Ice cream and intelligence

The Economist's daily chart on April Fools' Day demonstrated the correlation between per capita ice cream consumption and average score on the PISA reading scale (which measures reading for 15-year-old students in each country):

Clearly New Zealand students are underperforming in reading relative to expectations based on our ice cream consumption. But hold on before you start to wonder if Chick-fil-A is going to boost the intelligence of Americans. Of course, while the data is serious and the correlation is real, there is unlikely to be any causal relationship here (which was of course the point of The Economist's data team posting this on April 1).

Countries that are richer tend to consume greater quantities of animal protein. These countries also tend to spend more on education, which should in theory lead to better reading scores for richer countries (maybe that's the case in this graph?). Of course, there's a lot of other stuff going on, but those two contemporaneous relationships with national income are enough to ensure that there is a correlation between ice cream consumption and reading scores. That is, because ice cream consumption and national income are positively related, and reading scores and national income are positively related, then it would appear to a casual observer that ice cream consumption and reading scores are positively correlated.

Inequality, redistribution, and fairness

Yesterday's post about preferences for redistribution got me thinking, and reminded me of a couple of articles I read last year (and had filed for future reference, but not come back to until now). As I noted yesterday, preferences towards redistribution on average haven't changed over the last 30+ years in the U.S., but New Zealanders view redistribution less favourably than earlier. In the U.S., certain subgroups (older, richer, better educated, and Republican voters) have grown less in favour of redistribution over time than other subgroups.

But, preferences for redistribution don't really tell us about preferences for inequality. Redistribution is one solution to reducing inequality, but it probably matters how the redistribution is undertaken. I would argue that people (rich and poor alike) want to feel like the system treats them fairly.

Fairness is something we rarely consider in economics. However, I think it was one of the more interesting aspects of Daniel Kahneman's book Thinking, Fast and Slow. In Kahneman's research, he showed that fairness was important to how people perceive economic decisions. For instance, price increases make buyers unambiguously worse off (they have to pay more for the same good or service). However, buyers are less concerned with their loss if the price increase is perceived as fair (such as the seller passing on genuine cost increases) than when the price increase is perceived as unfair (such as the seller raising the price of umbrellas on rainy days, to take advantage of increased demand).

Coming back to inequality and redistribution, fairness probably matters a great deal here too. I think Paul Bloom nailed it with the title of this article in the Atlantic last October: "People don't actually want equality - They want fairness". Bloom writes:

But in his just-published book, On Inequality, the philosopher Harry Frankfurt argues that economic equality has no intrinsic value. This is a moral claim, but it’s also a psychological one: Frankfurt suggests that if people take the time to reflect, they’ll realize that inequality isn’t really what’s bothering them.

People might be troubled by what they see as unjust causes of economic inequality, a perfectly reasonable concern given how much your income and wealth are determined by accidents of birth, including how much money your parents had, your sex, and the color of your skin. We are troubled as well by potential consequences of economic inequality. We may think it corrodes democracy, or increases crime, or diminishes overall happiness. Most of all, people worry about poverty—not that some have less, but rather “that those with less have too little.”

Frankfurt argues, though, that we aren’t really bothered by inequality for its own sake. He points out that few worry about inequalities between the very rich and the very well off, even though these might be greater, both absolutely and proportionately, than inequalities between the moderately well-off and the poor. A world in which everyone suffered from horrible poverty would be a perfectly equal one, he says, but few would prefer that to the world in which we now live. Therefore, “equality” can’t be what we really value.

What we really value, according to Bloom, is fairness. We want to know that the inequality we observe is not grossly unfair. We want people who work hard (noting that this need not be paid work) to be rewarded with a larger share of the wealth (or income), but equally we want those who would have worked but were unable to do so, to not be left with nothing.

We must also want redistributions to be fair as well. Consider the Kenyan experiment described in this Economist article, also from last October:

The Busara Centre for Behavioural Economics in Nairobi, Kenya, runs experiments with participants from slums and rural areas. Its researchers looked at the results of a lottery-like scheme in rural Kenya, in which a random sample of 503 households spread over 120 villages was chosen to receive cash transfers of up to $1,525. The average transfer, $357, was almost enough to double the wealth of a typical villager. The researchers measured the well-being of villagers before and after the transfer, using a range of different methods: questionnaires about people’s life satisfaction, screening for clinical depression and saliva tests for cortisol, a hormone associated with stress.

Since not all the villagers received a transfer, the experiment sheds no light on what would happen if everyone’s wealth increased equally. But the study does mimic the distributional results of economic growth, which tends to allot gains unevenly. As expected, those who received transfers reported greater satisfaction with their lot after the money arrived. Cortisol levels and the incidence of depression fell too.

However, the satisfaction of those who did not receive anything fell sharply as their neighbours’ fortunes improved. The decline in satisfaction prompted by seeing one’s peers get $100 richer was bigger than the increase of satisfaction from getting a handout of the same size. The bigger the handouts to others in their village, the greater the dissatisfaction of non-recipients. (The handouts did not seem to have any impact cortisol levels or the prevalence of depression among non-recipients.)

One problem with the experiment is that people are very concerned about relative comparisons - we like to be doing better than our peers. So while making some people in the village better off than others will be good for those that received the transfer, it will be bad for everyone else who didn't receive the transfer. These transfers might also be seen as unfair. Although the cash transfers were distributed randomly, I (and probably many others) wouldn't consider it fair to double the wealth of some people and leave their equally-deserving neighbours poor - especially if we could have given a smaller transfer to everyone instead without much loss in efficiency.

So, if we want fairness rather than equality, and we are concerned about our own (income or wealth) status relative to others, then that has implications for our views about redistribution. If a person is most concerned that redistribution will lead to a distribution of wealth (or income) that substantially removes the relative rewards for hard work, then they are less likely to support such redistribution. More so if they are likely to be one of those giving up wealth as a result of the redistribution (notwithstanding any altruistic 'warm glow' one might feel from giving to others). On the other hand, if a person believes that redistribution is the best way to provide for those who cannot do so for themselves (or to raise incomes for the less fortunate more generally), then they are more likely to support such redistribution. And more so if they are likely to be a net recipient of any redistribution. And this might go some way towards explaining the results in the U.S. noted above, especially the growing polarisation in preferences between Democrats and Republicans. As I've noted before, the results for New Zealand still require some further analysis.

Read more:

• Changes over time in attitudes towards redistribution in the U.S.
• Who cares about income inequality?

Changes over time in attitudes towards redistribution in the U.S.

In November last year, I wrote a post about how New Zealanders' attitudes towards redistribution had changed over time (based on this Philip Morrison article in Policy Quarterly). A new article published in the journal Economic Modelling (ungated version here), by Maria Grazia Pittau, Alessio Farcomeni, and Roberto Zelli (all Sapienza University of Rome), takes a more thorough look at similar data on preferences for redistribution from the U.S. General Social Survey covering the period 1978 to 2010.

Importantly, Pittau et al. use multi-level modelling to disentangle the cohort effects from the changes over time (a solution to the age-old problem of distinguishing between age, cohort and period effects). I hadn't considered multi-level models as a solution to this problem before, but apparently it is increasingly common (with repeated cross-sectional data).

In terms of results, the overall picture is fairly uninteresting. Attitudes to redistribution have barely changed over time, as shown in the figure below (when the proportion of respondents supporting redistribution is on the y-axis, the solid line is the average, the dotted line is the linear time trend, and each observation is actually the average of a five-year birth cohort).

The more interesting results are summarised in the conclusion of the paper, and probably confirm a lot of priors:

– Aging influences redistributive attitudes. However, support for redistribution among older people substantially decreased in the last four decades.

– Personal income has a strong performance as a predictor over the whole period, and rich people tend to oppose redistribution more strongly over time.

– There are two different time patterns for education: a downward trend for less-educated American citizens and an upward trend for the highest education level. University or college graduates increase their probability to be pro-redistribution constantly and significantly over time, while non-high school graduates reduce their likelihood persistently.

– Systematic differences between Democratic and Republican voters have enlarged in the past thirty years. Americans are much more polarized on redistributive issues by self-declared party affiliation than they were in the past.

– Ethnicity is generally regarded as a driving factor in mapping preferences towards redistribution. Our findings however show that ethnicity matters at least until the 1990s but ethnic group preferences gradually move closer over time and in the 2000s the gap seems to close.

– Further investigation confirms that in the late 1970s the racial gap was much more important than the political gap in shaping preferences for redistribution, but it was the reverse in the 2000s.

It would be interesting to see what a similar analysis for New Zealand would reveal, especially given Morrison's finding that New Zealanders' attitudes have been shifted away from a preference for redistribution. And it would be also interesting to look at home ownership as an important variable in terms of attitudes to home ownership (following Phil Morrison's subsequent suggestion that home ownership is a neglected variable in the inequality debate in general).

Read more:

• Who cares about income inequality?

Dealing with squealing children, NSW edition

I've written a couple of posts in the past about dealing with the problem of squealing children (see here and here). When I read this article last month, I thought it was time to write another. From the article:

A SYDNEY mum is furious after receiving a letter from her apartment building strata company threatening her with legal action unless she can stop her toddler from creating “excessive noise”...

In the letter, which Ms Mayer posted to Facebook over the weekend, the strata company says it has received reports from her neighbours of “shouting and screaming”, disturbing other residents and putting her in breach of the strata scheme by-laws.

Squealing (or shouting and screaming) children is a classic negative externality - an uncompensated impact of the actions of one party on a bystander. The poor residents of the apartment block face a cost that is imposed on them by the actions of the child (shouting and screaming create noise pollution). Since the child has no incentive to take into account the costs that they are imposing on the apartment residents, they generate too much noise compared to the socially efficient optimum.

How can the externality problem be solved? One solution is proposed by The Coase Theorem, which tells us that, if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own (i.e. without government intervention, or the intervention of the building strata company in this case).

However, a bargaining solution is unlikely to work for the apartment building, because it would require the child (or rather their mother) to enter into an arrangement with each of the other residents of the apartment (separately or all together). We know that bargaining solutions break down (or fail to arise) when there are many parties to the bargaining - either because of coordination problems, or because one or more parties may try to hold out against a solution, in order to get a better deal for themselves (what we refer to as a 'hold-out minority').

Instead, the apartment in the story uses a command-and-control policy - a rule against excessive noise, which if breached results in a penalty of $550 for the perpetrator (or in this case, their parent). This solution is based on the "polluter pays principle". Under this principle, the party that is responsible for the pollution is solely responsible for making restitution for the damage they cause.

However, the polluter pays principle is not always the best solution to problems of negative externalities. That is because there may be other ways of solving the problem that involve a lower cost (as I have argued before). Following this 'least cost principle', instead of imposing fines on parents for their noisy children (which would be an ongoing cost to the parents), perhaps the apartments could be better sound-proofed. That would only entail a one-off cost, and although that cost might be high initially, it would also reduce the problems of externalities from neighbours who enjoy loud dinner parties or other loud activities. Avoiding those other activities entails an ongoing cost that may be more costly overall.

Read more:

• Solutions to the problem of squealing children, Japan edition
• Dealing with squealing children at least cost