This sounds strange, but household income figures can mislead. Higher per capita income can decrease household income.  As economist Thomas Sowell notes, “Increased real income per person enables more people to live in their own separate dwelling units, instead of with parents, roommates, or strangers in a rooming house.”

Per capita income statistics aren’t perfect, either. The city or county could pass more zoning laws that inflate housing prices. These exclude poor people, and hence per capita income increases.

If you want to more accurately compare 1999 with 2009 incomes, look at income mobility, which compares the same flesh-and-blood people each time. For example, the Tax Foundation reports that “nearly 60 percent of households in the bottom income quintile in 1999 were in a higher quintile in 2007.”

But income mobility doesn’t tell the whole story either, as it neglects the value of employee benefits. “Health insurance costs relative to payroll increased 34 percent between 1996 and 2005,” write economists from the RAND Corporation.

A version of this article was printed in the Daily Camera on October 2, 2010.

Thanks to Linda Gorman for the link to the RAND study.

For further reading, I recommend Thomas Sowell’s article “Income Confusion.” He discusses the issue in dept, including income inequality, in his book Economic Facts and Fallacies.

Why does college cost so much?

There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge. …

[An alternative to funding college education for the poor] would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.

That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts — the latter being equivalent to issuing corporate bonds.

Last week I read Thomas Sowell’s three-part essay on this. I found the above ideas intriguing. Here are some other parts that summarize his ideas:

Part I:

The general thrust of human interest stories about people with economic problems, whether they are college students or people faced with mortgage foreclosures, is that the government ought to come to their rescue, presumably because the government has so much money and these individuals have so little.

Like most “deep pockets,” however, the government’s deep pockets come from vast numbers of people with much shallower pockets. In many cases, the average taxpayer has lower income than the people on whom the government lavishes its financial favors. …

Prices force people to economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost.

Without market prices that convey the real costs of resources denied to alternative users, people waste. …

Whether someone goes to college at all, what kind of college, and whether they remain on campus to do postgraduate work, are all questions about how much of the resources that other people want are to be taken away and used by those on whom we have arbitrarily focused in human interest stories.

This is not just a question about robbing Peter to pay Paul. The whole society’s standard of living is lower when resources are shifted from higher valued uses to lower valued uses and wasted by those who are subsidized or otherwise allowed to pay less. …

How many people would go to college if they had to pay the real cost of all the resources taken from other parts of the economy? Probably a lot fewer people.

Moreover, when paying their own money, there would probably not be nearly as many people parting with hard cash to study feel-good subjects with rap sessions instead of serious study.

There would probably be fewer people lingering on campus for the social scene or as a refuge from adult responsibilities in the real world.

Part II:

…education is not a Good Thing categorically in unlimited amounts, for people of all levels of ability, interest and willingness to work.

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Nor is there any obvious way to set an arbitrary limit. These are questions that no given individual can answer for a whole society.

The most we can do is confront individuals with the costs that their choices are imposing on others who want the same resources for other purposes, and are willing to pay for those resources.

Those who cannot bring themselves to face the tough choices that reality presents often seek escape to some kind of fairy godmother — the government or, more realistically, the taxpayers.

When the idea of conscripting taxpayers to play the role of fairy godmother for some arbitrarily selected favorites of the intelligentsia, “the poor” are often used as human shields behind which to advance toward their goal.

What will happen to the poor if there are no government subsidies for college?

If this argument is meant seriously, rather than being simply a political talking point, then there can always be some means test used to decide who qualifies as poor and then subsidize just those people — rather than the vastly larger number of other claimants for government largesse who advance toward the national treasury, using the poor as human shields.

Another option would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.

That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts — the latter being equivalent to issuing corporate bonds.

Not only would this get the conscripted taxpayers out of the picture, it would also make it unnecessary for parents to go into hock to put their children through college.

Still, the financially poorest student in the land could get money to go to college, with a good academic record and a promising career from which to pay dividends on the lender’s investment.

More fundamentally, it would confront the prospective college student with the full costs of all the resources required for a college education.

Part III

Why does college cost so much?

There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge. …

In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is “unaffordable,” why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference? …

The criteria used by most accrediting agencies are based on inputs — essentially spending — rather than results for students.

Competition among academic institutions therefore seldom takes the form of lowering their costs of operation, in order to lower tuition. The incentives are all the other way.

Competition often takes the form of offering more upscale amenities — posh lounges, bowling alleys, wi-fi, finer dorms.

None of this means better education. But, so long as the customers keep buying it — with government help — the colleges will keep selling it.

Today Yahoo News reported the this Live Science article:

Conservatives Happier Than Liberals

Individuals with conservative ideologies are happier than liberal-leaners, and new research pinpoints the reason: Conservatives rationalize social and economic inequalities.

Regardless of marital status, income or church attendance, right-wing individuals reported greater life satisfaction and well-being than left-wingers, the new study found. Conservatives also scored highest on measures of rationalization, which gauge a person’s tendency to justify, or explain away, inequalities.

The rationalization measure included statements such as: “It is not really that big a problem if some people have more of a chance in life than others,” and “This country would be better off if we worried less about how equal people are.”

Upon reading this I smelled something fishy. My question, which reveals that I’ve learned something from Thomas Sowell, was: Why did the study assume that inequality was something to be explained? Why not ask people who expect equality (however defined) to be the “normal” state of affairs to explain why they think it’s normal?

In his essay, Race, Culture, and Equality, Thomas Sowell starts off listing several historical instances of inequality. He then asks

Why are there such disparities? In some cases, we can trace the reasons, but in other cases we cannot. A more fundamental question, however, is: Why should anyone have ever expected equality in the first place? …

Given similar educational disparities among other groups in other countries– disparities in both the quantity and quality of education, as well as in fields of specialization– why should anyone expect equal outcomes in incomes or occupations? …

Groups also differ demographically. It is not uncommon to find some groups with median ages a decade younger than the median ages of other groups, and differences of two decades are not unknown. …

It makes sense to blame human beings for biased rules and standards. But who is to be blamed for circumstances that are the results of a confluence of all sorts of conditions of the past and present, interacting in ways that are hard to specify and virtually impossible to disentangle?

The whole essay is worth reading.

If you had just one hour to learn essential, basic economics, listening to this talk would be the way to do it. The core topic is the reasons for income variation across people and over time. It is organized around refuting the claim that rich people need to keep poor people down. Along the way, he takes on (although not by name) the four main biases that Bryan [Caplan] has found among non-economists: anti-foreign bias, make-work bias, anti-market bias, and pessimistic bias.”

On that note, it’s time I quote one of my favorite passages from Thomas Sowell’s The Vision of the Anointed (pp.211-213).

Despite the voluminous and often fervent literature on ‘income distribution,’ the cold fact is that most income is not distributed; It is earned. People paying each other for goods and services generate income….

To say that ‘wealth is so unfairly distributed in America,’ as Ronald Dworkin does, is grossly misleading when most wealth in the United States is not distributed at all. People create it, earn it, save it, and spend it.

If one believes that income and wealth should not originate as they do now, but should instead be distributed as largess from some central point, then that argument should be made openly, plainly, and honestly. But to talk as if we currently have a certain distribution result A which should be changed to distribution result B is to misstate the issue and disguise a radical institutional change as simple adjustment of preferences. The word ‘distribution’ can of course be used in more than one sense….

Those who criticize the existing ‘distribution’ of income in the United States are criticizing the statistical results of systemic processes….for the economic positions of given individuals vary greatly within a relatively few years. What is really being said is that numbers don’t look right to the anointed–and that this is what matters, that all the myriad purposes of the millions of human beings who are transacting with one another in the marketplace must be subordinated to the goal of presenting a certain statistical tableau to anointed observers.

To question the ‘fairness’ or other index of validity of the existing statistics growing out of voluntary economic transactions is to question whether those who spent their own money to buy what they wanted from other people have a right to do so. To say that a shoe shine boy earns ‘too little’ or a surgeon ‘too much’ is to say that third parties should have the right to preempt the decisions of those who elected to spend their money on shoe shines or surgery. To say that ‘society’ should decide how much it values various goods and services is to say that individual decisions on these matters should be superseded by collective decisions made by political surrogates. But to say this openly would require some persuasive reasons why collective decisions are better than individual decisions and why third parties are better judges than those who are making their own trade-offs at their own expense.

“Again, no one would seriously entertain such an arrogant and presumptuous goal, if presented openly, plainly, and honestly….

(Excerpts are available here.)

Update, Sept. 2010:

See also Sowell’s article “Income Confusion.” It begins:

Anyone who follows the media has probably heard many times that the rich are getting richer, the poor are getting poorer, and incomes of the population in general are stagnating. Moreover, those who say such things can produce many statistics, including data from the Census Bureau, which seem to indicate that.

On the other hand, income tax data recently released by the Internal Revenue Service seem to show the exact opposite: People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005.

The top one percent — “the rich” who are supposed to be monopolizing the money, according to the left — saw their incomes decline by a whopping 26 percent.

Meanwhile, the average taxpayers’ real income increased by 24 percent between 1996 and 2005.

Sowell goes into more detail in his books Economics Facts and Fallacies and Intellectuals and Society.