Wednesday, April 28, 2010
Thursday, April 22, 2010
The income gap, as it’s generally considered, refers to the perceived distance between the middle class and the upper class of America in terms of what they earn (how one defines these alleged classes is an entertaining exercise in subjectivity). The impression, amidst many in the United States, is that there is a vast “working class” and “middle class” who are fraternally symbiotic in their race to pay the bills, while resting atop their blood, sweat, and character exist the rich, parasitic elite. The rich elite are somehow removed from humanity on account of their wealth, and they somehow exist as a separate society on the other side of the income gap, safely pent up in their gated communities, and using the poor, dried-up homeless as their preferred source of firewood. As the story goes, the rich get richer and the poor get poorer, and thus this fabled chasm grows more expansive year by year.
Where does this impression originate, I wonder? Likely, the vision of the wealthy as somehow “above” or “apart” from the peasantry has its roots in the monarchies, serfdoms, and aristocracies of the past. In those days, there indeed was a gap between very definable classes. Usually, this separation was legally upheld by the governments, who kept the plebeians in their place. Also likely is that Marxist ideology – which ironically arose just as class boundaries were becoming lenient and flexible during the industrial revolution – nurtured this centuries-old conception of the rich versus the poor. Fast forward to modern America and these ideas still hold firm amidst a poorly-educated populace, augmented by politicians all too eager to elicit support from those voting masses who can’t wait to get their hands on the bourgeoisie’s medical insurance.
So to back up the assertion that the income gap is a myth, it needs to be shown that no such gap exists. Income, while clearly not distributed equally (the idea that income is “distributed” is another fallacy), is in fact acquired by individuals along a relatively smooth curve. One need only review the U.S. Census Bureau’s HINC table, which lists the number of households receiving various levels of income, to see the inaccuracy of the fable. Here is 2006 as an example, but any year has a similar pattern:
From this graph, you can see a smooth slope in income distribution. Notice that the spike above $100k is a result of the change in x-axis incrementation. The Census Bureau does not seem to provide a breakdown of the top two tiers, yet it should be quite clear that the pattern of distributional proportion does not change significantly along the x-axis. Readers are also welcome to examine the Census data above $200k, for it follows the same downward slope.
I challenge the reader to determine where one class ends, and the other begins. I would assert that any such categorization would be fairly arbitrary and not based on any obvious statistical grouping. The percent of households at any income level slops gradually downward to zero (zero percentage of households earn $100 billion in a fiscal year). So, where is the gap?
If there were an income gap, then you would see a large distributional divide somewhere between what is considered “middle class” and what is considered “upper class.” For example, if we consider households making $150k per year as “upper class,” then we would expect a void to exist so that a large group was earning under $100k and a large group was earning over $150k per year, but very few were earning incomes between these two levels. That would be an income gap, and that would signify that there was something structurally askew. No such gap exists.
The percentage of households earning income all along the income curve is quite remarkably very smooth. There is no vast distance between the “haves” and the “have-nots.” At any given level of income, there is a percentage of households which is roughly equivalent proportionally to the percentage of households on either side of it (though always sloping downwards). This signifies, quite clearly, that there are not two or three classes in America, as politicians, the media, and “academics” would have us believe. Rather, there are an essentially infinite number of classes, which is to say that “class” is a meaningless term. There is the “class” making $10-$20k per year, the class making $20-$30k per year, the class making $30-$40k per year, all the way up the income chain.
Critics will cite something like, “well, the top 1% makes 25% of the income.” This phenomenon does not represent a “gap,” for if you then examine the top 2%, then the top 3%, then 4%, then 5% and so on, you will see a relatively uniform curve of incomes. If one gets angry at the steepness of this curve, one likely has great hatred toward compound interest, which is akin to throwing a tantrum after learning that 3+3 tends to equal 6, or that water tends to run downhill. Regardless of one’s anger, it would be folly to legislate that water should run down hill more slowly.
Also, there is no structurally imposed “jump” in income levels that an individual must overcome to switch classes. There is no point at which one says, “alright, to get from my current socio-economic class to the next one, I’ll have to overcome a huge systemic obstacle. I’ll have to somehow jump the gap.” An individual may look out at the wealthy neighbor nearby and say, “That is where I want to be, he is clearly in the class above my own,” but this individual needs to remember that there are countless individuals at every income level between himself and the rich man in the house he envies.
Classes do not exist in America, in any definable way, because between every two classes exists another class of similar proportion. Those who would divide and categorize Americans into distinct classes are not only committing a statistical and empirical error, they are sowing the seeds for unwarranted tension between neighbors. Interestingly, these tend to be the same people brandishing “Peace” stickers on their cars.
The consequences of this fabricated divisiveness, while good for the politician who can leverage it, harms the cohesion of American society, turning every community into a jealous antagonist, bent on forcing closed a divide that doesn’t exist. Let us banish this term, “income gap,” to the magical fields of children’s fables, where it can frolic and dance with the unicorns and, over tea, discuss with the fairies their ordeals at the airport. Article page
Wednesday, April 14, 2010
The United States has a growing debt problem. It also has a problem measuring the same. The statistic normally used is the “Debt to GDP” ratio, referring to the amount of debt versus the nation’s sum total of transactions. As of Q1 2010, the US debt to GDP ratio was 87%. However, the Debt to GDP ratio should be ignored, because it is meaningless.
It is worse than meaningless, because it disguises the true problem and lulls us into a false sense of solvency. Why is Debt to GDP a poor metric? Because the debt must be paid off with the income from taxation. It cannot be paid off through some relative percentage of economic expenditure. This is an important distinction. The debt is not serviced from a portion of the economy’s activity as a whole; it is serviced from tax revenues. As such, the ability to repay debt is based on tax revenues, not on the GDP.
It cannot even be said that a growing GDP will necessarily assist in the payment of debt. Consider that when the Government spends money it increases the GDP side of the ratio, thereby helping to minimize the appearance of its own debt! In other words, if Washington spent four gazillion dollars, our Debt to GDP would only be about 100% (roughly 4 gazillion in debt and roughly 4 gazillion in GDP). This is only 13 percentage points higher than our current level. Greece could actually decrease its Debt to GDP ratio by spending 4 gazillion Euros – from its current 125% to a much more manageable 100%. Debt to GDP is a highly deceptive metric.
“Debt to Tax Revenue” is a much better statistic for examining government debt (it is also much more accurately calculated). If the Government owes $1 trillion (wouldn’t that be nice?) and takes in half a trillion in tax revenue, then the Debt to Tax Revenue ratio would be 2:1, or 200%. Using all tax revenue to service the debt, it could be paid in 2 years (if, of course, all other government services were canceled for those two years).
Using this much more honest metric, how does the US fare? There exists currently about $12.7 trillion in national debt (this doesn’t include state debt nor unfunded future liabilities). The 2008 tax receipts were $2.5 trillion (2009 data is not yet available). Thus, the Debt to Tax Revenue ratio is roughly 12.7:2.5, or 508%. Put another way, it would take 5.08 years’ worth of taxes to pay off the debt assuming every single federal program was cancelled during that time. Not even the Washington accountants administering the debt payments would receive a paycheck. Soldiers in Iraq would receive neither pay nor ammo nor a plane ticket home. Everything would have to stop, and it would still take over half a decade to pay the debt. This is akin to an individual spending absolutely nothing for 5 years in order to pay off his credit cards. Within a few weeks he’d be dead of starvation.
Let’s compare with Greece. Greece currently has $405 billion in national debt, with the CIA estimating its most recent tax revenue at $108 billion. Greece therefore has a Debt to Revenue ratio of about 375%. Take California, the state everyone knows is already bankrupt – it had a debt in 2008 of $122 billion and 2008 revenue of $151 billion, creating a Debt to Revenue ratio of only 81%. Relative to tax revenue, both Greece and California are significantly better off than the US Federal Government. Yet, that’s not the impression people get when observing erroneous Debt to GDP figures.
Spending more of one’s money does not make one more credit worthy, yet that absurdity is propagated when we use the nation’s Debt to GDP ratio as our gauge of solvency. If every citizen went out and bought a car this year, the GDP would skyrocket, and suddenly the Government’s debt ratio would fall. Does anyone really believe that a better fiscal situation would have been attained? No. In fact, a much worse situation would exist, because Americans would be then less able to pay for other expenses – such as government debt – after purchasing the new car.
In short, we are currently measuring sovereign debt with an arguably deceitful statistic. Whether one believes that the Federal Government should increase or decrease spending, we should all agree that dishonest accounting is not a policy of prudence.
Debt to GDP examines debt based on a nation’s volume of transactions. It therefore suggests that debt burdens can be reduced to the extent we consume. How does that make any sense? Conversely, Debt to Tax Revenue examines debt based on a government’s ability to pay it back.
Which metric should the sincere accountant use? Which metric is more deserving of our attention?Article page