Time

This is a response to a student who asked if we should focus more on the discrepancy between rich and poor in America.

I think that what we should focus on is ensuring that markets are voluntary, competitive, based on respect for property rights and the rule of law, and that people have sufficient information to make rational market decisions. If we do this, then you do not need to worry too much about the rest. I do not have time nor the room to go into a lot of detail, but it you study network theory (and the economy is a giant network) you find that for the network to function efficiently the major hubs of the network (like Google on the Internet) must grow in size. If the government were to mandate that all websites on a network must to receive the same amount of traffic, the Internet would cease to function. Thus, as the world economy becomes more integrated and connected and economies continue to grow, we should expect to see bigger concentrations of wealth. These are the network hubs. They are the focal points of economic activity. If Bill Gates can reach everyone on the planet and they all want to buy his products, he will become richer than if he can reach the US market alone.

A second point, in real terms it is not the same to be a billionaire today as it was in 1989. To make a comparison, it is important to use inflation adjusted dollars. According to the BLS, a 1989 dollar is equivalent to $1.64 in 2007. Therefore, $1 billion in today’s dollars would have been $610 million in 1989. Even if real wealth did not change, we should expect to see many more billionaires today.

Another point is that there is no universal poverty line. Being poor in the US is not the same as being poor in most of the world. In many countries being poor is defined at less than $1 per day. Poverty lines are political decisions made by governments. http://www.wisegeek.com/in-the-united-states-how-is-the-poverty-line-determined.htm The poverty line in the US is just below $10,000 for an individual. This is roughly per capita GDP for the world. https://www.cia.gov/cia/publications/factbook/rankorder/2004rank.html In other words, to be poor in America is to be average in the world as a whole.

Over the long-term, economic incentives make a tremendous difference. If changes in incentives change long-term growth by 1%, over a few decades the difference is staggering. I made this table last year to show the difference in the size of the US GDP fifty years in the future based on different possible rates of growth.

Size of US Real GDP in 2056 (in 2006 dollars)
1.0% Average Growth	$21.47 Trillion
2.0% Average Growth	$35.39 Trillion
3.0% Average Growth	$58.40 Trillion
3.4% Average Growth	$71.33 Trillion
4.0% Average Growth	$96.21 Trillion

In 50 years the difference between 3% and 4% GDP growth $25 trillion dollars per year in 2006 inflation adjusted dollars. That is the twice the size of the current US GDP. To your grandchildren this will make a tremendous difference. http://markbarnes.us/blog%202-13-07.htm

Even if the relative difference increases between the top and the bottom income levels in a particular country, you can be sure that the poor in the richest countries will be much better off than the poor in the poorer countries. As the top level becomes richer, the definition of poverty goes up. http://markbarnes.us/blog%2012-10-05.htm Dinesh D’Souza, in immigrant from India to the U.S. and well known author illustrates this point with the following story:

Indeed newcomers to the United States are struck by the amenities enjoyed by "poor" people in the United States. This fact was dramatized in the 1980s when CBS television broadcast a documentary, People Like Us, which was intended to show the miseries of the poor during an ongoing recession. The Soviet Union also broadcast the documentary, with a view to embarrassing the Reagan administration. But by the testimony of former Soviet leaders, it had the opposite effect. Ordinary people across the Soviet Union saw that the poorest Americans have TV sets, microwave ovens, and cars. They arrived at the same perception that I witnessed in an acquaintance of mine from Bombay who has been unsuccessfully trying to move to the United States. I asked him, "Why are you so eager to come to America?" He replied, "I really want to live in a country where the poor people are fat."

http://www.nationalreview.com/comment/comment-dsouza070203.asp

One other thing that people often do not understand about both the rich and the poor in the US is that the people who make up those categories are in constant flux. My guess is that the many of the original 13 billionaires in 1989 are not in that category today, and most of the people who were below the poverty line in 1989 are not there today. In fact, there is a strong age correlation to these categories. If you extend the 1989 date back 2 more years to 1987, my family and I fell below the poverty line US poverty line. This was while I was in law school. If you divide economic groups into quintiles (20% ranges), most people in the US move through several of these quintiles during the course of their lives. I came out of a middle class home. My parents were both public school teachers. During the course of my life, I have been in everyone of these 5 income categories. Statistically I am not unusual.

In all of this talk about income distribution, I think that it is a mistake to think of things as still pictures frozen in time. It is important to think of things as they evolve through time. What can look like a serious problem or good idea when looking at a snap shot of time can look very different when considering how things will plays out over time.

		March 31, 2007 *Time: The Missing Ingredient in Bad Economic Analysis*
	This is a response to a student who asked if we should focus more on the discrepancy between rich and poor in America. I think that what we should focus on is ensuring that markets are voluntary, competitive, based on respect for property rights and the rule of law, and that people have sufficient information to make rational market decisions. If we do this, then you do not need to worry too much about the rest. I do not have time nor the room to go into a lot of detail, but it you study network theory (and the economy is a giant network) you find that for the network to function efficiently the major hubs of the network (like Google on the Internet) must grow in size. If the government were to mandate that all websites on a network must to receive the same amount of traffic, the Internet would cease to function. Thus, as the world economy becomes more integrated and connected and economies continue to grow, we should expect to see bigger concentrations of wealth. These are the network hubs. They are the focal points of economic activity. If Bill Gates can reach everyone on the planet and they all want to buy his products, he will become richer than if he can reach the US market alone. A second point, in real terms it is not the same to be a billionaire today as it was in 1989. To make a comparison, it is important to use inflation adjusted dollars. According to the BLS, a 1989 dollar is equivalent to $1.64 in 2007. Therefore, $1 billion in today’s dollars would have been $610 million in 1989. Even if real wealth did not change, we should expect to see many more billionaires today. Another point is that there is no universal poverty line. Being poor in the US is not the same as being poor in most of the world. In many countries being poor is defined at less than $1 per day. Poverty lines are political decisions made by governments. http://www.wisegeek.com/in-the-united-states-how-is-the-poverty-line-determined.htm The poverty line in the US is just below $10,000 for an individual. This is roughly per capita GDP for the world. https://www.cia.gov/cia/publications/factbook/rankorder/2004rank.html In other words, to be poor in America is to be average in the world as a whole. Over the long-term, economic incentives make a tremendous difference. If changes in incentives change long-term growth by 1%, over a few decades the difference is staggering. I made this table last year to show the difference in the size of the US GDP fifty years in the future based on different possible rates of growth. Size of US Real GDP in 2056 (in 2006 dollars) 1.0% Average Growth $21.47 Trillion 2.0% Average Growth $35.39 Trillion 3.0% Average Growth $58.40 Trillion 3.4% Average Growth $71.33 Trillion 4.0% Average Growth $96.21 Trillion In 50 years the difference between 3% and 4% GDP growth $25 trillion dollars per year in 2006 inflation adjusted dollars. That is the twice the size of the current US GDP. To your grandchildren this will make a tremendous difference. http://markbarnes.us/blog%202-13-07.htm Even if the relative difference increases between the top and the bottom income levels in a particular country, you can be sure that the poor in the richest countries will be much better off than the poor in the poorer countries. As the top level becomes richer, the definition of poverty goes up. http://markbarnes.us/blog%2012-10-05.htm Dinesh D’Souza, in immigrant from India to the U.S. and well known author illustrates this point with the following story: Indeed newcomers to the United States are struck by the amenities enjoyed by "poor" people in the United States. This fact was dramatized in the 1980s when CBS television broadcast a documentary, People Like Us, which was intended to show the miseries of the poor during an ongoing recession. The Soviet Union also broadcast the documentary, with a view to embarrassing the Reagan administration. But by the testimony of former Soviet leaders, it had the opposite effect. Ordinary people across the Soviet Union saw that the poorest Americans have TV sets, microwave ovens, and cars. They arrived at the same perception that I witnessed in an acquaintance of mine from Bombay who has been unsuccessfully trying to move to the United States. I asked him, "Why are you so eager to come to America?" He replied, "I really want to live in a country where the poor people are fat." http://www.nationalreview.com/comment/comment-dsouza070203.asp One other thing that people often do not understand about both the rich and the poor in the US is that the people who make up those categories are in constant flux. My guess is that the many of the original 13 billionaires in 1989 are not in that category today, and most of the people who were below the poverty line in 1989 are not there today. In fact, there is a strong age correlation to these categories. If you extend the 1989 date back 2 more years to 1987, my family and I fell below the poverty line US poverty line. This was while I was in law school. If you divide economic groups into quintiles (20% ranges), most people in the US move through several of these quintiles during the course of their lives. I came out of a middle class home. My parents were both public school teachers. During the course of my life, I have been in everyone of these 5 income categories. Statistically I am not unusual. In all of this talk about income distribution, I think that it is a mistake to think of things as still pictures frozen in time. It is important to think of things as they evolve through time. What can look like a serious problem or good idea when looking at a snap shot of time can look very different when considering how things will plays out over time.