting on this a bit, I begin to wonder, how much of our lot in life really depends on our own actions, and how much of it depends on chance. In fact, beyond just the narrow hedonic enjoyment of earning more money, if the pursuit of happiness were to be the ultimate measure of success, then we could find an even bigger divide opening up.

About 50% of our ability to have a pleasant life depends on our genes, which is not very modifiable, according to psychologist Martin Seligman (other studies suggest this could be as much as 60%). This would not be good for those who weren’t born with the right disposition.  Of course, for those who are disadvantaged in this way, they can still influence their level of happiness by focusing on the residual aspects of life that can be modified to produce happiness, a mere 15-20%. That is if they can afford to pay for therapy which again disadvantages those who happen to be residing at the bottom of the economic ladder.

As James Kwak who recently re-read John Rawls’ A theory of Justice, has said

well-educated, hard-working people did not deserve to make more money than other people, at least not as a normative (as opposed to a utilitarian) matter.

Kwak quotes the passage from Rawls’ treatise to support his claim

[The liberal conception of the second principle of justice] still permits the distribution of wealth and income to be determined by the natural distribution of abilities and talents. Within the limits allowed by the background arrangements, distributive shares are decided by the outcome of the natural lottery; and this outcome is arbitrary from a moral perspective. There is no more reason to permit the distribution of income and wealth to be settled by the distribution of natural assets than by historical and social fortune. . . . Even the willingness to make an effort, to try, and so to be deserving in the ordinary sense is itself dependent upon happy family and social circumstances.

At work, I am currently involved in developing and implementing a pilot project that seeks to help socially disadvantaged groups improve their learning and employment outcomes through a range of interventions. Social disadvantage comes in many forms. The issues encountered by our case officers usually involve multiple and complex needs such as drug and alcohol abuse, inter-generational poverty, lack of economic opportunity where they live, sexual abuse, abandonment, domestic violence, discrimination, disability both physical and mental.

Unfortunately much of Australian mainstream society sees these individuals as “bludgers” or people who leech off the tax and welfare system. The mainstream of society cannot really see why they can’t just find work in a country where there are skills shortages in many industries. I must admit, I used to subscribe to this way of thinking too.

This is reflective of meritocratic aspirations Aussies share with their American and British counterparts. A study by Dan Ariely and featured recently by PBS finance correspondent Paul Solman demonstrates this. Respondents were given three pie charts resembling the spread of wealth in unnamed countries. The first showed an equal distribution of wealth. The second showed a slight advantage to the two top quintiles. The last showed a very disproportionate concentration of wealth to the top 40%.

They were asked to specify which country they thought the US represented. Most went for the pie chart that showed a slight skewing of wealth to the upper classes. They were unaware that it was actually the third chart which they thought represented a third world country which represented the US. And yet, as the piece by Solman suggests, there is a lack of appetite among voters for tax reforms that would correct such a lopsided distribution of income and wealth.

At least in affluent countries, there is a system for attending to marginal groups. In less developed countries, the problem of addressing poverty, inequality and social disadvantage is harder because of scarce resources. Even in countries like China and India which have lifted millions out of poverty, this mostly depends on where people live. Those who reside along coastal provinces in China tend to have higher incomes than those that live in the interior whose incomes are closer to some countries in Sub-Saharan Africa.

In a middle income country such as the Philippines that has experienced growth but not a lot of change in its distribution of wealth, the experience has been that such growth has not been inclusive. Not only is economic opportunity not evenly distributed in the population, but this distribution itself seems to be perpetuated by laws and policies of successive governments.

I say this because the sorts of reforms that have been proposed to address disadvantage, namely tax reform, land reform, and reproductive health have been held back or denied the kind of support, moral, political, and financial, required for them to be implemented correctly. There are two kinds of attitudes that might be responsible for this:

1. Self serving bias is the tendency to claim more responsibility for successes than failures. Thus, those who are well-off tend to think they deserve their successes.
2. Just world phenomonon is the tendency for people to believe that the world is just and therefore people "get what they deserve." So those who hold this belief look at poverty and social inequality and think that those who suffer from them deserve to be where they are.

These forms of ‘cognitive bias’ may lead us to misapprehend the problem of social disadvantage and inequality to the point that we may even claim self-righteously that certain outcomes are just when in fact they are not. I certainly have come to reconsider my views on this. What about you? 

London Burning

No matter how hard he tries, David Cameron's attempts to evade responsibility not just for the conditions that may have caused or contributed to the eruption of riots in London, but also the inadequacy of the response to it, it is becoming apparent that not only politicians, but the public at large are losing faith with his reforms and the Big Society it promises.

Cameron of course, beset by calls from the Labor Opposition to reconsider cuts to the police budget laid the blame on parents and the so-called broken society. The rioting was criminality run wild, not a form of political protest against an unjust social order. The police response was slow and tactically wrong, he intoned during parliamentary debates.

Unfortunately for him, the police did not take too kindly to this characterization of events, and the public appear to back them instead of the political leaders. The seeming disconnection of the politicians who were on holiday, the PM in Tuscany, his deputy in France and the London Lord Mayor Boris Johnson in the United States, when the burning of London raged surely did not help build credibility for them.

In this situation, the importance not only of empathy but also a desire to ease suffering on the part of ordinary citizens could have gone a long way.

Austerity and the End of Multiculturalism in Britain

Toby Helm, Matthew Taylor and Rowena Davis report in the Guardian that

David Cameron was accused of playing into the hands of rightwing extremists today as he delivered a controversial speech on the failings of multiculturalism within hours of one of the biggest anti-Islam rallies ever staged in Britain.

A coordinated attack or just a slip up? Salma Yaqoob seems to think the latter. She writes also in the Guardian

I like to think Cameron was genuine in his words when he visited my ward. And that somehow his mind was hijacked by the right wing of his party. I hope for all our sakes he wins it back. Because while areas like Sparkbrook are not perfect, they are succeeding...

 Cameron once had a vision. It was a positive and genuinely uniting and inclusive one that gained him admirers across the political spectrum. He should return to it.

 The "Big Society" the name coined by PM Cameron to couch his vision for Britain to counter the idea of "Big Government" attached to Labor which has resulted in huge fiscal deficits was coincidentally his way of re-branding the Conservative Party in Britain and make them electable. Margaret Thatcher had previously declared, "there is no such thing as society." This was a complete reversal of that way of thinking. Just as Tony Blair had reinvented the Labor brand, so was Cameron.

It now appears that the "Big Society" that the PM had in mind is not so big after all having some strict preconditions for entry. As Yaqoob notes, this is a total reversal of the "face" he put on when he was aspiring to become Britain's next PM. Does the PM's statement unmask the fact that the new Tory brand is just a repackaging of the mean old Thatcherite ideology?

While all this was taking place, a fourth quarter contraction in GDP was hitting the headlines. Dean Baker commenting on the Great British Austerity Experiment notes that

(t)he fourth-quarter GDP report showing that the economy went into reverse and shrank at a 2.0% annual rate is exactly the sort of warning that many of us here were expecting. Weather-related factors may have slowed growth some, but you would have to do some serious violence to the data to paint a positive picture. Of course, the austerity in the UK is just beginning. There will likely be much worse pain to come, with a real possibility that the country will experience a double-dip recession, or at least a prolonged period of stagnation.

 With the pain of economic stagnation possibly setting in, is this the end of multiculturalism in Britain?

Economists Behaving Irrationally (or Economists Gone Wild!)

Brad de Long considers it "the greatest improvement in economics in my lifetime."

He is referring to the Journal of Economic Perspectives' recent decision to allow open access to its articles on the web. I tend to agree with him on this and hope that other serious academic journals follow suit.

Anyway, I took the opportunity to scan the contents of its archives to find articles that discuss a relatively new perspective in the economics profession, and that is how individuals or agents do not act rationally most of the time.

I came upon this one by Liran Einav and Leeat Yariv entitled What's in a surname? The effects of surname initials on academic success. It finds that among leading economics departments in the US, the supposed pre-eminent exemplars of rational decision-making,

Faculty with earlier surname initials are significantly more likely to receive tenure (...) are significantly more likely to become fellows of the Econometric Society, and, to a lesser extent, are more likely to receive the Clark Medal and the Nobel Prize. These statistically significant differences remain the same even after we control for country of origin, ethnicity, religion or departmental fixed effects.

There you have it, evidence that economists behave irrationally. The authors go on to state

We suspect the “alphabetical discrimination” reported in this paper is linked to the norm in the economics profession prescribing alphabetical ordering of credits on coauthored publications. As a test, we replicate our analysis for faculty in the top 35 U.S. psychology departments, for which coauthorships are not normatively ordered alphabetically. We find no relationship between alphabetical placement and tenure status in psychology.

Based on this research, not only do economists behave irrationally, their actions are based on others behaving the same way(!) as shown by their careful selection of co-authors and their increasing unwillingness to follow the alphabetical ordering norm. 

I suppose the core principle of economics about people responding to incentives still holds; whether such behaviour is based on rational or irrational norms is quite another thing altogether.

Neighborhood Tipping Points: New Evidence

Bill Easterly in his blog previews one of his latest studies, which delves into the issue of racial composition of communities cited by Malcolm Gladwell in his book The Tipping Point in referrence to the work of Nobel Laureate Thomas Schelling to describe the phenomenon of “white flight” in racially integrated neighborhoods. For those of you who would demand a demonstration of how this famous model works, this video prepared by Tim Harford, a member of the Financial Times editorial board, should do the trick.

The key insight is that peer effects, aka herd mentality affects individuals who may not necessarily agree strongly with the views of those whose behaviour they are mimicking. So, in the case of neighborhoods with mixed racial composition, the first to leave under Schelling’s model are the ones with the strongest preference for racial homogeneity, followed by those with weaker preferences. This approaches a tipping point and leads to an equilibrium in which integrated neighborhoods become segregated.

The model would have some fascinating applications in areas of interest to human development specialists such as improving educational attainments. Given the same peer effects, a growth in the number of individuals with an above average level of educational attainment would lead to a tipping point for the broader population in its preference for higher education.

Easterly’s work has been quite contrarian in a number of ways. He has argued that the implementation of IMF stabilisation policy in developing states has not materially improved their situation (a case of “policy does not matter”) and that development assistance is actually counterproductive (a form of “dutch disease”) as exemplified here.

His work in this area is no exception. His findings are that homogenous “white” neighborhoods in the US are more unstable than mixed ones (there is a higher level of movement in and out of these neighborhoods). In other words, there is no evidence to back up the tipping point concept. He serves these findings with a caveat though: they are based on single period observations (multiple periods might produce different results).

The punchline that he provides is worth quoting:

Think twice and check for evidence before you accept popular stories like the Tipping Point.

That is good advice for those who are working in public policy in any area.

Pride and Prejudice

Imagine having to assess a stack of applications to fill an executive post in a large company. Apart from education, intelligence and experience, research suggests that socially-sensitive attributes such as weight, appearance and race, significantly come into play.

Eugene Caruso of the Chicago School of Business uses a method called conjoint analysis in proving that they do (market researchers use this method in approximating the added costs consumers are willing to pay for products with certain attributes). His research demonstrates that despite what we say, our actions tell a different story on our tendency to discriminate based on some socially-sensitive trait.

A relatively recent article appearing in the Journal of Political Economy by Kerwin Kofi Charles from the Harris School of Public Policy Studies and Jonathan Guryan from Chicago School of Business, estimates that about a quarter of the racial wage gap comes from discrimination. Marianne Bertrand of the Chicago School of Business and Sendhil Mullainathan of Harvard University also show that resumes with stereotypic white names get more interviews than those with black sounding ones.

All this makes the election of America’s first black president rather astounding. During the primaries it became apparent how his opponents were willing to exploit social prejudice by using his foreign sounding middle name and mixed racial ancestry against him. He weathered through these attacks and succeeded not by positioning himself as a candidate with an agenda for advancing the interests of the black community, but as a vehicle for bridging the American cultural divide.

On Australia Day 2009, reconciliation took a step further when, following an official apology to descendants of the stolen generation, when the honour of Australian of the Year went for the first time to an indigenous leader Mick Dodson.

Given that researchers can detect racial discrimination, and that it seems to evade our own conscious efforts, that despite these symbolic milestones, human societies have yet to get over the biases that have been transmitted down from previous generations.