Sunday, 30 October 2016

Work Out What You Want To Say And Find A Fact That Sounds Like You're Saying It

Open any left wing paper and on a weekly basis you'll be overrun with stories of societal injustice where we are told the income gap between rich and poor is disastrous, that the rich get rich at the poor's expense, that real incomes have stagnated for the majority, and that the poor have been getting poorer.

All of those claims are untrue, but the left wing newspapers are regularly providing us with skewed or bogus statistics to show why they think they are true. A puzzling question in scenarios like this is to consider whether these distortions are cases of economic naïveté or cases of mendacity where they try to be creative with the facts in order to get people to believe their fabrications.

It's probably a bit of both, and as such I will tell you where I think they are going wrong. One category error here is in reading too much into statistics without trying to understand how those statistics actually relate to the dynamical nature of human beings.

Take the statistics we often see relating to income inequality. The first thing to point out is that those statistics begin with a false premise, because there are actually no static income categories - people move around in different categories depending on where they are in their life stage (age being a big determiner of where you are in your career). Secondly, different statistical groups have different numbers of people, which also skews the data.

For example, it is totally possible for the richest people to receive a higher share of the UK's overall income yet still see their personal incomes fall. This is not a contradiction, it is simply the case that some people were in the top 1% and then dropped out, and others increased their income at the expensive of those in the top quintile. Equally, it is possible that the share of the income going to those in the lowest quintile can decline even though those in that group see an increase in their own personal incomes.  

To highlight another case where statistics deceive, let's take for example a claim I saw in the Guardian this week about households not feeling the benefit of economic growth. The writer made this claim by asserting that there has only been about a 6% increase in household incomes in the past 40 years. As you can imagine, the people writing in the comments section were outraged.

The statistic though is deceptive because household income is a misleading way to gather data. What you should look at instead is real income per person, where you'll find it has risen by about 51% (or something close to that last I checked). How can both those stats be true?

Well, what's been happening in those 40 years is that average household numbers have dwindled in terms of individuals in a household, whereas number of households has increased as more people have bought their own place and moved out of the family home. The increase in the average number of persons per household is caused by increased economic growth. That is, people move out and become home owners because they can now afford to do so. Complaints about household stagnation are really complaints about individuals doing better.

Being a regular Guardian reader, but not on their side in most economic arguments, I have to find myself wondering why you will never see a Guardian writer talking about the positive parts to the human growth story. When they wanted to talk about Labour's term in office in 1997 to 2010 they would usually use per capita income statistics to talk of its successes; whereas when they wanted to criticise Cameron and Osborne they would usually use household income statistics when they wanted to depict failure.

Not only is it the case that increases in real income enables more people to live on their own, and no longer with their parents, or house sharing - what we have is a statistic that actually results from increased real incomes but yet can be used to look like stagnation when describing households. A reduction in the number of people living in a household will bring down average household income when better off individual start their own household.

If the Guardian printed something along those lines their piece wouldn't technically be inaccurate, but it would be wholly misleading. Suppose there are, as I think there are in America, approximately 40 million people living in households whose income is in the bottom 20% and 65 million living in households in the top 20%, measuring income inequality is going to mislead.

If different groups contain different numbers of people, a stat about income inequality concerning the bottom and top percentages is deceptive. Moreover, in a changing time when people get paid more for their work, those that either don't work or work part time will fall behind those that work full time. But it goes deeper, because there are other factors that contribute to income inequality that are not merely society's injustices, they are simply the result of billions of individual choices that people have made.

Remember even St Paul in his letter to the Galatians declared that we do actually reap what we sow as well - not that we should hold back from caring for and helping those less well off than us, but that actually society is not a melting pot of injustices, but rather it is an aggregate of millions of people reaping what they sow in terms of millions of life decisions made every year of their lives.

As I've said before in a previous blog or two, the biggest determiner of how well people are doing is work. A household that has two workers in it will usually be doing better than a household with one. A household with no workers will be doing worse still. Last time I fact checked, the top 20% of households have four times as many workers as those in the bottom 20%, and more than five times more in full-time work. That is going to make a huge difference - and it is one of the most disingenuous things we do to say this doesn't matter.

Alas, Ken Loach, the director of very enjoyable films such as Kes, Riff-Raff and Raining Stones, treated us to a litany of these basic category errors on Question Time this Thursday - demonstrating to the entire country that while he's a good movie-maker, he is basically clueless about how economies work, and blind to how individual choices eventuate in the societal outcomes we see.

Income inequality is caused by people contributing different amounts to society, and that is reflected in the wage differentials. The left are always going on about how unfair society is because there is so much income inequality. But even by the time we reach puberty we ought to have worked out that this is the opposite of the truth. A society that has unequal income distributions based on having unequal societal contributions is hardly one that ought to be called unfair - it is the playing out of what Paul said in Galatians.

Yes in spite of this, the very notion that inequality is caused by some contributing a great deal to society and some producing considerably less is scarcely mentioned, which is surprising because every person reading this will know of people to whom both examples apply.

Those in the bottom 20% of earnings not only have far fewer people in work, they have fewer skills and less education with which to contribute as much as the top earners to society. The bottom 20% will have far fewer university graduates and people with college qualifications than the top 20%, and these are important statistics that demonstrate not an unjust society, but one that is a lot more just than many care to acknowledge.

Moreover, that's not quite the end of it either, because as well as the Guardian's and Ken Loach's mendacity in skewing the narrative, income inequality stats are quite naturally misleading in other ways too. For example, they omit the welfare received by those in the bottom 20%, which amounts to substantial benefits to which the recipients contribute nothing. In fact, it may shock you to know, but the bottom 50% of earners in society pay only about 5% of the total tax generated.

Last time I checked, transfers from the government to the welfare recipient accounted for around 78% of resources for people in the lowest quintile. Not only does this mean we live in a society in which the rich heavily subsidise the poor; it means that the inequality statistics that are always appearing in the social commentary of the left are based on just 22% of the lower quintile's income - their earned income, where the rest constitutes handouts.

Another popular way to underestimate growth and overestimate inflations is to refer to a price index to make your case - the most popular one being the consumer price index (CPI). It's easy to use the consumer price index to focus more heavily on the lower prices of the recent past (thus flagging price increases) and focuses less heavily on the higher prices of the recent past (thus overlooking price reductions).

When you go to Tesco and come away happy that your bananas and your cereal and your flaxseed were all cheaper than last month, do you honestly think that those reductions came from nowhere? Had you bought grapes and tinned fruit and fresh fish you might well have found that you had paid more than last month. Only a fool would focus on the goods they happen to flag as being reduced and naturally assume that Tesco’s net price index was lower than last month. 

It’s another easy way to create a false impression by only focusing on one aspect of the situation. You might be perturbed by price rises if I only told you about the increase in price in train and bus fares, newspaper obituaries, postage stamps, and chocolate bars over the past 25 years. Less so if I only told you about mobile phones, computers, media players, and most household electrical goods (televisions, fridges, freezers, microwaves, washing machines, cookers, etc).

That is what the consumer price index does – it focuses most heavily on the things we used to get cheaper and overlooks all the things we used to pay more for. It is impossible to present a meaningful value index that encapsulates all elements and is without bias. Even a totalised economic price index would still be devoid of many factors that are related to good consumption – pleasure, utility, happiness, and well-being are four examples.

Moreover, as will be pointed out in the early chapters of many economic text books, analysis of inflation must also factor in changes in products that are concomitant with price increases. The most obvious example is cars, which are more expensive these days, but also full of features that would have been considered a luxury a few decades ago (I remember as a young boy being fascinated by a neighbour's new Ford Sierra because it had electric windows).

Think back to when cars were first prototyped and think about the vast progressions since those early days. Not only have cars become safer every year, they have improved their speed, their efficiency, their technology and their luxury, as well coming equipped with alarms, air conditioning, satellite navigation systems and CD players (these days it's actually now an iPhone played through the car stereo with an auxiliary port).

Cars that used to be luxury are now standard and affordable for the majority, and this applies to laptops, mobile phones, video cameras and similar such things. Also someone of today has access to all the world's knowledge, access to the most up to date research, countless public services benefits that were once inaccessible, and communication with the world's most developed countries.

Most of the taxes paid are by people with an above average income, and many with a below average income are receiving transfers of wealth from the top downwards. Statistics about income greatly exaggerate the differences in standards of living, particularly so nowadays. Lefties have a tendency to exaggerate what Jack has and understate was Jill has, to construct fallacies of injustice.

I think a lot of the problem is that people tend to assume that when people get rich they do so at the expense of others getting rich. But this is to fall for the fixed pie fallacy. Think about it; if having billionaires was detrimental to the rest of the population then America would be one of the poorest countries in the world, as it has over 500 billionaires.

But the wealth of the richest doesn't occur at the expense of the poor - just the opposite - it helps create wealth for others in the population. In fact, last I read in Forbes the number of billionaires and millionaires in the world began to decline, which indicates that more people are seeing their real incomes go up. Just over 50% of American households have incomes of $50,000 and higher, whereas fifty years ago the number of households with the equivalent purchasing power was less than half that.

A lot of people who are statistically recorded as being not well off in terms of income are actually some of the most well off people in the land - wives of high-earning husbands, pensioners who have retired, but who own their own home and have assets that do not count as income; university graduates who are going to go on to earn a good living, young adults who are still in the high income family home, and young professionals at the start of their career who've yet to start earning what their qualifications and training will see them go on to earn.

All of the above will fall under the Guardian's statistics as being low earners, because statistics don't differentiate between the people who are going to have low incomes for much of their lives and those that have not or will not. Many of the people whose incomes are in the bottom two quintiles in the early parts of their working life will go on to be in the top two quintiles in the next 10 to 20 years of their working life.

For this reason, income inequality measured at any given time is not representative of income inequality over people's lifetimes. Nor is it representative when huge cash transfers from the government are omitted, nor the large taxes paid by the higher earners, nor the wealth of pensioners and the future wealth of the young but well educated post-graduates. The rhetoric from the media-celebrity left is all a bit of a mess really, and unless more people in the country stop encouraging them, wise-up and learn some of the basics, they won't grow out of it anytime soon. 

In failing to admit these truths, the left are letting down the people whose causes they are purporting to champion. While they assert that the poor are victims of injustice and that through no fault of their own society has placed roadblocks in front of their path to success, they gloss over many of the actual reasons why some do less well than others.

In other words, in many cases (although not all cases, of course) what those falling behind need is not so much a character embellishment but a reality check and a few home truths about the decisions they've made. I don't mean we should turn into a society that is judgemental towards those who've made a series of bad life decisions - but to do as the left does and not only fail to acknowledge these things but also pretend they are not there by writing their own hackneyed, distorted version of the reality, is helping nobody.