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Getting emotional about economics

Written By: - Date published: 9:27 am, February 14th, 2008 - 64 comments
Categories: articles - Tags:

Michael Shermer of the LA Times asks:

“Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000?”

Somewhat surprisingly you might think, it turns out that most people chose the first option. They’d rather earn twice as much as others even though that means earning half as much as they otherwise could have.

Read on to find out why…

64 comments on “Getting emotional about economics”

  1. It looks like the psychology of economic wellbeing is the inverse of the politics of envy. It’s not so much keeping up with the Joneses as trying to be relatively better off compared to your peers, who may not necessarily be your immediate neighbours.
    The choice is posed in only monetary terms, they could have asked which way you’d be happier.

  2. BeShakey 2

    And of course this is a big issue for the left. It suggests that people may get upset if the government steps in to reduce the gap between (relatively) rich and poor, even if the rich end up better off in absolute terms.

  3. Lance 3

    When this question was first put to me, the note “Assume for a moment that prices would stay the same” was left off. That would lead me to choose the second option.

    Without that, I wasn’t looking at the dollar figure, I was assuming that in a society where everyone was earning $250,000 and I was earning $100,000 I would be “poor” (struggle to sustain myself – I assumed pricing would be adjusted so that someone on $250,000 was on a “comfortable” wage/salary), but if in a society where everyone was earning $25,000 and I was earning $50,000 – I would be “rich” (easily sustain myself, buy toys and give to charity).

    But with prices staying the same, I’d rather earn $100,000 while others earned $250,000. Anything else is just mind bogglingly stupid.

  4. djp 4

    agree with lance, the first thing that came to mind was “what is the effect to prices?”.

    which brings us back to the minimum wage debate… “what effect does it have on prices?”

  5. Camryn 5

    Labour party policy is spot on then. Let’s all have less, as long as we each get some special presents (e.g. WFF) to feel like winners.

  6. Tane 6

    Labour party policy is spot on then. Let’s all have less…

    Wages are rising faster under Labour than they did under National.

    National and the wage gap

  7. Camryn – that’s the stupidest thing I’ve ever seen you write. What do you think should be done to increase incomes?

  8. BeShakey 8

    Yawn, as they say, God abhors a vacuum, so I guess it was invitable that someone would step up to fill the gap left by D4J.

    djp and Lance: there have been studies where the prices have been held steady, or where prices are irrelevant and people still prefer to be less well off in absolute terms, if they are better off in relative terms.

  9. mike 9

    “Wages are rising faster under Labour than they did under National”

    Just no where near as fast as the cost of living or other countries have.
    To quote the next finance Minister ” A huge opportunity lost”

  10. How old are you Mike? Do you remember what happened to wages last time National was in?

  11. Steve Pierson 11

    mike. wages have risen faster than the cost of living. if you bothered to check the graphs you would see they are adjusted for inflation.

    It is exceedingly difficult to measure relative wage growth between countries due to changes in exchange rates, inflation rates and purchasing power parity, not to mention taxes and other complications. We don’t have a researcher to spend a couple of days working it out for us but I can tell you that NZ’s GDP per capita (an approximation of incomes per capita) has risen as a percentage of Autralia’s GDP per capita, after it fell behind in the 1990s. I’m work on a post on this topic.

  12. Santi 12

    How old are you Michael Porton? Do you remember what has happened to taxation (direct and indirect)during the last nine years Labour has been in power?

  13. Tane 13

    Just no where near as fast as the cost of living or other countries have.

    And now you’re just making stuff up. Do you actually do any research yourself, or do you just rely on John Key’s carefully focus-grouped talking points when you comment here?

  14. “We don’t have a researcher to spend a couple of days working it out for us”

    Didn’t Patrick Nolan do some work on this at NZIER http://www.nzier.org.nz/Site/Publications/NZIER_reports_working_papers.aspx (look at about October)

    Cross country comparisons are notoriously difficult to make, but does have a phd looking at effective marginal tax rates, and was able to make comparisons between the Australian and NZ tax systems.

  15. mike 15

    Steve, I do not have the time to dig up data etc but its obvious to most people that wages have fallen behind in NZ and house prices/fuel/rates /food etc,etc have ballooned.
    Not to mention interest rates which are 2nd highest in the dev world. Wasn’t Cullen scarmongering about high interest rates under a National Gov last election …

  16. Tane 16

    its obvious to most people

    That’s the logic of talkback. I’d rather deal in facts.

  17. How old are you Michael Porton? Do you remember what has happened to taxation (direct and indirect)during the last nine years Labour has been in power?

    Yeah Santi – I know it’s become more equitable and I know a lot more New Zealanders are paying more tax because a lot more are working and earning more.

  18. Phil 18

    Steve/Tane/Mike

    If you look at the latest numbers on Purchasing Power Parity (It’s either the OECD or the IMF that run them… i’ll dig out a link) you’ll see that New Zealand has drifted down the ranks quite a bit in the last decade. If I recall correctly, the results indicate that we now have a lower standard of living that Slovakia.

  19. mike 19

    That’s the logic of talkback. I’d rather deal in facts.

    Only if they suit the agenda though eh..

    Thanks Phil, I’m too busy deunionising my dept today. 2 down all gone by lunchtime.

  20. Camryn 20

    Tane and Sod – How is that stupid. You just disagree, is all. May I refer you to the policies of the Irish government during the Celtic Tiger period? Something like that’d be nice.

    http://en.wikipedia.org/wiki/Celtic_Tiger

    “Credit has been primarily given to free market capitalism: low corporate taxation; decades of investment in domestic higher education; a low-cost labour market; a policy of restraint in government spending; and EU membership – which provided transfer payments and export access to the Single Market.”

    One of those we can’t copy (EU), but the rest reads more like Act policy than Labour policy (except higher education investment, but sounds OK to me as long as it’s done well).

    I don’t want to get into a debate about our specific situation etc etc. You asked why I think Labour’s policies keep us all poorer than we would be and this is it.

    Exactly like the article says: Grow economy = small shares may be relatively worse off, but absolutely better off. Stifle pie growth = more equal, all absolutely worse off.

  21. BeShakey 21

    For a start, it’s hard to argue that Labour has ‘stifle[d] pie growth’. Many of the problems they are now being criticised for are the result of a booming economy, not a stagnating one.

    In terms of the article, I think you misinterpreted it. People prefer relative gains over absolute gains if they are forced to choose. So people would rather have more inequality (even if their personal situation worsens), rather than have less inequality (even if their personal situation improves). If you wanted to try and implement this as policy you’d want to create an underclass, not get rid of one.

  22. Ex Labour Voter 22

    So the hundred thousand New Zealanders who have left the country permanently in the last fifteen months for better incomes in Australia, Britain, and elsewhere, are just WRONG.

    Wow, that’s a winning message.

  23. Hey Cameron – “low-cost labour market” – that’s kinda what we’re talking about avoiding. Sheesh bro, you really don’t get it do you. I’ll try to make it simple for you:

    The problem is not the economy.
    The economy is doing very well.
    Many people are not sharing in this.
    Their wages are low.
    The money is there.
    How do we make their wages higher?

  24. Matthew Pilott 24

    Crap another reference to the Celtic Tiger. Well, aren’t we lucky to have a market of hundreds of millions on our borders or within a few hundred miles, with no trade barriers, and huge subsidies to help us along.

    Oh wait, that’s Ireland.

    Not a useful reference – it was due to the EU, and not Irish policy that worked there.

    P.s. that low corporate taxation – s that the one National voted against?

    ELV – maybe you’ve actually hit on something there – people don’t exist and exert effort purely for money. Of the people I know who have gone overseas – the’ve taken advantage of very low airfares to see a bit more of the world, have some new experiences and so on. They all plan to come back here in a few years.

  25. r0b 25

    Camryn: Exactly like the article says: Grow economy = small shares may be relatively worse off, but absolutely better off. Stifle pie growth = more equal, all absolutely worse off.

    It’s a beautiful theory Camryn, and at some times in history it must have been correct. I don’t see that it is correct for modern economies necessarily.

    Take America, with roughly 45% increase in GDP since 1995. Meanwhile numbers in poverty have oscillated. They certainly haven’t decreased, they are currently increasing. That’s with respect to an absolute definition of poverty too (not a relative one, relative levels are also variable over this time). See:

    http://en.wikipedia.org/wiki/Poverty_in_the_United_States

    So, why aren’t there 45% fewer people in poverty since 1995? It’s a bigger pie, but the same number of people are missing out! Well, here’s why. “In the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation’s wealth”

    http://en.wikipedia.org/wiki/Distribution_of_wealth

    In short, the growing pie makes (as usual) the rich richer, and it does sweet FA for the poor (and, increasingly, the middle class). They get 45% more of nothing. So in America we have the same rates of poverty, and increasing signs of middle class stress (ever lower rates of savings, ever higher rates of debt, record mortgage foreclosures, and so on).

    The growing pie theory is not working in America, it’s not a magic bullet. There need to be other mechanisms to make sure that wealth is fairly distributed. If you take an honest look at the data you will see this for yourself.

  26. MikeE 26

    “Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000?’

    It makes sense to want to earn $50k if everyone else earns 25k as you would be earning 2x as much as the average person.

    If you earnt $100k, while everyone else earned $250k you’d only be earning 40% of the average wage.

    Of course all of this is meaningless unless one knows how much say $50k or $100k would buy in each scenario.

  27. BeShakey 27

    MikeE – the usual assumption is that prices are constant (it might have been done badly and not stated in this study, but others have stated it, or used examples where price is irrelevant). In these cases the question is why you should care about what the average wage is, your options are absolute gain and relative loss, or absolute loss and relative gain. People prefer the latter even though their purchasing power (if the example is financial) is worse.

  28. Michele Cabiling 28

    Rob’s claim:

    “In short, the growing pie makes (as usual) the rich richer, and it does sweet FA for the poor (and, increasingly, the middle class)” is so old that it creaks.

    It retreads tired old Marxist-Leninist class warfare dogma which assumes that people are born, live and die in the same economic circumstances they start out in.

    Why is this a lie, when so many statistics seem to substantiate it? Let’s start at square one and take it a step at a time.

    First up, there’s a fundamental difference between statistical categories and flesh-and-blood human beings.

    When there’s a growing disparity between one statistical category and another statistical category over time, that doesn’t mean there’s a corresponding growing disparity between flesh-and-blood human beings over time, since human beings move from one statistical category to another.

    The statistical categories in this case are income brackets. There’s no question that incomes in the top income brackets have risen both absolutely and relative to the bottom income brackets.

    However, millions of people move from one income bracket to another. In fact, many US taxpayers whose incomes were in the bottom 20 percent in 1996 had a 91 percent increase in incomes by 2005.

    Meanwhile, taxpayers in the top one-hundredth of one percent — “the rich” or “mega rich” if you believe politicians and the media — had their incomes drop by 26 percent over those very same years.

    Obviously, when millions of people’s incomes nearly double in a decade, many of them move up out of the bottom income bracket. Similarly, when other people who were at the very top see their income drop by about a quarter, many of them drop out of that bracket.

    When we talk about “the rich” and “the poor” we mean rich and poor human beings, not rich and poor statistical brackets. Yet politicians and the media treat people and statistical categories as if they were the same thing.

    Part of the reason is that data on statistical brackets is more numerous and easier to find, whether from Census statistics or from a variety of other sources.

    Data based on following actual flesh-and-blood individuals over time is, however, also available. The statistics quoted above are from the US Treasury Department, which has people’s income tax returns, so it’s simple for it to follow the same people over the years.

    You can check out the numbers for yourself in a 13 November 2007 report from the US Treasury Department titled “Income Mobility in the United States from 1996 to 2005.” The same data is summarised in a Wall Street Journal editorial that same day.

    This is not the only data telling a diametrically opposite story from the usual leftard plaint that the rich are getting richer and the poor are getting poorer.

    A previous US Treasury Department study showed similar patterns in individual income changes between 1979 and 1988.

    Moreover, a longitudinal study conducted at the University of Michigan followed the same individuals over an even longer span of time. It also found most people moving from income bracket to income bracket over time — especially among those who began in the bottom 20 percent.

    The University of Michigan Panel Survey on Income Dynamics showed that, among people who were in the bottom 20 percent income bracket in 1975, only 5 percent were still in that category in 1991. Nearly six times as many of them were now in the top 20 percent in 1991.

    The University of Michigan data was also summarised in the 1995 annual report of the Federal Reserve Bank of Dallas, which issued an excerpt titled “By Our Own Bootstraps.”

    Among leftards, it is fashionable to sneer at income mobility as a cruel myth. As someone once said, you cannot refute a sneer. But among people who have not yet abandoned facts for rhetoric, it is worth stopping to consider whether they want to continue being jerked around for political gain by leftard politicians and their media enablers.

  29. Among leftards, it is fashionable to sneer at income mobility as a cruel myth.

    ‘Chele – roger gave you the stats disproving major income mobility the last time you pulled this shit up. Why are you trying to hawk it again? Oh that’s right ‘cos your a libertaritard.

  30. r0b 30

    I’m not sneering at social mobility Michele. My claim is that growing the American economy (“the size of the pie”) has not reduced poverty in that country. Some move out of poverty, some move into it, but the basic picture stays the same despite growth in GDP.

    Among leftards, it is fashionable to sneer

    Do you have even a rudimentary sense of self awareness Michele?

    Let me repeat the same advice you’ve had many times before here. Keep your posts shorter if you want people to read them. Don’t be rude. Don’t Plagiarise. Have a Nice Day.

  31. Michele Cabiling 31

    But the stats don’t disprove it dumbass!

    Sure, there’s a recalcitrant and growing welfare-nurtered intergenerational underclass of around 15 percent of the population that shows no income mobility.

    That’s because the kids never see anyone in the house getting up in the morning to go to work, and the only sources of income are crime and benefits. The apple never falls far from the tree, so most of these kids lack the self-discipline and other skills to even get onto the lowest rung of the ladder of opportunity.

    That’s the fault of power-hungry politicians who see a massive political dividend in keeping as many people as possible shackled and helpless on Nanny State’s plantation.

  32. Michele Cabiling 32

    Rob wrote:

    “Some move out of poverty, some move into it, but the basic picture stays the same despite growth in GDP.”

    As the Bible says: “The poor are always with you.” Even in a society of millionaires you can draw an arbitrary line on an income distribution chart to say the x percent of people (based on statistical categories) are “poor.”

    “Some move out of poverty, some move into it, but the basic picture stays the same despite growth in GDP.”

    Yes, based on aptitude and effort. How entirely appropriate that people should be rewarded for hard work, thrift and personal enterprise. And that those who fail to demonstrate these traits are penalised to the extent of their failure to display them.

    There’s a saying: “The first generation makes it, the second generation sits on it, the third generation loses it.”

    Why do you think the sensible mega rich tie up most of the behests they make in trust funds? It’s so that worthless offspring like Paris Hilton can’t squander the family fortune on “grasshopper” lifestyles.

  33. r0b 33

    Michele 1: It retreads tired old Marxist-Leninist class warfare dogma which assumes that people are born, live and die in the same economic circumstances they start out in. Why is this a lie…

    Michele 2: Sure, there’s a recalcitrant and growing welfare-nurtered intergenerational underclass of around 15 percent of the population that shows no income mobility. … The apple never falls far from the tree, so most of these kids lack the self-discipline and other skills to even get onto the lowest rung of the ladder of opportunity.

    Michele has been back at The Standard for a couple of hours, and she’s already contradicting herself. A new record. And an old trend.

    There is no consistency in your thinking Michele, you just spout incoherent libertarian pseudo-philosophy seemingly at random.

  34. Michele Cabiling 34

    There’s every consistency in what I say above.

    85 percent of people display income mobility over time. The 15 percent who don’t fail to do so, not because of any deficiency in the free market model, but because they were created and supported in their live-for-the-moment indolence by government intervention.

    The problem is not the market at all but venal power-hungry politicians quoting Mickey Savage crap like: “The welfare state is applied Christianity” to co-opt the political support of the well-meaning.

  35. burt 35

    This is how the policies of envy work. Tell people that $60K is rich and they will vote to punish the rich people for their own gain. Emotional voting, easily inspired in a low wage economy.

    Explaining to a teacher friend in 1999 that their $48K is only about 4-5 pay rises away from making him rich didn’t seem to make much sense against the partisan (in agreement with union opinion) head nodding of the time. Needless to say, he gets it now!

    BTW: The last sentence of teh quote you used adds valuable context to the question. “Assume for the moment that prices of goods and services will stay the same.” Without that clarification the first option seems like the smartest option.

  36. r0b 36

    Michele Cabiling folks. Give her a Big Hand.

    Good night!

  37. Michele Cabiling 37

    Try giving Robinsodomite a big hand (or rather a Big Fist) he’d appreciate it more …

  38. And once again MC proves her intellect. What was your degree in again M? Oh that’s right, Property Management. You are such a loser girl.

  39. Matthew Pilott 39

    Michele uses talk of “income brackets” to describe income mobility. This is either a lie, or she’s statistically inept. A bracket denotes a fixed statistical range (i.e. $0-$9,999; $10,000-$19,999 and so on). The report she mentions uses income quintiles – a measure of income in relation to others – not an absolute measure of income.

    High income mobility among quintiles simply indicates a volatile economy for the “flesh and blood”. The most obvious case is the report Michele so clearly admires. I’ve read it before myself, and wasn’t impressed.

    Of the people in the lowest income Quintile (not bracket) in 1996, 42% were still in the same quintile. By 2005 31% had dropped to the lowest quintile from higher ones. So income mobility works both ways – some people get rich, some are poorer and many stay the same.

    What this dos not disguise is the fact that the gulf between rich and poor is still yawning more than ever.

    So go the fucking market – it can make you rich, it can bankrupt you but it can’t do a bloody thing to help. Cheers for bringing this up Michelle.

  40. burt 40

    Matthew Pilott

    What this dos not disguise is the fact that the gulf between rich and poor is still yawning more than ever.

    So go the fucking market – it can make you rich, it can bankrupt you but it can’t do a bloody thing to help. Cheers for bringing this up Michelle.

    I could reword that as;

    What this dos not disguise is the fact that the gulf between rich and poor is still yawning more than ever.

    So go the fucking Labour party – it can make you rich, it can bankrupt you but it can’t do a bloody thing to help. Cheers for bringing this up Matthew.

  41. I see you’re already into the sherry, Burt.

  42. Matthew Pilott 42

    I could reword that as – yes, but that would make you an ignorant jackass, sugarpuff.

    Shit, Labour can make you rich? Go figure 😛

    That’s pretty low, even from you, Burt. Given that New Zealand is doing better than the US in the poverty-gap stakes, what will the ACT-National types do about it?

    Tax cuts. For the rich.

    Sweet.

    Feel free to make an intelligent contribution though, anytime.

  43. r0b 43

    America, New Zealand, it’s all the same to Burt.

    ‘Sod, you’re on fine good form tonight! (Well, maybe not the goats thing, but teleology, heh!)

  44. burt 44

    Labour for 9 years and it’s getting worse…. I don’t think anything suggested by ACT, National, Maori, Green or other poodles could sound as silly as claiming Labour are doing a good job. It sux now, change is clearly required. Let me quess, Labour have the answers this time, for the precious 4th term, they promise… please please.

    Or did I forget it’s the fault of the National party from the 90’s responding to the shambles left by Labour through the 80’s or what was that excuse for our falling statistic again?

  45. Cheers Rob (although I prefer the “goats” discourse – better cut-though across demographics).

  46. burt 46

    Robinsod

    No, not at all, but what would you like to debate, drinking that I’m not doing or one of the many and varied topics that come up in the thread?

  47. Yeah Burt – that reduction of glue-ear, over-crowding, foodbanks, youth suicide and all those other poverty indicators really sux. You’re right. I’m certainly gonna vote national this time. Bring back the 90’s!

  48. r0b 48

    Labour for 9 years and it’s getting worse

    Unemployment at a 20 year low. Minimum wage increased. Numbers on benefits down. Crime down. Economy growing. Cullen Fund and KiwiSaver providing long term planning. NZ doing well in international rankings for health, education, honesty, cost of doing business.

    Yes Burt, it’s getting worse, in your head.

  49. what would you like to debate

    Burt, I don’t want to “debate” anything with you because you are a moron and I find it much more enjoyable to mock you.

  50. burt 50

    rOb/Robinsod

    Matthew Pilott is quoted here.

    What this dos not disguise is the fact that the gulf between rich and poor is still yawning more than ever.

    I think you guys were not paying attention, the gulf between rich and poor is what I’m talking about. Please feel free to tell me it’s got better under Labour!

  51. r0b 51

    Burt, see above. America. New Zealand. Not. The. Same.

    Mathew was talking about America.

  52. Matthew Pilott 52

    r0b, maybe he’s talking about the United States of ANZUS?

    😉

  53. r0b 53

    Matthew – ahh yes – don’t you miss the Good Old Days?

  54. r0b 55

    S’all right Burt, we all make mistakes.

  55. AncientGeek 56

    I see ‘chele is back. Wondered where I was going to have some fun this weekend.

  56. r0b 57

    I’m off line this weekend AG, but y’all enjoy!

  57. Gooner 58

    Rob doesn’t think economic growth can make us all more prosperous as he doesn’t want the pie to get any bigger.

    I give up.

  58. Dean 59

    “Unemployment at a 20 year low.”

    This is true.

    “Minimum wage increased.”

    Shame about the tax brackets not moving in forever and therefore meaning people take home less isn’t it.

    “Numbers on benefits down.”

    You are obviously not counting WFF “tax credits” as benefits.

    “Crime down.”

    Except when the moon is full and it’s summer. I mean, really.

    “Economy growing.”

    Entirely debatable and only if you’re using the figures that suit you. It must be horrible looking at productivity rates.

    “Cullen Fund and KiwiSaver providing long term planning.”

    Shame we’re not allowed to provide long term planning for ourselves through tax credits though isn’t it? Or am I just being a hater and/or a wrecker?

    “NZ doing well in international rankings for health, education, honesty, cost of doing business.”

    Pity about the other OECD rankings, isn’t it.

  59. Wendigo Jane 60

    Oh yes Michele, when ‘The Bible’ – oh no hang on that would actually be Jesus – said ‘For ye have the poor always with you’ I’m sure he went on to say ‘But please feel free to do nothing about it, they will display income mobility over a period of time.’

  60. Matthew Pilott 61

    Wendigo Jane – bloody priceless 😀

  61. lprent 62

    Wendigo, I appreciate the laugh. But the spilt coffee was a bit of a problem. Please give me more of a warning.

  62. r0b 63

    Rob doesn’t think economic growth can make us all more prosperous as he doesn’t want the pie to get any bigger.

    Sorry Gooner, that makes no sense at all.

    I give up.

    Promise?

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