Whenever I am going through a rough patch in my life, it's nice when a friend offers kind words of encouragement, some motivational thoughts--Hey! You can get through this!--and everything eventually gets better.
Perhaps that's what JPMorgan Chase Chief Executive Officer Jamie Dimon was thinking when he in effect told the poor: Buck up! Things are much better than you realize.
Dimon, a billionaire, was speaking at an event in Detroit recently when he noted the positive effect technology was having on inequality, even with wages stagnant for so many workers for so long. "It's not right to say we're worse off," he said. "If you go back 20 years ago, cars were worse, health was worse, you didn't live as long, the air was worse. People didn't have iPhones."
I like my iPhone, but I had no idea it had the power to make up for three decades of stagnant wages, especially for those workers on the lower half of the income scale. No wonder Steve Jobs was so beloved.
Things-aren't-so-bad arguments seem to fall into a few distinct archetypes, some more much more worthy--and entertaining--than others.
The first is a pushback against the Malthusians, or the idea that humans will outstrip the earth's resources, mainly arable land. We shouldn't listen to these doom-and-gloom types.
The second type notes that regardless of how good things may be, humans tend to find the negative. When comedian Louis CK told Conan O'Brian that "Everything's amazing and nobody's happy," it went viral because it was a) hilarious and b) resonated as true.
The last type, including the one made by Dimon, is both cynical and deeply misleading. I call it hedonic adjustment for the poor. Like all bad arguments, it has just enough facts to make it look plausible. It isn't, and can easily be debunked; indeed, it falls apart upon close examination.
Hedonic adjustments trace their recent history to the work of Michael Boskin, who served as chairman of the President's Council of Economic Advisers under President George H.W. Bush. The Boskin Commission--or as it was formally known, the Advisory Commission to Study the Consumer Price Index--reached the dubious conclusion that inflation was overstated. To address this finding, the commission made a series of recommendations that were implemented by the Bureau of Labor Statistics.
Adjusting for quality--hedonics--was one of the many ways that inflation measurements were reduced. It's complicated, but hedonics essentially says that quality improvements are the equivalent of price increases. Looked at another way, if something stays the same price but its quality goes up, you are essentially paying less than you previously were and thus inflation is slower. Adjusting for quality was one of the factors that reduced reported inflation by more than 1.1 percent in almost every year since 1997. The Mises Institute does a good job of explaining why hedonics is mostly nonsense.
And so we come back to Dimon. His comments are warmed-over think-tank pablum. The conservative Heritage Foundation, for example, a few years ago made the preposterous argument that no one with a refrigerator or stove is truly poor.
Forget the fact that the billionaire is tone deaf and ask yourself how it is possible for the CEO of JPMorgan to have such a fundamental misunderstanding of what constitutes wealth.
Or maybe he does: Noting that even though income inequality is a problem, Dimon said that slashing CEO pay wouldn't help: "It is true that income inequality has kind of gotten worse ... you can take the compensation of every CEO in America and make it zero and it wouldn't put a dent into it."
So if you confiscated the pay of the rich, that wouldn't reduce income inequality? Think about that. Of course it would, though obviously that isn't the way anyone should want to go about closing the gap. Far better is raising the pay of everyone further down the earnings ladder. (To his credit, Dimon does seem to acknowledge this.)
If you really want to understand wealth and income disparity, consider looking at the gap between rich and poor on things such as life expectancy, educational opportunities and career options. Even simple things like access to fresh food or quality medical care are wildly disparate and widening. Contrary to what some think tanks claim, these things are not becoming more available, even for the middle class.
An easy way to identify a bad argument or investment thesis is to follow the 19th-century mathematician Carl Jacobi's idea to "Invert, always invert." Doing so with Dimon's logic allows me to offer the following tongue-in-cheek suggestion: A new confiscatory 90 percent income tax on the top 1 percent would be fine because, after all, they would still be left with their iPhones, expensive luxury cars and the Hamptons weekend houses.
This argument is just as terrible as the one Dimon is making. It is exactly the reason Cambridge economist Joan Robinson wrote: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
Or by anyone else.
Editorial on 09/27/2015