Monday, 25 July 2016

Having more money helps the poor? Go figure!

The link between income and happiness has been one of the most hotly contested relationships among social scientists. Many researchers from various branches of social sciences have repeatedly denied the existence of a causal relationship between income and happiness (despite overwhelming evidence on how the great rise in living standards was led by the significant increase of post-Industrial Revolution incomes per capita), with the obvious normative conclusion being that having more money is not that important to us after all. 

Well it just happens that it is important.

In an article published last month in the New Yorker entitled "The Case for Free Money", the author James Surowiecki (the Wisdom of Crowds guy) makes a compelling case in favor of universal basic income - a policy proposal (rejected in a referendum in Switzerland earlier this year) where every adult citizen of a country would each year receive a guaranteed basic income. In the US this would be equivalent to $10,000. While there are many potential benefits to this idea (as well as some major obstacles - such as it being too expensive), I do not intend to contemplate on the basic income proposal in this post. I will leave that for another time. What caught my attention was the opening paragraph where Surowiecki calls upon a research paper from a Canadian economist Evelyn Forget who examined the effect of a field experiment being done in Canada in the 1970s. Here's the excerpt:
"In the mid-nineteen-seventies, the Canadian province of Manitoba ran an unusual experiment: it started just handing out money to some of its citizens. The town of Dauphin, for instance, sent checks to thousands of residents every month, in order to guarantee that all of them received a basic income. The goal of the project, called Mincome, was to see what happened. Did people stop working? Did poor people spend foolishly and stay in poverty? But, after a Conservative government ended the project, in 1979, Mincome was buried. Decades later, Evelyn Forget, an economist at the University of Manitoba, dug up the numbers. And what she found was that life in Dauphin improved markedly. Hospitalization rates fell. More teen-agers stayed in school. And researchers who looked at Mincome’s impact on work rates discovered that they had barely dropped at all. The program had worked about as well as anyone could have hoped."
I went through the paper and it was indeed a proper field experiment (lasting a total of 4 years): they had random selection of participants, paired control group from the same community, isolated families, etc. In other words, it was legit, making the conclusions of the paper correct. Having more studies and field experiments just like this one would make the case for the universal basic income even stronger (although, the main problem was the lack of money to carry out the experiment further than 4 years).

However, you can't tell any of this from the paragraph above as the author makes an inference mistake. He should have said that hospitalization and schooling outcomes improved compared to the relevant control group. This way a reader might suspect that the research was not done properly if it only looked at the pre- and post-basic income outcomes in that city alone (these alone would not tell you much about the causal relation). I, for example, had immediate doubts about the validity of the research, which is why I had to read the paper myself. But as I said, the paper is legit. 

For me the most interesting finding this experiment suggests is that by handing out more money to people, the policy entailed positive effects on their quality of life. The basic income improved peoples' health and social outcomes. In other words, it made them happier. So without any unnecessary quibbles about the existence or non-existence of the correlation between money and happiness, by using basic income experiments we can finally empirically establish a positive relationship between money and happiness. Not directly, as few people enjoy money just for the sake of money, but indirectly, as money helps us attain a better living standard. 

My point is, if you advocate universal basic income, don't contradict yourself by saying that money doesn't make people happy. I certainly does. If not directly, than indirectly (just look at the leftist propaganda meme below). For one thing having money means less worries about it. That fact alone improves happiness.  

Tuesday, 12 July 2016

Why is the US white middle class going rouge? ... and voting for Trump

A recent paper published in PNAS by Princeton professors Anne Case and Angus Deaton (last year's Nobel prize winner) reported a stunning finding: there has been a significant increase in mortality and morbidity among middle-aged non-Hispanic white men and women in the US over the past 15 years. The causes have been attributed to suicide, and drug and alcohol abuse. The graphs below summarize the findings:
Mortality in selected countries, 1990-2013.
USW stands for US white. USH stands for US hispanics.
Source: Case & Deaton (2015) "Rising morbidity and mortality in
midlife among white non-Hispanic Americans in the 21st century."
Proceedings of the National Academy of Sciences Vol. 112(49)
December 8th 2015.
Mortality by cause, US white non-Hispanics, 49-54. Source: Case & Deaton
(2015) "Rising morbidity and mortality in midlife among white non-Hispanic
Americans in the 21st century." Proceedings of the National
Academy of Sciences
112(49) December 8th 2015.
Every comparable developed country has experienced a steady decrease in midlife mortality over the past two decades, while the trend for whites in the US has suddenly switched upwards in 1999 and has been steadily increasing ever since. The second graph illustrates why this is so. Deaths from poisonings have gone way up (over 300%) over a time span of only 15 years. Liver diseases and suicides have also gone up. Furthermore, the turnaround in mortality has been driven primarily by whites with a high school degree or less. Those with college education or less remained the same, while those with BA or higher have had death rates decrease. All this suggests that mid-life low-skilled workers, after experiencing job losses, have descended into personal depression and are trying to cure this with drug and alcohol abuse. And if you think that drugs are too expensive for an average unemployed person in the US, think again. The popular TV series Breaking Bad has showed that getting your hands on things like crystal meth is becoming widespread across the low and middle classes in the US (I know it's a fictional TV show, but it does draw implications from the real world). 

Why are these people descending to such states? Why are they killing themselves with alcohol and drugs? A simple explanation is economic, although not necessarily tied to the financial crisis since the trend started during favorable economic times. However the productivity slowdown and the outsourcing trend (a trend that accelerated in the 1990s and particularly in the 2000s), have made their own dents among the low-skilled population. These are not just job losses we are talking about. It's also the prospects of finding a new job for the low-skilled workers (which is perceived to be difficult given immigrants which are prepared to work for much less), as well as their lagging incomes, widening inequality, and disturbed social mobility. However most developed countries have experienced the same problems in recent decades, but these problems haven't manifested themselves into higher death rates for the mid-life low-skilled workers. 

So what gives? Perhaps the fault lies within the US health care system that is out of reach for the poor and middle classes (particularly if unemployed), making them more likely to die from the conditions they've imposed on themselves. In other words, perhaps European low-skilled workers are reacting the same way to globalization-induced job losses (via drugs and alcohol) but are simply more likely to be cured by their free-of-charge public health care systems. That still, however, doesn't explain the increase in suicide rates in the US. Perhaps the inequality and social mobility problems are even worse than we think which is forcing people over the edge. Financial insecurity could also be the issue, as pensions are traditionally tied to stock market earnings. But it's always been this way, and it wasn't a problem before. On the other hand, there has never been such a prolonged period of stagnating low and middle class incomes, so once a low-skilled worker losses his/her job, not having any significant savings accumulated (recall that the savings rate in the US is in steady decline since the 1980s), and possibly overburdened with a home loan, there isn't really much else he or she might hope for. Finally, perhaps the US cultural values emphasizing individual success are taking a psychological toll on its population for the first time in history (or since the Great Depression) as they are unprepared to deal with failure. I'm tapping in the dark here, but one thing is certain - something has definitely gone wrong in the US. 

It is therefore perfectly understandable why the white mid-aged US low and middle classes are switching to populism and are grouping behind Donald Trump. This has been long time coming. Populist messages blaming immigrants on job losses and a wrecked benefits system is exactly what the low-skilled workers have been craving for. Looking at these graphs it is easy to understand why Trump's support has been so high despite all of his political incorrectness and even his billionaire stature. Trump is delivering loud and clear messages that resonate with a part of the electorate that seems to be fighting with various forms of psychological depression and which represent clear losers of globalization (note: globalization certainly has a lot of benefits, but it also has its inevitable losers - for developed countries these are the holders of the scarce resource - the low-skilled workers). Furthermore, the political establishment has failed to hear these voices over the past decades (not only in the US). In such a state, where you lose your job and blame immigrants for it, where you have no savings and no long-term prospects, when you're faced with foreclosure on your home loan, when you realize your children will probably be facing the same bleak future, and finally when the politicians you never really liked anyway are not even hearing your messages, you very easily descend into populism and accept the first loud enough rhetoric that's expressing everything you're concerned about. It is no wonder these people "want to make America great again". For them, America has failed. Their intrinsic voter motivation is in this case actually quite rational. 

Europe is faced with the exact same problem of rising populism resonating to low-skilled losers of globalization, despite its lower mid-life death toll. The most dangerous way of fixing these problems facing low-skilled workers is descending into populism. Let's hope the establishment will realize this and offer realistic solutions before it's too late.