The Wealth and Social Health of America

June 2001 -- [BOOK REVIEW] It's Getting Better All the Time: 100 Greatest Trends of the Last 100 Years. By Stephen Moore and Julian Simon (Washington, D.C: Cato Institute, 2000. 294 pp. $29.95).  

The Social Health of the Nation: How America Is Really Doing. By Marc Miringoff and Marque-Luisa Miringoff. (New York: Oxford University Press, 1999. 245 pp. $19.95).

These two books offer readers interestingly contrasting views about the state of economic and social well-being, primarily in the United States. The first book shows that living standards, health, social conditions, and many other indicators have been improving significantly during the last century or more. The second contains information about trends in social indicators that are much less rosy than those presented in the first. Some of the latter indicators imply that social conditions in the United States have deteriorated.

It's Getting Better All the Time has its roots in previous work done by Julian Simon, who died of a heart attack in 1998. His co-author, Stephen Moore, completed the book, which had been in a first draft at the time of Simon's death and had always been intended to be a jointly authored work published by the Cato Institute. The book contains virtually all of the empirical information Simon had gathered in the preceding thirty years, plus some new data unearthed during more recent research.

This book, much like Simon's previously published studies, is designed as an antidote to the profound pessimism about the future propagated by the many doomsayers of the last 50 years, especially: Rachel Carson, the Report of the Club of Rome, the U.S. government report Global 2000, Stanford biologist Paul Ehrlich, and the many other self-appointed experts who gain the attention of the media by their never-ending predictions of economic, social, environmental, and biological catastrophes.

Moore and Simon's book presents one hundred time series. Most cover developments during the postwar years, some cover the entire twentieth century, and one, the price of copper, starts in 1800. Most data are from the United States because information from other countries is either not available or was not accessible to the authors. The sources of the information are well documented and it is clear that the authors drew on the previous work of many others. The graphs are presented in bright color, are carefully labeled, and are easy to read.

The time series are aggregated into twenty-one different sections with headings such as: health, diet and nutrition, wealth, the state of poor Americans, social and cultural indicators, racism, education, safety, and environmental protection. It is clear that Moore and Simon did not limit their work to economic variables.

Needless to say that virtually all of the graphs show improvements in the economic and social health of the United States since the late 1800s and especially since the end of the Second World War.

For example, in 1920, net growth of timber in the United States amounted to 5 billion cubic feet, while 12 billion cubic feet were removed. In 1991, net growth was 23 billion and removal came to only 16 billion. So much for the myth that U.S. timber resources are being depleted at an alarming rate. The cost of energy from coal and electricity relative to average wages was six times higher in 1900 than in 2000. So much for the myth that there is a world energy shortage. The average hourly earnings of workers (wage plus fringe benefits) adjusted for inflation in 1909 was $3.43. In 1997 it was $14.84. So much for the myth that the real incomes of workers are falling. Teachers earned, in inflation adjusted dollars, $6,404 in 1900, $20,049 in 1950, and $39,374 in 1995. Teachers, many of whom are among the most vocal critics of the U.S. economic system, might remember what it has done for their living standards.

One of the main points Moore and Simon made with this large amount of empirical information is that understanding of current conditions and the projection of trends into the future must, first, be based on documented facts and, secondly, involve long periods. The value of considering longer run trends is demonstrated strongly by the energy crisis of the 1970s, which had done so much to feed the frenzy of the predictors of pending doomsday. The energy crisis shows up as a rather short run deviation from a consistent downward trend in the prices of energy. Today, the marginal cost of discovering an additional unit of recoverable petroleum and gas reserves is the lowest in history.

The lengthy introduction by Moore and the foreword by Rita J. Simon, Julian's widow, provide important perspectives on the empirical time series. First, they offer an explanation of why, as the title indicates, it's been getting better all the time. They explain the role played by economic freedom in the United States and cite work showing that across countries and through time, economic freedom is highly correlated with income levels and economic growth.

Secondly, they deal with critics of their view of the role of freedom. These critics suggest that without government we would not have seen the improvement of air quality, the rise in minimum wages, decline in industrial accidents, and so on, which have occurred during the last century. I found this section more defensive than it needs to be. Many improvements attributed to government policies developed long before the passage of regulations. Consider the downward trend in accidental deaths at work from 38 per 100 thousand in 1930 to 4 per 100 thousand in 1995. This trend is unchanged after the outpouring of safety legislation by the Occupational Health and Safety Administration (OHSA), which began in the early 1960s (graph on page 175 ofGetting Better). Moreover, the literature on economic freedom does not argue that all government activities are harmful to society. Government activities at low levels can increase economic efficiency and social well-being. The problem with most governments at present is that their activities have exceeded their optimum levels and that at the margin they do more harm than good.

Thirdly, the authors discuss some negative trends, the most important of which are included also in the book by Miringoff and Miringoff , The Social Health of the Nation. Lastly, Moore and Simon speculate on why the general public tends to believe the doomsayers and is so poorly informed about the good trends that have brought to the United States and many other countries the highest living and best health and social conditions in the history of the world. The authors suggest that the public is poorly informed by the media's well-known hunger for controversial news.

INDEX OF SOCIAL HEALTH

The Social Health of the Nation's main purpose is to argue the need for the creation of an Annual Report of the Social Health of the United States. This report would be designed to rival the Annual Report of the President, which is prepared by the Council of Economic Advisers and is almost exclusively concerned with economic and financial developments. Miringoff and Miringoff envision that the social report would attract as much attention as the economic report. Their effort has been supported by the Ford Foundation and has resulted in the creation of a Working Group on Social Indicators comprising twenty-one academics and representatives from research institutes, foundations, the media, government, business, and local community organizations. The group's headquarters are at Fordham University in New York City.

The work of the group benefited from another "source of energy and support" with an inquiry from the Rockefeller Foundation: "Do you think your concept of the social health should incorporate the perspectives of the arts and humanities?" The result has been the creation of another working group concerned with these issues and its input is reflected in the book under review.

The empirical part of Social Health contains statistics about social conditions. It begins with a graph contrasting the strong and consistent upward trend in Gross Domestic Product from 1959 and the early 1970s in the United States with a plot of the Index of Social Health comprising nine indicators. The two lines move parallel between 1959 until the early 1970s. Thereafter the Social Health Indicator fell by about 50 percent. A noticeable upward trend in the index appears in the early 1990s, but since the data end in 1996 it is impossible to say what its development has been during the boom years at the end of that decade.

The graph certainly tends to awaken readers' interest in what is going on. It is important to note, though, that the gap between the two trend lines has been exaggerated because the appropriate measure of economic well being is per capita GDP, not the total GDP figure shown. At the same time, the social index is based appropriately on the incidence of variables per unit of population. Because total GDP has grown more slowly than per capita GDP, the divergence in the trend line between the social index and the chosen index of income is greater than it would be if the appropriate measure for the latter had been used.

The Index of Social Health is a composite of three groups of indicators. The first group consists of four indicators with improving performance: infant mortality, high school dropouts, poverty for those 65 and older, and life expectancy at 65. The second group includes indicators of worsening performance: child abuse, child poverty, teenage suicide, health-care coverage, the uninsured, average weekly wages, inequality, and violent crime. The third group, "Indicators of Shifting Performance," consists of teenage drug use, teenage birth, alcohol-related fatalities, affordable housing, and unemployment.

Miringoff and Miringoff's data cover the period from about 1970 to 1996. But the sources are well documented. The graphs for the most part do not label the time axis in appropriate intervals, which makes it difficult to know precise turning points in the series and to link them to important economic and political events. As a scholar, I regret that both Getting Better and Social Health fail to present consistent definitions of the variables and the methodology used in constructing them, though I can understand that the publications are aimed at the general public and that such scholarly notes might reduce readership.

DIFFERING MESSAGES

What are we to make of the fundamental messages of these two books? I read such books to learn about historic facts for their own value. But ultimately I want to know what caused the developments, not just out of intellectual curiosity, but mainly because such explanations tend to suggest government policies that can improve matters.

Getting Better's authors offer their views on the causes of the positive trends recorded in the one hundred graphs. The theory they use draws on basic, mainstream economics, focusing on the way in which government policies affect incentives and economic efficiency. In two different, major projects, the Fraser Institute (in cooperation with 55 institutes in 55 different countries) and the Heritage Foundation have measured and tracked the strength and quantity of these government policies and summarized their findings in indices of economic freedom for over one hundred countries of the world.

The two indices have been used in a growing number of studies, including measurement of the impact of economic freedom on countries' varying economic growth rates much as one might measure the impact that traditional input of capital, education, and knowledge have on growth rates. I have used the index to study the effect on social indicators and how income redistribution policies interact with economic freedom and the growth in national product (Cato Journal, Vol. 18, No. 2. 1998).

However, the most simple and stunning application of the freedom indices is reproduced in two graphs in Getting Better. The first of these (using the Fraser Institute's data) shows that in 1997 per capita income of the economically freest top 20 percent of countries was $18,108, while that of the 20 percent of countries with the lowest economic freedom was only $1,669. The remaining countries grouped into quintiles have incomes that are unambiguously an increasing function of economic freedom. The second graph uses data from the Heritage Foundation and shows that growth in per capita income is similarly closely related to the economic freedom in each of the countries. Milton Friedman, who was deeply involved in the conceptual design of the Fraser Institute's index, had this to say about the graph:

There is nothing in the way the indexes are calculated that would prevent them from having

no correlation whatsoever with such completely independent numbers as per capita GDP and

the rate of growth of GDP. Yet, the actual correlation between the indexes and the level and

rate of economic growth documented in some graphs in the book is most impressive. No

qualitative verbal description can match the power of that graph (Gwartney, Lawson, and Block,

Economic Freedom of the World, Fraser Institute, 1996).

By contrast, Social Health has virtually no theory about the determinants of social indicators presented. The introduction and epilogue focus almost entirely on the need for the creation of a periodic social-health indicator for the United States as a whole. The authors list the frequency and number of economic indicators produced by the U.S. government, suggesting that social statistics are relatively neglected. But mainly they back their demands by arguing that many other countries have been publishing such indices for a long time, Britain since 1970 and Australia since 1993, with eighteen other countries in between. The government of Canada, for example, has published Canadian Social Trends—Canada Yearbook since 1986. There is a similar, long list of social indicators published regularly by local and state authorities.

A RALLYING POINT FOR INTERVENTIONISTS

Most people, myself included, welcome the creation and distribution of information about economics, social developments, culture, the environment, and whatever else can be measured. I wish Miringoff and Miringoff luck in their endeavors. I see only one problem likely to arise if the desired Index of Social Health is published readily: Its release will become a focus for media attention and provide a rallying point for all those who want government policies to improve the indicators. In my experience, people likely to do so tend to know the value of everything and the price of nothing—in contrast to economists who are reputed to know the price of everything and the value of nothing.

It is remarkable how studiously Miringoff and Miringoff have avoided even hinting at the possible use of the social indicators to lobby governments. The closing sentence of the introductory part of the book reads: "Using data and information that is currently available, we will begin the effort to form a social health perspective for the nation" (P. 36).

There are hints about the type of social-health perspective and interpretations Miringoff and Miringoff expect to be made of the statistics:

The globalization of economies has begun to alter the nature of modern society. Downsizing,

outsourcing, the weakened position of large segments of the work force, and declining or

stagnating wages have become pervasive phenomena, significantly altering the social contract

among government, corporations, and employees. This "system shift," as Joachim Vogel writes,

is occurring in Europe as well as the United States and "has inevitably led to growing social

inequality, as measured by most indicators of material living conditions" (P. 41).

This quotation implies clearly where the enemy is: The spread of economic freedom, not just within but also among countries. But then the authors hedge the preceding quotation with the sentence: "This may be part of the impetus behind the community indicators movement." Miringoff and Miringoff want to keep out of this book the diagnosis of social ills and the discussion of possible cures.

I find very disappointing and a little disturbing Miringoff and Miringoff's strategy of avoiding explicit diagnosis of U.S. social ills and the prescription of policies to remedy them. I do not know whether this strategy is deliberate, but given the authors' professional background and the agenda of most sociologists in general, I would find it surprising that it would not dominate their thinking and motivate their work.

I find it similarly disappointing and disturbing that the discussion of each of the social pathologies in the individual graphs is limited to suggestive hints and virtually omits the analytical examination of causes and the implicit remedies. Consider the following comment on child abuse: "Increases [of child abuse are] brought on by economic stress, substance abuse, and violence in the home and the larger society" (P.75). The growth in youth suicide rates is explained by a dark reference to Emile Durkheim's 1897 book Le Suicide, which identifies that rate as "a reflection of the underlying problems of a society" (P. 87), but it also draws the comment: "Suicide among youth remains a difficult problem to understand, even to experts in the field" (P. 91).

FLAWED DATA

As an economist, I have little detailed knowledge about the construction of worsening social indicators concerning youth suicides, drug use, child abuse, and violent crimes. Neither am I familiar with the causes of these pathologies found in the relevant professional literatures. The authors do not help other readers or me with these matters.

However, I can speak with some authority about the economic pathologies presented by Miringoff and Miringoff. Some of them present an incomplete and misleading picture. Consider average weekly earnings, for example. Miringoff and Miringoff show that earnings have fallen from $298 in 1970 to $256 in 1996 (in 1982 dollars; table 5.20, p. 99). This 25 percent fall in real wages is used widely by the enemies of globalization and economic freedom to argue that these policies have failed.

But these data are flawed in two important ways. First, they are not adjusted for the length of the average workweek. Moore and Simon show that it has fallen from 40 to 35 between 1950 and 1998 (P. 99). Average hourly wages in manufacturing, which are not dependent on the length of time worked, have risen from $9.96 in 1950 to $14.84 in 1997 (in 1998 dollars, p. 101). Secondly, the average weekly earnings data do not include non-cash benefits like pensions and health insurance. Moore and Simon's table shows that about half of the $5 gain in hourly earnings between 1950 and 1998 is due to increases in such non-cash benefits. In other words, average weekly earnings used by Miringoff and Miringoff to demonstrate an economic-social pathology are highly misleading. Workers' well-being has not diminished if we include in pay non-cash benefits and we adjust properly for the value of the greater leisure they have chosen.

I might also note in this context the importance of looking at longer time series. The 1970s are known for high levels of inflation and the energy crisis, which caused economic inefficiencies and corresponding reductions in all real incomes. Many argue that these economic pathologies were caused by reductions in economic freedom justified by the widely held belief that government could improve on the superb economic performance over the preceding two decades. After President Reagan unleashed the potential of the U.S. economy in the 1980s through tax cuts, deregulation, privatization, and other measures to increase economic freedom, the subsequent adjustments took time to bear fruit. They did so during most of the 1990s when average incomes rose smartly. Contrary to widely held views, during the boom years 1997 to 1999 "earnings for lower paid workers grew faster than for those at the top" (Business Week, April 23, 2001, p. 43, drawing on data from the Economic Policy Institute).

GROWING INEQUALITY, GROWING MOBILITY

The growing inequality of family incomes is probably the most important pathology of U.S. society identified by its critics. Miringoff and Miringoff present several data to document the rise in inequality. One graph (P. 104) shows that the most general measure of inequality, the Gini coefficient (which would be zero if everyone had a completely equal share of income and one if there were total inequality—one person getting all the income and the rest getting none), has risen from .353 in 1970 to .425 in 1996, indicating a growing inequality of income. Miringoff and Miringoff also show that the income share of the richest fifth during the same period has risen from 40.9 to 46.8 percent while that of the poorest fifth has fallen from 5.4 to 4.2 percent. Most dramatic and easiest to understand is the information that the top 5 percent of income earners had a mean income of $131,450 in 1970 and $217,355 in 1996, while the bottom fifth during the same period experienced a fall in mean income from $11,640 to $11,388. (All figures on income in 1996 dollars, from pages 106-107.)

What are we to make of these data on the growing inequality of income, which are given so much publicity and are used by social activists to demand more government income redistribution policies? First, and a relatively minor point, is that the last cited figures are for mean incomes, which tend to be distorted by the inclusion of such super-rich people as Bill Gates and other dot-com millionaires. The proper measure for comparison with the bottom fifth, which has a floor at zero income, is the median income of each group. The level and growth of the median tends to be much less than the mean.

Secondly, and most important, the data beg for further analysis. One such analysis considers that the appropriate measure of inequality is lifetime income, not the distribution of income at any moment in time, which underlies all of the above indicators of inequality. Christopher Sarlo (Poverty in Canada, Vancouver: Fraser Institute, second edition, 1996, Appendix) has shown empirically that perfect lifetime equality generates incomes of the top fifth equal to five times that of the bottom fifth in a snapshot of the distribution of income. He reached this conclusion by assuming that the average person's income rises from the lowest level at the start of work life, reaches a peak at age 65, and thereafter is low again. He used actual income data for cohorts with two different levels of education and assumed an equal number of people in every age group. He concludes: "Age and skill differentials explain about 80 percent of the deviation from perfect equality in both the bottom and top quintiles" (P. 222).

My criticism of conventional measures of income inequality and Sarlo's results should not be interpreted as suggesting that there is no poverty or that inequality is not real. The analysis suggests that the data on income inequality presented as a worsening social problem by Miringoff and Miringoff probably seriously overstate the problem and that therefore the data should not be used to describe the social health of the nation.

Many believe that the social health of a nation is determined most importantly by the opportunities it offers its citizens to improve their lives, be it over their life cycle of earnings or breaking through it with the help of extra effort or luck. Moore and Simon present an impressive table on page 79, which shows the degree of income mobility of Americans between 1975 and 1991. Of those in the bottom quintile in 1975, fully 98 percent moved into higher brackets at some point. Over the same period, 31 percent in the top quintile were replaced by upwardly mobile people from other income groups. In other quintiles, only between 20 and 30 percent have remained in the same income category, the rest have either moved up or down. In my view, no static data on income distribution should be published without reference to or accompaniment of the dynamic picture about income mobility just discussed.

DEFINING THE POOR

A similar critical analysis is needed before the data on child poverty presented by Miringoff and Miringoff can be used as evidence of the deterioration of social health. Children are poor because their parents are poor. But how is their parents' poverty measured? I know from conversations with many people that in their mind poverty most identify with hunger, homelessness, and inadequate clothing. There are such poor people in the United States, Canada, and must industrial countries. And certainly, children in this lot deserve assistance even more than their adult parents.

However, the data on poverty used in Social Health, like those in other countries, do not reflect the number of hungry and homeless people. They reflect the number of those whose incomes are low relative to the income of the average citizen. It is useful to understand how poverty is defined and measured. In Canada, for example, Statistics Canada estimates that a Canadian family with average income in 1978 spent 38.5 percent of its income on food, shelter, and clothing. The statisticians then added an arbitrary 20 percent to account for other expenditures, which are assumed to be required to make people feel that they are not poor. The 58.5 percent of the average family income is calculated and published as the Low Income Cut-Off (LICO) income.

While Statistics Canada warns strongly against the use of this income as a measure of poverty, social activists use it readily to estimate how many families have incomes below this level. This number is then widely publicized as the number of Canadian living in poverty. The United States uses a similar measure, the essence of which is that the expenditures other than those on necessities are constantly revised upward to reflect the increasing average incomes of Americans. The number of poor families by this definition has been used by Miringoff and Miringoff to indicate the number of children living in poverty.

I have no objections to counting the number of people who are relatively poor. This measure merely supplements the other indices of income distribution like the Gini coefficient and ratios of top and bottom quintile incomes. However, I do object to saying that the relatively poor live in poverty.

Salerno has made efforts to measure true poverty in Canada (Poverty in Canada). He estimated the cost of the basic necessities and found that one million Canadians in 1988 had incomes inadequate to buy these necessities. The LICO measure claimed that in the same year 3.3 million Canadians lived in poverty. Sarlo looked more carefully at the demographics of the one million poor and found that most were students, elderly, and 300,000 were single-parent families. All of these poor have access to social assistance, which is not counted in the income statistics and which is provided to deal with their low-income situations. Sarlo also estimated (Fraser Forum, March 2001, p. 33) that an astoundingly large proportion of the poor defined by his measure tend to own consumer durables like washers, dryers, color televisions, and home computers.

Moore and Simon use the relative income measure (argued to reflect poverty) to show on page 77 that the (relative) U.S. poverty level income of $8,480 in 1998 was nearly twice the average per capita income in the rest of the world. They give data that show "the poor today have a living standard—based on what they can afford to own—that is higher than that of the middle class 50 years ago and higher than that of all but the richest Americans at the start of the century" (P. 76). The graph on page 75 shows that people who have relative poverty-level incomes in 1998 came to about 14 percent of all Americans. However, since these people receive social assistance, draw on support from families (as students do), or use their accumulated savings (as pensioners do), only about 3 percent can spend less than is needed to lift them out of poverty.

The use of economic indicators like average wages and poverty without appropriate qualifications will make the index of social health misleading. I hope that Miringoff and Miringoff will consult with economists familiar with these issues and publish more meaningful measures of average real income, income inequality, and poverty among children.

I also hope that in future reports they append to each index a summary of the literature on the causes of the social pathologies. If they do, it will be possible to have a rational, informed debate over the costs and benefits of possible remedies. Let me conclude my review by suggesting what such a process might discover.

Moore and Simon quote James Q. Wilson writing about the United States:

You need only do three things to avoid poverty in this country: finish high school, marry

before having a child, and produce the child after the age of 20. Only 8 percent of families

who do this are poor; 79 percent of those who fail to do this are poor (quoted in Getting Better, p. 74).

These facts suggest that we need to understand why some Americans fail to do these things. The reforms of the U.S. welfare system, which started in Wisconsin and eventually reached Washington, have reduced the incidence of the behavior identified by Wilson. More work is needed both to explain the development of the pathologies and the recent success of the welfare reforms.

Lastly, it concerns me that activists will succeed in using allegedly deteriorating social indicators to persuade policy makers to take more direct action to improve conditions. Such policies typically require higher taxes, more social assistance, and government regulations, which give rise to two important problems of their own.

First, these policies may work in the short run, but in the longer run, they are likely to be much less successful. All of the possible policies involve moral hazard, that is changes in behavior induced by the availability of government support. It is well established that unemployment rates are higher, ceteris paribus, the more generous are unemployment insurance benefits. This fact does not mean unemployment insurance should be dismantled, but it does mean that the cost of taking care of the unemployed is much higher than had been expected when the system was first created. It also means that the remedial programs give rise to new, possibly serious new pathologies, such as cycles of dependence and welfare traps.

Secondly, higher taxes directly reduce economic freedom as measured in the above-mentioned studies. Government regulations and policing have to be increased to reduce taxpayer cheating and to limit moral hazard behavior among the recipients of benefits. As was noted above, the loss in economic freedom accompanying income redistribution policies will reduce economic growth. It will also therefore slow down increases in the absolute level of income of the poor.

In a recent study (Cato Journal, Vol 18. No. 2. 1998), I found empirical verification in data from seventeen industrial countries of the theory that the stronger are income redistribution and the accompanying policies, the greater is the reduction in economic freedom. Combining these results with the information about the extent to which lower economic freedom reduces economic growth, I was able to measure the extent to which income redistribution policies in these seventeen countries actually have lowered economic growth.

One set of my calculations suggests that a reduction in the ratio of the top over the bottom fifth of the income distribution from 9 to 5 (through taxation and a redistribution of wealth) results in a slowdown in the rate of economic growth by .2 percent per year. In a policy simulation model, I considered two countries identical initially in every respect, including the absolute level of income of the bottom fifth. One country redistributes income from the top to the bottom fifth. The other does not. In a span of forty-nine years, the absolute level of income of the bottom fifth without the initial income redistribution exceeds that of the country with such policies.

I do not put too much stock in the accuracy of my estimates, but the existence of the theoretically expected effects of social policies on economic freedom, growth and the income of the lower income earners show up clearly in the regressions. The empirical results just reported may be taken by many as evidence that income equality is a goal worth pursuing given the small reduction in economic growth. Others might disagree with these conclusions. Both points of view need to be presented for debate before income redistribution policies are enacted to remedy the kind of inequalities noted in Social Health.

Will Miringoff and Miringoff's initiative to measure the social health of the nation lead to such discussions? I hope so, but it is not encouraging that the authors in the major book under review have studiously avoided discussion of the causes and nature of the social pathologies.

The author of sixteen books and over 180 articles, Herbert G. Grubel is a professor of economics (emeritus) at Simon Fraser University and a senior fellow at the Fraser Institute, both of which are in Vancouver, British Columbia. He was also the Reform Party Member of Parliment for Capliano-Howe Sound during 1993-97, serving as the Finance Critic during 1995-97. He discusses this service in his book, A Professor in Parliment (Surrey, B.C. Sherwood Publishers).

This article was originally published in the June 2001 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.