Poor-Rich Gap and Declining Marginal Utility

September 18, 2011

I have been thinking about the declining marginal utility of money and the shrinking difference between being rich and being poor. There is much consternation over the ever widening income gap between the richest and the poorest Americans. However, there is a shrinking difference between the subjective value of what that money buys. Most understand that new technologies and products are expensive luxury items at first and then get cheaper. As a matter of fact they continue to get cheaper and cheaper until practically everybody can afford some version of the new item. This process actually takes place very quickly in the U.S. and the more competition allowed within an industry, the faster that adjustment will take place.

Take a look at this chart from Steve Horowitz comparing ’03 and ’05 in ownership of certain commodities.

% Households with: Poor 2003 Rich 2003 2003
Poor 2005 Rich 2005 2005
Washing machine 67.0 94.8 27.8 68.7 95.2 26.5 -1.3
Clothes dryer 58.5 93.6 35.1 61.2 94.3 33.1 -2.0
Dishwasher 33.9 86.1 52.2 36.7 88.4 51.7 -0.5
Refrigerator 98.2 99.6 1.4 98.5 99.8 1.3 -0.1
Freezer 25.4 44 18.6 25.1 43.7 18.6  0.0
Stove 97.1 99.6 2.5 97.0 99.7 2.7  0.2
Microwave 88.7 98.6 9.9 91.2 98.8 7.6 -2.3
Color TV 96.8 99.5 2.7 97.4 99.5 2.1 -0.6
VCR 75.4 97.7 22.3 83.6 98.5 14.9 -7.4
Personal computer 36.0 87.9 51.9 42.4 92.7 50.3 -1.6
Telephone 87.3 98.6 11.3 79.8 97.1 17.3  6.0
Air conditioner 77.7 90.3 12.6 78.8 89.1 10.3 -2.3
Cellular Telephone 34.7 88.6 53.9 48.3 92.4 44.1 -9.8

In almost every category gains to the poor have outpaced gains made by the rich. As Steve points out in his post it is easy to complain that because the rich are already at practically 100% ownership in most of these categories they have nowhere to go but down, but that’s the point of declining marginal utility. It does no good for a rich fridge owner to own 2 fridges all they can do is own higher quality fridges. The move from having no fridge to any fridge is huge. The move from the worst fridge to the state of the art fridge isn’t as big.

In the past being poor meant not having access to certain experiences and commodities that the rich had: televisions, washing machines, cell phones, European vacations. Every year there are fewer and fewer things that the rich can have but the poor can’t. As long as you define your commodities as this graph does, i.e. TV not plasma TV, 40″+ TV, etc. then there are not that many items that are what might be called rich-only. Yes, the rich have Iphones but everybody has a cell phone. The difference between rich and poor becomes more and more qualitative rather than quantitative.

And all this is in the face of a very real increase in income inequality. The poor are actually poorer than ever, in monetary terms, relative to the rich. But it’s not clear that this is as big a deal as it seems. To quote Steve:

“[The rich] end up being first adopters of new technologies, such as color TVs years ago or cellphones today… The more that the distance between the poor and the rich becomes about who gets the latest technology first and less about who has basic comforts and enough to eat, I’d say inequality is shrinking.”


Institutionalize Adversarial Media Bias

September 1, 2011

Megan Mcardle deserves reading on how journalistic bias works. Take-home:

While it’s undoubtedly true that some reporters consciously repress facts which threaten their ideological priors, I don’t think that’s really the issue in most cases.  What bias does–in science, in media, in any situation where information is gathered–is affect what questions you ask.

Later, Megan

Journalistic ethics, a committment to truth, and so forth, are supposed to compensate for the fact that yes indeed, 95% of my peers vote Democratic in almost every national election.  But intention is no substitute for that fiery, almost angry “that can’t be right” reaction which drives us to dredge for more information… But we don’t investigate things that everyone knows–reporters do not start off each new story by checking if gravity is still in operation.  The more things that everyone knows, the more unnoticed holes there will be in stories.  And there is no one without blind spots–the best you can achieve is getting together a bunch of conscientious people who all have different blind spots. For all the laments over partisan media, there are actually ways in which it is a check on this sort of blindness.

The adversarial legal system is premised on exactly this truth: that countervailing biases will, on balance, produce better results than a single investigator attempting to be unbiased. In court, lawyers are paid to be as biased as possible. We’re not quite there yet in the newsmedia, but we keep getting closer to a divided press; advocates paid to be biased. This is a good thing, treated as a disaster.

Employers Don’t Test

August 31, 2011

In principle, I don’t have a problem with evaluating public school teachers by the test scores of their students. Compared to evaluating nearly all of them without any objective criteria (virtually all teachers evaluated by peers and principles are deemed satisfactory), test-based evaluation is an incredibly impartial and fair device. But, as many opponents have pointed out, testing is a rather blunt instrument. Even the “value-added” methodology (comparing students’ incoming test scores to year-end improvement) is likely to lead to dismissal of good, alongside the bad, teachers. Test evaluations fluctuate so wildly as too be almost random. Neither do they flush out the very worst teachers, who are causing real damage.

The idea of test-based evaluation works on the notion, a notion I agree with, that public schools should be run more like private companies, if we expect them to create value the way profit-driven companies do. However, the test-based approach is, I think, using the wrong model for imitation.

If a school is like a business, the reasoning goes, the students are the product. If the teacher (worker) adds value to the product, then the company (society) will profit. The best way to tell if the workers are adding value is to test the products to see if they are well produced. Finally, keep good workers, fire bad workers, and definitely fire workers who subtract value. I’ll call this the “assembly line” model. The thing is, if there are problems on the assembly line it is a relatively straightforward task to root out the issue and identify the cause.

Outside of actual product manufacturers, almost nobody works in an environment like this. Teachers included. Productivity in large systems is difficult to measure and predict. Most employees contribute in nebulous ways to company productivity. Often, employees themselves don’t understand just how they add value and profit even when they actually contribute quite a lot.

How does the private sector deal with this kind of uncertainty? Manager evaluations. Companies with employees whose value is unclear rely primarily on exactly what public schools already rely on: Subjective evaluations.

Private companies aren’t exclusively wedded to manager evaluations the way schools are. They sometimes bring in outside firms to evaluate their efficiency (a trend I would be heartened to see in schools) and they do have profit as a measuring stick. But ultimately, most decisions are up to a supervisor, just as they are in schools. This strategy doesn’t work very well for schools for a whole host of reason from lack of defined purpose (e.g. profit) to bureaucratic constraints (e.g. labor contracts), but not because they don’t emulate private companies enough when they hire and fire. Because they do.

Reverse Engineering Climate Arguments

August 29, 2011

Today, in Washington D.C. Bill McKibben, environmental author and activist, is leading a group of protesters onto the White House lawn to be arrested. They are specifically protesting the Keystone XL pipeline and, to hear McKibben on NPR, they are enthusiastic about their impending arrests.

While the protests will no doubt be peaceful, the persuasive tack seems, to me, misguided. If what climate change activists want is to convince climate skeptics, who they see as anti-scientific and ant-intellectual, then they would be well advised to abandon their appeals to science, and certainly demonstrations like rallies and protests, for greater variety and more conservative rhetoric.

Conservatives are not convinced by appeals to science and peaceful protests. Progressives can often be found pointing this out en masse. This works well for pointing out the differences between left and right, but not for changing minds. Perhaps it is because conservatives do not “own” methods like protest and perhaps they have honest concerns about scientific ideological bias. Doesn’t matter. It is easier to provide targeted evidence than to convince an opponent on what kind of evidence he should accept. Conservatives are more likely to appeal to moral and philosophical reasoning (more intuitive, less empirical), free market indication (they believe in the price system of information), and a raft of other ideological soft spots.

In the political realm brinksmanship is understandable and expected. There is a political purpose to making the other side look foolish. But on both a personal and ideological level it makes little sense to isolate dissenters. It would seem to do little to advance the idea of climate change and only problematize and slow its mainstream acceptance.

Progressives would be well advised to (1) try a greater variety of strategies and (2) try to target the ones that appeal to those who disagree with you. If scientific evidence isn’t the kind that will convince your opponents what will? Again, this strategy does not allow you to signal your allegiance to science and intellectualism, or allow you associate yourself with elites you admire. Quite the opposite. I am suggesting you have the discussion in conservative terms, using conservative ideas, and conservative rhetorical strategies.

Conservatives believe in nationalism, appeal to that with an argument that we will be left behind economically if we don’t develop green technology. You will get some push back, engage it. Conservatives listen to to moral arguments. Conservatives believe that markets provide solutions. This seems to me to be the best area for persuasion since conservatives have the same sort of unblinking faith in markets that progressives have in science. Predictions markets like this one, which climate skeptics set up themselves and then lost, provide the kind of evidence that convinces the right and adds believers to the fold…

…if that is what you’re after.