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Sunday, September 20, 2020
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Back in November, Scientific American ran an article about a computer model that a research team at Tufts University used to simulate and research the economic processes that drive the inequalities in income and wealth of individuals, families and households in modern industrialized nations having capitalist market economies. The article was written by Prof. Bruce Boghosian, one of the leaders of this team.

By studying the results from this model after running it with a variety of hypothetical and historical data inputs, the researchers found that concentration of wealth is mostly inevitable in modern market-oriented nations. However, wealth redistribution mechanisms can mitigate the severity of concentration and prevent extreme oligarchy. A “redistribution mechanism” is something like Robin Hood; it takes from the rich and gives to the poor (or intends to, but is often misused by those who aren’t poor).

An example would be the progressive tax system, whereby the rich are subject to higher taxes on income, while the poor pay less (or nothing). The poor also benefit more than the rich from government spending on subsidized housing, subsidized health care (e.g. Medicaid), low-income tax credit cash refunds, etc. Some nations have more generous redistribution mechanisms while others have more stingy ones (redistribution is usually the province of the government, although voluntary charity and philanthropy can also have a redistribution effect). Obviously, American’s “social safety net” has been getting more and more stingy in recent decades.

Prof. Boghosian calls this model an ”asset exchange affine model” (“affine” is an obscure mathematical concept; asset-exchange is a fancy way of thinking about ordinary economic interactions like buying something in a store or on-line, or selling a lawnmower on Craig’s list). The model is based around the “Fokker-Planck” equation, which is a more continuous and sophisticated form of a “Markov chain” of “stochastic interactions” (i.e., involving random numbers). These interactions are assumed to take place repeatedly between a myriad of simulated individuals. I myself set up a simple Markov chain on Excel after reading the article, based on the simple example given in the first few paragraphs. After a few runs, I could see the hyper-sensitive nature of Markov results after a large number of sequential interactions. As per the Markov design, each interaction is partly determined by changing random factors.

Basically, the Markov output in my model disfavors the “middle class”; it biases towards a lot of poor individuals, and allows a handful of super-rich players who share a huge cut of the overall “economic pie”. Very few if any stay in the middle after many interactions over time. Such Markov outputs are different from the bell-shaped curve of output frequencies from a “Gaussian” process; a bell curve would give a lot of middle class people with only a few rich and poor.

This “affine” exchange model from SciAm does not analyze the cost of redistribution on economic growth; according to standard microeconomic theory, vigorous redistribution schemes generally cause fairer outcomes, but total wealth for the entire population will be lower due to reduced incentives. So, it’s hard to say what the net benefit to the poor will be in certain cases. Obviously, for policy reasons and social stability, we don’t favor having a high level of total societal wealth, where 99.9% of it belongs to 1% of the population (the “oligarchical scenario”, as the article calls it). However if net societal wealth is severely lowered by a strong distribution scheme, many people on the lower end of the wealth distribution, say all below the 50% percentile of net wealth, wind up doing worse than under a scheme with lower redistribution and less fair wealth accumulation, but having higher overall net wealth. This is the “rising tide lifts all boats” scenario that free-market Republicans like to quote.

The article gives a brief explanation of the Gini Coefficient, a commonly used way to measure how close or far an income or wealth distribution is from the ideal of perfectly even distribution (i.e. everyone gets an equal share). If the Gini is 0, there is perfectly even distribution. If higher, then the distribution becomes more “bunched”, e.g. the top half gets 70% of income or wealth, and the bottom 50% gets 30%. At Gini = 1, one person gets everything and everyone else gets nothing. So, if there is no redistribution, the Gini might be 0.6, a concentrated distribution of wealth.

I suspect that economists could (or maybe already have) come up with a metric to gauge the net effect after redistribution inefficiency — i.e., considering both bunching and size of the pie. One rough example might be (1 – Gini Coeff) x Total Wealth (or Income).

Let’s say that total wealth for everyone is 10,000, but it is very unevenly distributed. Now let’s put a redistribution plan in place, such that the Gini goes down to 0.4 from 0.6. But now the wealth drops to 6,500 in response (this is just a hypothetical, the actual effects would need close study). So, the total effect metric would be 4,000 without re-distribution. After re-distribution, the total effect metric drops to 3,900. This is a rough indicator that many people who have less than the average wealth would be somewhat worse off, despite the redistribution scheme. E.g., in some socialist countries where severe redistribution mechanisms were put in place, the GDP of the country dropped over time, such that the poor and middle were actually worse off in the long run. Unfortunately, the SciAm article does not consider this.

Arguably, it works the other way – or so free-market Republicans like to argue. Suppose the current net wealth of a nation is 10,000, and there are already in place a lot of income and wealth redistribution mechanisms (graduated tax rates, tax credits for low income households, subsidized housing, subsidized medical care, free day care, etc.). The Gini coefficient is now 0.4. Let’s now cut taxes and reduce subsidies for low-income individuals and households. Let’s say that we get more economic growth and thus national wealth becomes 14,000. However, the distribution of net wealth, grows worse as expected; the Gini goes to 0.6, let’s say. So, pre-tax cut, our net distribution indicator is 6,000. But the tax cut changes it to 5,600. This indicates that “all boats” did not benefit from the “rising tide” of stimulated economic growth; actually, many families and households become worse off.

Aside from a redistribution factor, the asset exchange model incorporates two other interesting parameters reflecting real-world dynamics. First, the benefit of being rich; and second, the burden and disadvantage of being poor. This is a bias (negative multiplier) to those below some level of wealth, and the benefit (positive multiplier) to those above some level of wealth. E.g., when you are poor, you can have a talent or an idea or an ability, but because you are poor, you can’t use it as effectively as someone who is more wealthy and has more access to specialized training, information, business contacts, e.g. When you are better off, you gain increased access to resources that help you make the most of your abilities. That sure sounds like what is happening these days in America! As the John Mellencamp song refrain goes, “Ain’t That America”.

So, with the right input parameters for redistribution, cost of poverty, and benefit of affluence, and also using an additional factor in the model to account for household use of debt (thus allowing a person or family to have negative net worth), this model appears to do a rather good job of predicting how inequality has built up over the past few decades in the US and other western nations. This supports Professor Boghosian’s conclusion that our economy naturally tends towards “bunching”, i.e. unfair distribution of income and wealth. To quote:

the ‘natural’ wealth distribution in a free-market economy is one of complete oligarchy. It is only redistribution that sets limits on inequality.

Redistribution schemes help somewhat, but cannot fully overcome the tendency. Inequality in wealth and income seems more or less inevitable. And further — the author does not discuss the following point, but it is quite apparent — when you enter the game of survival in a capitalist free-market economy with little wealth, most likely you stay poor. The “poverty burden” factor is hard to overcome, you have to be very lucky as well as industrious. Since this is a “stochastic” chain model subject to rolls of the dice, there is always a small chance that you will get lucky and go from rags to riches within your lifetime; but it is the rare exception, and is far from the rule.

Another interesting feature of a Markov-like stochastic model of a capitalist free market economy is “inherent instability”, especially when there is little or no redistribution. The article briefly refers to this. The economy has an inherent tendency toward oligarchy, i.e. extreme concentration of wealth; but just who gets to be one of the oligarchs is not fixed in stone. Over very long periods of time, any individual will go from rags to riches and back, and then back again, in an unpredictable cycle. So, today’s billionaires might be around for a while, but over many decades their families often lose their tremendous levels of wealth (although the inherent bias that gives wealthy individuals greater ability to generate additional wealth tends to keep them from becoming dirt poor – they usually remain “very comfortable”).

This is an interesting prism thru which to view the elements of what is now being discussed a lot in America these days, i.e. institutional racism. A lot of well-intentioned people, including myself, agree that institutional racism must be ended. But aside from the area of law enforcement, they often have trouble pointing to exactly what it is that needs to be changed or eliminated. Sure, there is the matter of red-lining in lending and insurance, but that is mostly in the past. Some people, e.g. proponents of critical racial theory, say that any policy that has a negative net impact on the black population is racist, even if it appears to be non-racial. E.g. very high academic admission standards at top colleges reflect a “socially constructed concept that is used by white people to further their economic and political interests at the expense of people of colour.”

This line of thinking touches on the fact that blacks as a whole have lower wealth, lower income, lower educational achievement, higher single parent family rates, higher crime rates, etc. And all of that hearkens back to the impact of over two centuries of slavery, followed by a hundred years of segregation, Jim Crow laws, and lower cast status in America. In the 60s and 70s, much of the legal and overt institutional segregation practices were ended, and society has made some progress since then in eliminating lower-cast attitudes and presumptions. But you can’t practically undo the heritage of slavery (1619-1865) and segregation (1866-1966) at once. Their effects have lingered for over 50 years and show no signs of being resolved anytime soon.

The Sci Am inequality model helps to explain that. In the US, despite all the rhetoric about opportunity, the truth is that when you start out behind, chances are that you stay behind. Due to slavery and over a hundred years of segregation, along with continued sub-conscious bias on the part of many otherwise well intentioned white people in power, along with the stubborn and substantial remnant of whites who continue to harbor negative prejudicial attitudes about blacks and other minorities, a “poverty burden” constantly applies to a large portion of “players of color” in the economic game. We might hope that this “color burden” has become lower than it was in the 1700s or 1800s or early 1900s; but it still exits.

Given the roll-of-the-dice nature of that game, some minority members still win. They might become wealthy and might enter the ranks of those having “wealth advantage” favoring future wealth accretion. On average, however, they continue to do worse than whites and others who are not subject to this “before anything else” burden. Not to say that many white individuals and families don’t suffer “poverty burden”. But they and their predecessors weren’t held back as much in the past by societal racial attitudes as blacks were, they don’t have to face the same deficits in “social capital” that past oppression imposed.

An analysis of the racial “wealth gap” using this exchange model provides an interesting contrast with critical racial theory. According to critical theory, powerful whites intentionally game the system so as to keep minorities from gaining true economic power (from whence social and political power often flow). Actually, the two ideas are not mutually exclusive; it certainly can be said that from 1619 thru the late 1900s, powerful white leaders designed and managed economic and social institutions so as to keep blacks poor and powerless. That can be accounted for in the affine exchange model through its poverty burden factor. Since the 1980s, however, the overt aspects of black suppression within these institutions have been largely removed. And yet, as seen in the many videos of police brutality against blacks suspected of criminal activity (including minor infractions like driving a car with a broken tail light), some real burden does remain.

Back in the 1960s, there was a theory discussed in academia that poor blacks were incrementally burdened in terms of wealth and power achievement because of a “culture of poverty”. This was the notion that low-income black communities encouraged certain social habits and thinking modes amidst members (which were inherited by their children thus self-perpetuated) that brought disadvantage in terms of income and wealth generation. These “habits” and cultural mores made complete sense in the context of the oppression and threats faced in day to day living; they were a rational adaption to circumstances in the short-term. However, in the long term, they held members of this “culture” back from economic achievement.

One frequently cited example of “poverty culture” was the large proportion of one-parent families in low income African American communities, often headed by a young female. Often this female was still in her teens. Social science studies quite clearly showed that these circumstances generally lead to lower educational achievement levels by children, and thus strongly correlate with lifetime income and wealth levels. Another might be the alleged tendencies for black elementary school students in low-income urban areas to derogate students who put effort into studying and getting good grades by calling them “acting white”.

In today’s charged racial environment, poverty culture theory is not publicly considered. Back in the 1960s and 70s it was very controversial, but it was given some regard. For instance, Daniel Patrick Moynihan was a government academic who studied families and race, and was a proponent of “culture of poverty” ideas. He was severely criticized for them. He started during the Johnson Administration, but went on to higher level appointments in the Nixon and Ford Administrations, concluding as UN Ambassador. He was later elected to represent the State of New York in the US Senate; he served there thru 2001. Obviously, his career was not broken because of his earlier writings. One could not imagine New York State doing anything like this today.

And yet – if properly viewed in an academic setting and not misused (as it frequently was) to blame blacks for their plight, a “culture of poverty” analysis does not necessarily contradict a critical racial approach. It can be used in a neutral, non-political fashion to look at the problem and help fashion a more complete response to centuries of racial repression. At least one black scholar, Professor William Julius Wilson, has very capably approached the issues of “poverty culture” for low-income black families. Professor John McWhorter summarized a nuanced view of “culture of poverty” in a 2016 review of “The Battle for Bed-Stuy”, a book about long-term poverty in urban neighborhoods and how government policies have been unable to adequately address it. His review begins with a review of what Black Lives Matter had put forth a platform of remedies for the crisis of black poverty – which avoid any reference to “culture”, not surprisingly. However, McWhorter provides an argument for such consideration:

It is hard to miss that ‘programs’ alone were unable to turn the tide in Bed-Stuy, or elsewhere, and the reason was due to something many social scientists and educated Americans find counterintuitive and even off-putting: that cultural traits and behaviors can persist independently of external conditions. That is, racism can condition legacies, under which behaviors persist even when what originally caused them has receded or even disappeared. One speaks the language one grows up hearing, and culture is not different in this regard, walking in lockstep with neither the GNP nor social tensions. This is hardly cause for dismissal of the problems in question; however, it means that changing conditions is often only part of the battle.

It was natural in 1964, then, to suppose that what ailed the black community was lack of opportunity — because, quite simply, this indeed was the problem. However, in 2016, what ails the black community is partly lack of opportunity, but also (dare we say) cultural orientations that this lack of opportunity conditioned decades ago. The challenge is that after such cultural orientations have set in, merely pointing people to opportunity can be insufficient as a social uplift strategy — more creative strategies are required.

The affine economic inequality model can contribute to such an approach and to finding creative strategies. It provides another possible pathway to better understand the incremental / historical “poverty burden” that many blacks continue to shoulder in the economic game of wealth accumulation. To paraphrase Professor McWhorter, historical racism and responses to such racism amount to an ongoing behavioral legacy, one that such racist actions and policies have conditioned over many decades.

In general, every way of looking at a problem holds the potential to reveal something that other viewpoints might not disclose, something that might help to find realistic solutions. Because it has been so terribly misused, “poverty culture” is off limits today. I hope that other means of finding effective solutions that contribute to equality will fill in for what might be missed because of this. The affine economic wealth approach discussed in SciAm might be one such method.

The argument for financial reparations from whites as repayment for the wrongs of slavery and segregation against the African American population are supported by the results of “affine” model studies. These wealth distribution models affirm the long-term economic injury done to blacks, and bolsters the case for reparation based on justice. But would a justice-based reparation scheme, even in significant sums, be able to undo the damage going into the future? Can cash fill the education / family culture gaps? If you gave low-income blacks a big chunk of money, would criminal behavior decline, would two-parent families become more widespread, would narcotics use dissipate, mental health improve? Permanently?

Personally, I am not sure how you un-do the damage of ancient history. The affine asset exchange model offers a hint, however. Given the effects of its poverty burden factor and its redistribution factor, it indicates that a long-term redistribution mechanism might be the better path to a fairer distribution of wealth for blacks over the long term (although with possible effects on net wealth). A “one and done” reparation mechanism might promote the cause of justice, but have little long-term impact on the wealth-generating ability of blacks (and negative impact on the strength of the overall economy for some period). Given the long-term cultural effects of historical opression and segregation, along with on-going racism, a long-term remedy may be more appropriate.

A longer-term redistribution “supplement” (e.g. enhancements of existing redistribution mechanisms based on race, including “affirmative action”) would be a less dramatic form of reparation. However, over the long haul it might be the more beneficial strategy of promoting stability and economic empowerment for disadvantaged blacks. I hope that more research and public discussion will ensue from this model, given the heightened concern in America right now regarding economic racial injustice.

◊   posted by Jim G @ 1:20 pm      

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