Muddy thinking of Liberals

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The ideas and proposals of liberals very often reveal a serious lack of understanding of basic economic principles and mechanisms. Very often their conceptions and thinking is muddy. Consider the following from Thomas Sowell. Intellectuals and Society. pp. 50 - 56

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Typical of the mindset of many intellectuals was a book by Professor Andrew Hacker which referred to the trillions of dollars that become “the personal income of Americans” each year, and said: “Just how this money is apportioned will be the subject of this book.” But this money is not apportioned at all. It becomes income through an entirely different process.

The very phrase “income distribution” is tendentious. It starts the economic story in the middle, with a body of income or wealth existing somehow, leaving only the question as to how that income or wealth is to be distributed or “apportioned” as Professor Hacker puts it. In the real world, the situation is quite different. In a market economy, most people receive income as a result of what they produce, supplying other people with some goods or services that those people want, even if that service is only labor. Each recipient of these goods and services pays according to the value which that particular recipient puts on what is received, choosing among alternate suppliers to find the best combination of price and quality — both judged by the individual who is paying.

This mundane, utilitarian process is quite different from the vision of “income distribution” projected by those among the intelligentsia who invest that vision with moral angst. If there really were some pre-existing body of income or wealth, produced somehow — manna from heaven, as it were — there would of course be a moral question as to how large a share each member of society should receive. But wealth is produced. It does not just exist somehow. When millions of other individuals are paid according to how much what they produce is valued subjectively by millions of other individuals, it is not at all clear on what basis third parties could say that some goods or services are over-valued or under-valued, that cooking should be valued more or carpentry should be valued less, for example, much less that not working at all is not rewarded enough compared to working.

Nor is there anything mysterious in the fact that at least a thousand times as many people would pay to hear Pavarotti sing as would pay to hear the average person sing.

Where people are paid for what they produce, one person’s output can easily be worth a thousand times as much as another person’s output to those who are recipients of that output — if only because thousands more people are interested in receiving some products or services than are interested in receiving other products and services — or even the same product or service from someone else. For example, when Tiger Woods left the golf tournament circuit for several months because of an injury, television audiences for the final round of major tournaments declined by varying amounts, ranging up to 61 percent. That can translate into millions of dollars’ worth of advertising revenue, based on the number of television viewers.

The fact that one person’s productivity may be a thousand times as valuable as another’s does not mean that one person’s merit is a thousand times as great as another’s. Productivity and merit are very different things, though the two things are often confused with one another. Moreover, an individual’s productivity is affected by innumerable factors besides the efforts of that individual — being born with a great voice being an obvious example. Being raised in a particular home with a particular set of values and behavior patterns, living in a particular geographic or social environment, merely being born with a normal brain, rather than a brain damaged during the birth process, can make enormous differences in what a person is capable of producing.

More fundamentally, third parties are in no position to second-guess the felt value of someone’s productivity to someone else, and it is hard even to conceive how someone’s merit could be judged accurately by another human being who “never walked in his shoes.” An individual raised in terrible home conditions or terrible social conditions may be laudable for having become an average, decent citizen with average work skills as a shoe repairer, while someone raised with every advantage that money and social position can confer may be no more laudable for becoming an eminent brain surgeon. But that is wholly different from saying that repairing shoes is just as valuable to others as being able to repair maladies of the brain.

To say that merit may be the same is not to say that productivity is the same. Nor can we logically or morally ignore the discrepancy in the relative urgency of those who want their shoes repaired versus those in need of brain surgery. In other words, it is not a question of simply weighing the interest of one income recipient versus the interest of another income recipient, while ignoring the vastly larger number of other people whose well-being depends on what these individuals produce.

The poor as consumers

Although most people in the lower income brackets as of a given time do not remain there permanently, some people do. Moreover, particular neighborhoods may remain the homes of poor people for generations, no matter how many people from those neighborhoods move out to a better life as they move up from one income bracket to another.

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Low-income neighborhoods tend to have their own economic characteristics, regardless of who lives in them — one of the most salient of these characteristics being that prices tend to be higher there than in other neighborhoods. Intellectuals’ discussions of the fact that “the poor pay more” are often indignant indictments and condemnations of those who charge higher prices to people who can least afford to pay them. The causes of those high prices are implicitly assumed to originate with those who charge them, and in particular to be due to malign dispositions such as “greed”, “racism” and the like. Seldom is the possibility even mentioned, much less investigated, that whoever or whatever conveys high prices may not be the same as whoever or whatever causes those prices to be higher than in other neighborhoods.

Confusing conveyance with causation is at the heart of many intellectuals’ discussions of “social problems.” In many different contexts, prices often convey an underlying reality without being the cause of that reality.

Among the underlying realities in many low-income neighborhoods are higher crime rates, vandalism, and violence, as well as a lack of the economic prerequisites for the economies of scale which enable big chain stores to charge lower prices and still make profits on higher rates of inventory turnover in affluent neighborhoods. But such mundane considerations do not present intellectuals with either an opportunity to display their special kind of knowledge or an opportunity to display their presumptions of superior virtue by condemning others. If stores in low-income neighborhoods were in fact making higher rates of profit on their investments, it would be hard to explain why national store chains and many other businesses avoid locating in such places, which are often painfully lacking in many businesses that are common in more affluent neighborhoods.

The underlying costs of providing financial services to people in low-income neighborhoods are likewise ignored by much, if not most, of the intelligentsia. Instead, the high rates of interest charged on personal loans to the poor are enough to set off orgies of denunciation and demands for government intervention to put an end to “exploitative” and “unconscionable” interest rates. Here verbal virtuosity is often used by stating interest rates in annual percentage terms, when in fact loans made in low-income neighborhoods are often made for a matter of weeks, or even days, to meet some exigency of the moment. The sums of money lent are usually a few hundred dollars, lent for a few weeks, with interest charges of about $15 per $100 lent. That works out to annual interest rates in the hundreds — the kind of statistics that produce sensations in the media and in politics.

The costs behind such charges are seldom, if ever, investigated by the intelligentsia, so-called “consumer advocates” or by others in the business of creating sensations and denouncing businesses that they know little or nothing about. The economic consequences of government intervention to limit the annual interest rate can be seen in a number of states where such limits have been imposed. After Oregon imposed a limit of 36 percent annual interest, three-quarters of its “payday loan” businesses closed down. Nor is it hard to see why — if one bothers to look at facts. At a 36 percent limit on the annual interest rate, the $15 interest charged for every $100 lent would be reduced to less than $1.50 for a loan payable in two weeks — an amount not likely to cover the cost of processing the loan, much less the risks of making the loan.

As for the low income borrower, supposedly the reason for the concern of the moral elites, denying the borrower the $100 needed to meet some exigency must be weighed against the $15 paid for getting the money to meet that exigency. Why the trade-off decision should be forcibly removed by law from the person most knowledgeable about the situation, as well as most affected by it, and transferred to third parties far removed in specific knowledge and general circumstances, is a question that is seldom answered or even asked. With intellectuals who consider themselves knowledgeable, as well as compassionate, it would seldom occur to them to regard themselves as interfering with things of which they are very ignorant — and doing so at costs imposed on people far less fortunate than themselves.

A New York Times editorial, for example, denounced the payday loan providers’ “triple digit annual rates, milking people’s desperation” and “profiteering with the cloak of capitalist virtue.” It described a 36 percent interest rate ceiling as something needed to prevent “the egregious exploitation of payday loans.” How much good it may have done the New York Times to say such things tells us nothing about whether it did any good for the poor to have one of their already limited options taken off the table.

None of this, however, is peculiar to the New York Times or to payday loans. Any number of ways in which poor people adjust to their poverty are shocking to people who have more money and more options — as well as more presumptions. The housing that the poor live in, for example, has long offended more affluent third party observers, who have often led political crusades to tear down “substandard” housing, removing the “blight” (and the poor) from their sight. This usually leaves the poor with no better options than before, unless forcing them to pay more for upscale housing than they wanted — and which they had the option to pay for before — is somehow considered to be better. Reducing people’s already limited options can hardly be considered to be making them better off, unless you are convinced of your own superior wisdom and virtue. But as someone has pointed out, a fool can put on his coat better than a wise man can put it on for him.

Nothing is easier than coming up with housing standards reflecting what upscale third party “reformers” would like to see, at no cost to themselves. Such housing reformers have destroyed whole neighborhoods as “blighted,” over the years chasing the poor from one neighborhood to another. In San Francisco, the net effect of such zealotry has been to chase huge numbers of blacks completely out of the city. By the early twenty-first century, the black population of San Francisco was half of what it had been in 1970. None of this is peculiar to blacks or to San Francisco, or even to housing reformers or critics of payday loans. These are just some of the ways in which the anointed can feel good about themselves, while leaving havoc in their wake.

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2 Jan 2024