David R. Henderson  

Luck, Wealth, and Immigration

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In his column in yesterday's New York Times, Cornell University economist Robert Frank writes:

Another important message of recent research is that a person's salary depends far more on where she is born than on her talent and effort.
For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who had no formal education but was spectacularly intelligent and resourceful. Beyond preparing excellent meals, he could butcher a goat, thatch a roof, plaster walls, resole shoes and fix broken alarm clocks. He was also an able tinsmith and a skilled carpenter. Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year. Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

Call me naive, but until the last sentence, I thought Professor Frank would go in a different direction. He's right that we Americans are lucky to have been born in arguably the richest country in the world. Or, in my case, I was lucky to have been born in Canada. Throughout his article and in much of his other writing, Frank shows concern for people in poor countries. Indeed, his own decision to join the Peace Corps may well be evidence of that concern.

That's why his last sentence was jarring. It was jarring in two ways. First, I think he's wrong to say that we owe a debt to "social investments," if he means by that term what I think he means. I think he uses "social" to mean "government" and "investments" to mean "spending." But it's hard to see how, for example, expensive but mediocre government schools are an important cause of our wealth. There's a more-obvious cause of the wealth that we have been born into: a great deal of economic freedom compared to that in other parts of the world. Check Economic Freedom of the World, 2008, to see the rankings. In 2008, Nepal came in a dismal 128th out of 141 countries ranked.

Let's say Frank disagrees with me about the causes of wealth, although I'm not sure he does. But let's say he does. There's something even more jarring. He and I both agree that his cook in Nepal had the bad luck to be born in Nepal. He also believes--and this is the whole point of his article--that government should do what it can to offset bad luck. One thing it could do is quit preventing people from Nepal from moving here. But Frank doesn't say a word about relaxing immigration restrictions.



COMMENTS (21 to date)
Hugo Pottisch writes:

Well - it really does not matter how intelligent, industrial or talented you are - if you're born under the wrong regime - nothing will elevate you to Western levels. The West has indeed fought hard to establish individual rights and hence property right and hence free markets and non-royal inheritance. We are standing on the shoulders of giants. All we can do is not to allow regress to happen. No violations of individual rights - least of all from the top. In that sense - I am glad that the Bush and Cheney era has ended. I can live with a 5% increase of tax - I might be able to live with needless debt albeit not as good as the ideal - but I cannot live with an obvious infringement of individual rights.

I am not sure how this all relates to government spending but I will finish reading Mr Frank's article and will come back to it.

spencer writes:

Boy are you loose and free with your labels.

You say mediocre government schools but that conceals a very wide diversity. The US does not have one school system. It has multiple systems.
Generally the government schools in affluent neighborhoods are great. The government schools in the middle class areas are good while those in poor communities are bad. Yet this makes the entire system mediocre to you. But for the most part the well off in out society get to inherit the great social capital of having good schools. but this fact does not enter into your calculations because you just create a label that hides the truth.

You like to talk about how economics involves incentives but do your best to hide the fact that these incentives exist when it is not convenient for your little ideological fantasy world.

spencer writes:

By the way, once you exclude the few private sectarian schools and only deal with Catholic and Non-sectarian schools, private schools are more expensive than public schools.

On average expenditures per pupil in private non-sectarian schools average some 150% of spending per pupil in public schools While expenditures per pupil in Catholic schools are some 85% of that in public schools. This difference is more than accounted for by the Catholic schools not really properly accounting for their capital cost.

see:http://nces.ed.gov/programs/youthindicators/Indicators.asp?PubPageNumber=11&ShowTablePage=TablesHTML/11.asp

H writes:

First, I think he's wrong to say that we owe a debt to "social investments," if he means by that term what I think he means.

Maybe he didn't mean just government investments but private investments too. It doesn't matter who built the infrastructure and the whole educational system, private companies or the goverment. It still means that other people built it for me to use even though I didn't pay for most of it. No one succeeds alone.

Even in a purely free-market society I would get "undeserved" spill-over benefits from all the knowledge, culture and material wealth around me.

Alex writes:

@ H : I'm thinking along the same lines as you. I'm 24 and I've been working since 18 while going to college. For the first 18 years I paid no income tax. In the six years I've been working the amount of income tax I've paid pales in comparison to the value of the benefits I've reaped up until now from the entire infrastructure of the country and the services I've been using funded by federal tax dollars.

The idea I'm trying to get across is that I'm paying for my advantages in arrears, and unless I become very wealthy, I will likely never pay back the full amount of the costs I'm responsible for. And without the advantages that I, and every other American, have received prior to payment, none of us would have a very good chance at succeeding and accumulating wealth. In the NY Times article Frank says that the disparity in pay is often massive, and I agree, it is. So for those fortunate enough to make millions and even billions of dollars in their lifetime, they can afford to foot the bill for some of the rest of us who weren't so successful. Some may say this sounds a bit socialist, but if nobody had paid the bill in advance for the people who are extremely wealthy now, where would they be? You are entirely correct, no one succeeds alone. In order to maximize the economic pie for the entire nation, some have to pay a higher marginal tax rate to cover for those with marginally less talent/luck.

David R. Henderson writes:

I find it interesting that no one focused on my main point: that for all his talk about how lucky we are to be in America, Bob Frank didn't say a thing about how we can even out the luck substantially by relaxing our immigration restrictions.

MikeP writes:

I thought the very first post agreed with you.

Hugo Pottisch wrote...

but I cannot live with an obvious infringement of individual rights.

If that isn't a ringing endorsement of relaxing immigration restrictions, I don't know what is.

David R. Henderson writes:

MikeP,
You might be right. Only Hugo can tell us for sure whether he included immigration restrictions as an infringement of rights.
Best,
David

H writes:

Bob Frank didn't say a thing about how we can even out the luck substantially by relaxing our immigration restrictions.

Substantially? Immigration is possible for only a few percent of the world's poor.

Mark writes:

It would be hard to write an article that contained more fallacious arguments than Frank's.

The whole Nepal angle, for instance. A) the main post is absolutely right, the right response for the US is to keep our country the most attractive for smart, hard working people who want to come here to maximize the gains from their hard work and intelligence. Non-US persons who want to emigrate to a country with greater public services may go to such countries; I believe our model is proving its attractiveness. His argument seems fundamentally un-American to me. B) The re-distributionist solution to Frank's observation is to transfer wealth from the US to Nepal -- nothing in that anecdote supports transferring wealth from a wealthy-by-global-standards US upper class to a wealthy-by-global-standards US middle class.

Then there is the "hockey player" argument, which supposedly proves that people "lucky" enough to be born in a certain month are "more likely" to wind up being professional hockey players. It seems an an equally relevant inquiry to compare (x) the effort invested in hockey practice of those who succeeded to (y) the corresponding effort made by all Canadian males born in that month. Wouldn't that likely support a far greater discrepancy between the two in hockey income? Frank and Gladwell both fail to consider whether over a lifetime, hockey players, who have short careers, earn all that much more than non-hockey players. Also Frank fails to explain whether the existing tax rate on hockey players already reflects the luck component.

But I thought the dumbest argument was that the whole justification for the tax increase is "more efficient provision of public services." That is ridiculous: by throwing more money at public services, they will become more efficient?? I believe that the definition of efficiency would lead to the opposite conclusion: providing more services for the same amount of money, or the same services for less money - either would be "more efficient service". And on a larger scale, the implicit premise of the argument is that the existing tax haul is being spent at maximum efficiency to begin with, which is absurd. One truly interested in the "more efficient provision of public services" would logically focus on eliminating waste of tax dollars to begin with.

Frank argues that individual compensation derives in some large but unspecified way from luck and not entirely from something more deserving in his eyes. But he fails to quantify any aspect of his argument. What rates would be just reflections of these variables in his mind? He cites Clinton era tax rates but he does not argue that the difference between those rates and the ones today correlates to the variables he purports to analyze. The argument is merely an excuse to take money from people other than Frank to spend on things Frank values more highly. In contrast, market-based transactions do provide a quantification of the value that freely choosing people attach to different services.

A final fallacy: if we all stand on the shoulders of giants, then it follows that everyone's income, not just the rich Frank chooses to focus on, reflects that fact. Ergo, it is possible that variations in compensation reflect only the variations in what people add to the foundation. In a $14 trillion economy, if A's non-luck efforts make a one-millionth enhancement and B's non-luck efforts make a one-billionth enhancement, A should logically receive 1000 times B's compensation. Frank cannot negate that possibility, given the premise of his argument.

MikeP writes:

It would be hard to write an article that contained more fallacious arguments than Frank's.

As I was reading through the article, I immediately doubted the hockey claim...

In his current best seller, “Outliers,” Malcolm Gladwell reports that a disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

In my experience extraordinary claims that purport to convey a clever universal truth, but do not offer any actual numbers, are usually false.

Turns out that when someone actually looked at the statistics, the claimed pattern did not show up at all.

Oh, well. Never let the truth spoil a good anecdote. Especially if you can blame someone else when it is wrong.

David R. Henderson writes:

MikeP,
Thanks and wow! That graph is amazing! Where do you think Gladwell got his data. BTW, I was Canada's worst hockey player in high school. :-)
David

MikeP writes:

David,

To be fair, the data on players' birth months should probably be normalized by birth month in the population as a whole.

After all, if people are too busy dancing around Maypoles to be conceiving children, then fewer will be born in January and February -- perhaps enough fewer even to make the lower number of hockey players born in those months proportionately greater than in any other month.

Yeah. Sounds thin. I guess I don't know where he got his data. But I do know that not quoting any of it makes it immediately suspect.

Nish writes:

Frank's support of progressive taxation but not progressive immigration is not surprising that he is playing to the galley. Supporting open borders will attract lot of flak from middle america, the way "tax the rich" won't.

MikeP writes:

BTW, I was Canada's worst hockey player in high school. :-)

Were you born in December?

Which gives me an idea...

Canadian-born Sharks by birth month:

1, 1, 2, 3, 4, 5, 7, 7, 7, 7, 8, 8, 9, 9, 12

median 7, mean 6, mode 7.

Canadian-born Ducks by birth month:

1, 1, 1, 3, 5, 5, 5, 6, 6, 6, 6, 8, 10, 10, 11, 12, 12

median 6, mean 6.35, mode 6.

It's a very close match-up, but the luck of all those June babies versus those July babies was apparently just too much for the Sharks to overcome.

David R. Henderson writes:

MikeP,
I was born in November. And for the record, I used to watch hockey games, in the early to mid-1960s, when each team had only one "enforcer." The rest didn't fight much.
David

Mark writes:

Thank you for that link Mike. This issue is being further discussed at Cafe Hayek.

The more I think about it, I think what really motivates the Krugmans and Franks is just relative status and prestige. They are part of a group that has certain tastes and preferences, centered in the not for profit world, just like CEOs and bankers are a group with certain tastes and preferences tilted toward profit and accumulation. Relative to CEOs and bankers, the Franks/ Krugmans place a higher value on certain nonmonetizable intangibles - including the power to influence others - and a lower value on money. But they compete as hard to maximize those intangibles as any banker or CEO competes to maximize personal compensation. And, also, they benefit from reducing the status and prestige of more wealthy people because doing so elevates their status and prestige on a relative basis.

I honestly don't think this has anything to do with the "more efficient provision of public services". I think, if the government took money from wealthy people and burned it, Frank would readily offer a justification for doing so because he would consider himself to be winning in the competition.

Hugo Pottisch writes:

First, David is right to claim that we missed his point about immigration restriction. Like others - I jumped on the "spending" funnies only.

David does make a very important point - immigration restrictions are economically bad and for America ideologically dangerous. And I sincerely hope that Mr Frank sees it this way too.

Nicholas Shackel writes:

I think the way you talk of the luck of birth is, whilst common, deeply mistaken. It only makes sense if you think that *you* might have been born as someone other than yourself. But that is impossible (unless we are incarnated souls-and even then, it is unclear whether you could have been). You could not have been born to different parents, nor even born of a different combination of your parents's DNA. So there is no luck in you being the person you are, the only luck is in whether you came into existence at all. And even in that case, the sense of luck in play is mere randomness--it would be misleading to talk about it as if it were a matter of being born fortunate or unfortunate. To be born of wealthy parents is not itself a matter of good fortune, and the only extent to which fortune enters into it is the extent to which their wealth may have depended on fortune. Even accepting Hayek's point that the acquisition of a morality or tradition that makes a free market possible is a result of experiment rather than design, it is no accident that societies that maintain such a morality are wealthier than those that do not. Hence the distinction between being born in a free market economy and some other kind is not a matter of good or bad fortune.

Matt Solodow writes:

A possible reason that the cook might not be wealthy by western standards is quite simply goods and services are only worth what someone else is willing to pay for them. I have never been to Nepal but I would guess although this cook is multi-talented, in his marketplace (Nepal) his skills are not necessarily considered a commodity. Additionally, the assumption in this scenario implies the cook is unhappy and is striving to advance himself monetarily. This view is myopic and takes a big assumption that the values Professor Frank believes to be true regarding his definition of success/wealth are in the same as they would be elsewhere around the world. It might be true that if this cook were born in the US, he could have a higher standard of living a be successful by Professor Frank's preconceived notion of being a success but based on his frame-of-reference and life experiences he just might be happy where he is. Some food for thought!

Paul Eich writes:

Thanks David. paul

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