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Blog » 2012 » Charts Are Hard Lets Go Shopping

I only took a semester of statistics, but it's pretty easy for me to see when a chart is intentionally selling something the data just doesn't support. I see liberals do it more often than conservatives, but that's because the conservatives I know are not the Fox News variety and are intelligent enough to discern when any chart for either agenda is just terrible. Unfortunately my liberal friends tend to emotionally react when they're in line with their agenda, and disbelieve them when they are against. It's one of the reasons I love http://www.modeledbehavior.com/ (now being updated, with lower quality insights if you ask me, on forbes.com.)

Todays' discussion will cover this chart.

Which I've received three times now, from various sources, email, twitter etc. Immediately I notice that there is no source for the information or how it was collected so I have absolutely zero confidence in the accuracy of the numbers. However, the numbers are not that surprising to me, so I'll assume they're mostly accurate, especially for the sake of this discussion.

It was a comment that accompanied this chart series that prompted me to write this post:

Being someone who loves capitalism, I was pretty shocked to see a situation that provided very little concern for what is in my opinion just another reason to love capitalism.

The basic premise for my appeal to capitalism, is that if implemented correctly, it is the fairest system by which society can live in based on the collective knowledge we have today. There might be infinitely more just systems, but they have not been discovered yet. To clarify, capitalism is not what we practice in the United States, that's more of a heavily modified version that melds a variety of market and government ideologies. In its true form, people are allowed to use any means necessary to earn a living unless it violates the freedoms of others to pursue the same goal. In the United States we allow for selective legal protections and fiscal endowments in virtually every industry. Taxation, regulation, licensing and permits, legal selection, tariffs, legal restrictions, and more produce a market that is as far on the opposite side of the capitalism scale as it can be and still be called capitalism. But realistically the results portrayed in these charts are the product of a mixed market economy, and even then the results are nothing to be alarmed about.

To clarify, free market capitalism (FMC) does not mean you can thieve, force, monopolize, harm, or otherwise infringe on the rights of others to obtain valuable goods. In no way does FMC imply that we abolish federal laws pertaining to regulation of land, water and air, or abolish our judicial system to protect against the infringement of your rights.

Let's go through an example to explain what should happen under FMC. Let's say anyone is able to start a restaurant because food licenses are not necessary and people can start the restaurant in their own kitchen serving people in their own home or apartment. You have immediately opened the job market to millions of people who can compete for your business. This policy would greatly target minorities and lower income families because they tend to cook more meals (providing greater efficiency and skill), and they could run a dinner only option during the week to increase the number of hours earning income per day while keeping a day job in the early phases. Critics of this plan would say that would lead to unhealthy food prep and serving practices that could sicken millions and even kill hundreds a year. Although this is possible, it's also true that homeless and starving people die every year from eating out of trash cans - I think for the margin of value they would probably opt for the quality of any home cooked meal regardless of the cook's health code licensing status.

Licensing is a bad regulation, sure there are people who would be stupid or deceitful and cause harm to others. However there are orders of magnitude more people who would be responsible because they know that if they injure their customers they won't have customers for very long. In the past this issue was much larger than it would be today because society had yet to catch up with science. People were not aware that germs were bad mkay? Nowadays the average person could prepare food without risking sickness because society maintains a better set of social norms like washing your hands after using the bathroom. But to be sure of your dining experience people have social media reviews of the food, and they could pay for independent food quality analysis services that grade them in the same way local DPHS offices do. And collusion amongst those organizations would be pretty uncommon, especially when grades are often published publicly and analyzed by 3rd parties who can communicate the information effectively and cheaply. In the past organizations had a monopoly on information distribution, but that problem is virtually non-existent with the internet - a major reason politician's careers are dropping like flies lately.

As a result more people have access to food at affordable prices, more people have options to generate income from actions they already do on a daily basis. And everyone has the means to gauge whether they personally want to eat food from the venue of their choice. Fancy restaurants and fast food joints will still exist, but so will boutique cafe's and you'd be surprised how delicious the food would be and the effects that increased supply and competition would have on food prices across the board.

The second major aspect of FMC that is directly communicated by those charts is that people are incentivized to become wealthy. Accruing wealth means you become less affected by disasters and downturns. Most everyone, despite not knowing how to do it as effectively as they could, desires to save in preparation for such disasters. On the lower end, that's difficult to do, on the upper end it's pretty easy to hire 15 people to help out. If these charts didn't show that the wealthy were more protected from economic shocks we'd all be in a heap of trouble because making money is hard, and if there is no reward, very few people would do it. But knowing how to earn wealth is a major roadblock for the lower 50 percentile, who believe that the lottery is a sound retirement plan, and that two months of saved assets is all they need to weather a fiscal storm - whereas in reality the lottery is the worst financial investment you could make, and in reality people need between 6 and 12 months of saved income to really be protected from financial crises.

What the charts don't show you is how volatile the membership of the middle and 90th percentiles really is, whereas on the lower end the membership is pretty stable and typically upward moving at a pace of a lifetime. The middle class is a mixed bag, so many people over extend themselves in the middle groups for a desire to live like the rich. And without a constant reminder that you're close to slipping off the edge of fiscal disaster, people tend to make riskier choices. The result is that a larger portion of the middle class will reach upper class and fall to the lower class than what would occur in the other classes. But the 90th percentile is also not a guaranteed life of riches. It's slightly more difficult to lose it all if the income was earned, but it's really common amongst those who inherit or win vast wealth.

But outside of those philosophical reasons, the charts themselves are just flawed. Firstly, the timeline was selective in nature - keep going back in time and you'll see that we're still net positive in our net worth - for all classes. They also don't show you how significantly lower the cost of living is these days - so the loss of assets doesn't affect the classes as much. In this case the damage occurs in the lower classes more significantly because the hardest aspect of the great recession was job loss. Investment opportunities still existed, and so the investment assets which represent almost all of the net worth of the top 10% were not affected to the same degree as losing 100% of your income when you lose your job. The numbers aren't price adjusted for inflation and a normalized dollar value. And despite all of that the standards of living for all classes are steadily improving - a positive effect of the mixed market economy.

If you think the marginal loss of savings is a serious capitalism problem then how do you explain the losses experienced in every country save for China, where capitalism is all but nonexistent? Hell, just compare it with the real GDP of the US. Growth in general has slowed in most markets, and those markets are various degrees of mixed. Yet the freest of them all, the US, still holds a vast majority of the global net worth. And the amount of GDP per capita has steadily risen over the last century http://www.chinesewalker.cn/wp-content/uploads/2009/01/11.jpg. The result is that people's assets will shrink during a recession, but what they can purchase with the remaining assets also matters, and in the US our consumer price index also crashed in response to the recession http://www.project.org/info.php?recordID=189, allowing individuals to maintain a quality their life despite a loss of assets (for the most part.)

Capitalism is not perfect, it is simply just - a fair system that does not play favorites to anyone. But it has it's weaknesses and governments typically attempt to correct them with various mixed market tactics. In our case, we do a damn good job at keeping the populous on an ever improving path, all while holding a dominant lead over most every other nation in terms of opportunity and market size. And although the poor are disproportionately affected by such downturns, it's an aspect of the design that incentivizes people to climb higher. If the incentive were not in this direction, or non-existent altogether, we would end up with a real race to the bottom market whereby all goods and services end up being rationed to the populace in a planned market economy - and historically those economies haven't worked out so well.