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Category: Public policy

Copy of my letter to the Minister for Planning, Victoria re: building system issues

Please note: This is not my typical blog post.

I’m publishing below a copy of a letter that I’ve written in my personal capacity to the Victorian Government in relation to gaps in the regulatory system for builders.

While specific to the Victorian system, this letter is also educative. I generally recommend minimal regulation. This letter, however, is a mixed offering. In this I ask for the two following things – one (if implemented) would reduce regulation; the other would increase it:

a) elimination of regulation that blocks reputational effects from operating; and

b) imposing targeted new regulatory requirements to weed out bad builders.

Does this letter have any implications for India? I don’t think so, since the governance system is radically worse in India.

====MY LETTER – as HTML (I will not be posting the Word/PDF copy) ====

From     Sanjeev Sabhlok

To          The Hon Richard Wynne, Minister for Planning, Victoria

Date:  6 February 2017 

Subject:  The problem of builders who do not build

Dear Minister

One would imagine that builders registered in Victoria would do the most basic thing: build. But that’s not always the case.

More than three years and two months after I signed my building contract, my builder has not only not finished the house he contracted to build, he effectively refuses to finish by refusing to respond either to me or to Consumer Affairs Victoria (refer case No. C2016/11/000691 that was closed by CAV on 4 January 2017 after the builder did not respond.  I have thereafter lodged a complaint with the Victorian Building Authority (VBA) on 17 January 2017 – Attachment 1).

The VBA and Department of Environment, Land, Water and Planning (DELWP) are not much help in this regard for, in their view, delays (or even non-completion of work by a builder) are not within their remit. It will not be excessive to suggest that the building system is broken.

In the past two years, I’ve learnt a few things about Victoria’s building system. In this letter I first identify some of the systemic failures that I have found in the system and then make suggestions for improvement. In doing so, I acknowledge that I do not fully understand all aspects of the system and my analysis may need refinement.

A) The many failures of Victoria’s regulation of builders

I am starting, below, with an issue that falls within the remit of the Attorney-General (who is copied into this email), but most of what I have to say is within your purview.

i. Defamation law sabotages reputational effects

Transparency and reputation are a powerful self-regulatory force. Ebay works without regulatory intervention because of reputational effects.

But Victorian laws actively block this essential ingredient of an accountable free market. I don’t quite understand the details of defamation law but note that Section 9(2)(b) of the Defamation Act 2005 allows corporations with fewer than 10 employees to sue. Presumably customers of big building companies can talk about their bad experience but customers of smaller companies cannot. Why should the government shelter bad builders through such restrictive laws?

My builder threatened me with defamation for making the slightest comment on the internet about his work. His many dissatisfied customers are afraid to talk about their case in public. I believe that truth remains a defence, but the average Victorian is not willing to test the law, and would much rather keep quiet – thereby not sharing information in the public domain which can protect future customers of a bad builder.

ii. VBA admit that delays are the primary concern of consumers but argue that these are a contractual matter

The VBA admit (via their email on 17 November 2016 – Attachment 2) that delays are the primary concern of consumers (i.e. even more significant than the quality of the build):

A building delay is a contractual dispute and when a complaint is received about building delays this is referred to Building Advice and Conciliation Victoria (BACV).  This is generally the primary concern of the consumer. Building delays in themselves can be complicated as there are many reasons for a delay, such as other contractual disputes, unforeseen difficulties, failure to make payment, or poor conduct of the practitioner.

The VBA have effectively washed their hands off the matter of delays by putting these into the contractual matters basket.

iii. DELWP believe, surprisingly, that delays are “not specified” in the Building Act

The Acting Executive Director, Planning, Building and Heritage, DELWP wrote the following to me on 14 December 2016 (see Attachment 3 which was forwarded to me by your Office on 15 December 2016):

Section 179 of the Building Act sets out the grounds for which a building practitioner may be subject to disciplinary action. Although delay in completing building work is not specified as a ground, such conduct, especially if repeated, may come within other grounds that are specified, for example, a pattern of incompetence or negligence in a particular matter.

The act of building a house is first and foremost a project management task. Without managing timelines there can be no building, hence such person cannot be a builder. This is implicit in the legislation. One can determine the quality of a building only if there is a building. The quality of a build is a secondary issue, timeliness being the primary one. One can’t keep the act of construction going on for 1000 years.

The second reading speech (available in the Hansard) by the then Minister for Planning on 11 November 1993 to explain the Building Bill says:

The Bill proposes the establishment of a Building Practitioners Board [BPB] to be responsible for the registration, oversight and discipline of a range of building practitioners. It is expected that the combination of the [Building Control Commission] commission’s capacity to oversee the system and the Building Practitioners Board’s inspectorial, inquiry and disciplinary powers will achieve maintenance of the existing high quality of building.

The only way the Building Act can be interpreted as not considering delays (given that delays are acknowledge by the VBA as being the primary concern of consumers) is if it specifically excluded delays.  For that, the then Minister for Planning would have had to say:

  • “I want anyone who claims to be able to build to be registered in Victoria, regardless of whether he actually builds anything”; or that
  • “Victorian builders are to be allowed infinite time to build. Delays are specifically not of any concern to the Government, and should not concern the BPB”.

Now, DELWP’s interpretation of the Building Act may well be the legal interpretation given to the matter by courts. If so, the government can fix this by specifying delays as a key disciplinary matter in the Building Act.

iv. The VBA seems to be a captured regulator

The VBA doesn’t much care for consumers but rolls out the red carpet for builders and is solicitous about any red tape it might impose on them.

The Team Leader of Complaint Services from the VBA informed me over the phone in November 2016 that since a builder might potentially build many houses, the VBA doesn’t impose information requirements on them. Apparently, asking them about the work they are undertaking, whether it is being completed in a timely manner, or even whether any of it has been ever completed, would make these poor friends of the VBA get burdened with red tape.

But not all regulatory requirements are red tape. Electricians in Victoria are required – for good reason – to provide certificates to the regulator for even small electrical work. It would definitely not be unreasonable for the VBA to ask essential information from builders. As far as imposing a burden is concerned, that’s a red herring. Someone who takes hundreds of thousands of dollars from customers can surely be asked to provide basic information to confirm whether he is doing his job.

Further, the VBA does not undertake even the most basic regulatory oversight. It does not coordinate with either CAV or the VCAT to pro-actively identify bad builders. As one of my builder’s many unhappy customers wrote to me:

… it was confirmed to me by a VCAT representative that there are no systems set up at VCAT to monitor repeat offenders. … they informed me that a builder can appear 100 times a year at VCAT … and it will not be flagged … as a public concern.

The [VCAT] representative said they do not have the systems in place to search a name, unless the person enquiring knows both parties names.

I also asked about why the cases I’d discovered do not show on the VCAT online searches and was told that not all cases via VCAT are registered online. So how would you know that you are about to enter into a contract with a complete rogue and financial robber with no access to important & relevant records?! VCAT confirmed “You wouldn’t know”. Surely this proves added onus on VBA to protect the public.

v. Insufficient ‘penalty’ for delays, and difficulty in accessing insurance

Accountability requires that if someone doesn’t perform his job, he should feel a financial pinch. But the system doesn’t even rap bad builders with a feather for delays, leave alone penalising them. The only ones who feel a severe financial (and psychological) pinch are honest Victorians.

In my case, the build cost around $600,000 but damages were set at around 3 per cent (on an annualised basis). This is less than the interest I’m paying on the mortgage, even excluding the many severe inconveniences caused by delay. To call this amount “damages” is a play on words, pure deception.

Further, there is the issue of the VMIA and insurance. I understand that even if a builder is deregistered by the VBA, customers of bad builders are not likely to get any relief. Insurance only kicks in if a builder dies or disappears, or becomes insolvent. For policies issued on or after 1 July 2015 (mine was in early 2014, so this doesn’t apply), if a builder fails to comply with a VCAT or court order, that, too, could allow some relief. But even for those who go to VCAT or court, there is a huge associated legal cost.

As you can now see clearly, everything in the system is stacked against consumers. Builders are kings and can do no wrong. I would have imagined that mere deregistration should suffice to get some relief, but that’s not the case.

As a result of all these factors, getting a good builder in Victoria is now a matter of pure luck. It is unclear why the government is going to such great lengths to protect bad builders at the expense of honest Victorians.

B. Consequence: Hell on earth for some Victorians

Once someone gets a bad builder, life becomes hell and there is no recourse, no remedy. My builder has been so emboldened that a few months ago he wrote to me: “let the games begin”.  Indeed, it would seem that it is the government that is playing games with honest Victorians.

Builders like mine have a simple strategy: they extract as much money as they can from customers and then stop work. Customers then run from pillar to post, and are ultimately forced to seek cancellation of the contract at great personal and financial expense.

This also makes a mockery of the alleged “statutory” warranty. When such builders don’t respond even to an email or phone call and the government is totally supportive of such builders, what hope can there be of getting them to fix defects in the portion of the house that they did build? There are many defects in my house (in addition to the fact that there are a number of incomplete issues) but the VBA are not impressed. Not only have I brought this builder to the VBA’s notice over the course of more than a year, at least around ten customers of my builder have repeatedly complained about him but the VBA feel that my builder is fit and proper.

C. Here’s how you can help

I believe your intervention, and the intervention of other relevant Ministers, has now become imperative. I’m outlining specific suggestions below:

i. Use the “fit and proper” and renewal provisions of the forthcoming Building Regulations 2017 to eliminate VBA’s discretion

The Victorian Auditor General (VAGO) has, through his May 2015 report, Victoria’s Consumer Protection Framework for Building Construction, advised you of some of these issues. The VAGO recommended that DELWP and the BPB (now VBA) “review the practitioner registration and discipline regimes and advise government accordingly, so that:

  • only qualified, competent and suitable practitioners are allowed to trade
  • disciplinary systems and sanctions ensure that there is sufficient disincentive to engage in misconduct and that registered practitioners who do so can be excluded from trading
  • data from registration and discipline regimes is collected and analysed to inform system improvements.”

I asked DELWP through a Freedom of Information request about what thinking they had put into these matters, particularly in relation to delays. I asked for information regarding:

(A) any official advice received by DELWP (either upon request or suo moto) from the VBA or CAV in relation to (1) the habitual practice of registered builders not completing domestic buildings in time, and (2) any suggestions received by DELWP from these entities in relation to options to address this systemic shortcoming, such as (but not limited to) through making it a requirement for renewal of the registration of a builder by the VBA, for the VBA to require proof of satisfactory and timely completion from all customers of buildings that were due for completion during the year before the date of registration renewal.

(B) summary of any research in this regard (i.e. specifically related to the nature and extent of this chronic problem of incessant delay by builders and use or lack thereof of the renewal system of registration to identify such delinquent builders, and any options identified in this regard) undertaken by the DELWP to potentially inform the forthcoming new Building Regulations 2017 which allow the Minister, under s. 172AA of the Building Act, to prescribe such requirements

The answer was: Nothing! I received a nil response (Ref. FI/03/4237 dated 28 November 2016 – see Attachment 3). DELWP have neither received any advice from anyone (such as the VBA) nor conducted any research of their own in this regard.

Please note that VAGO had asked DELWP to “review the practitioner registration and discipline regime”. Presumably, DELWP were required to do something about this mater. And given delays are the primary concern of consumers, it stands to reason that they’d have found something to say about this issue. But nothing.

One would have imagined that a competent regulator would identify the pattern of complaints it receives and advise government on remedies for these causes, but the VBA do not undertake even such basic analysis.

On 17 November 2016, the VBA wrote to me via email (Team Leader’s email, Attachment 2):

As a result of recent legislative change requiring 5 year registration renewals, the VBA will consider whether a practitioner continues to be a fit and proper person to practise as a building practitioner, when it receives an application for renewal. The VBA would consider a practitioner’s disciplinary history in that process. Practitioners will be transitioned to a 5 year registration progressively over the next 5 years. The fact that a complaint has been made against a practitioner may not on its own mean the VBA refuses to renew that registration.

The last line says it all. It would seem that the VBA are likely to go to any length to protect builders. They intend to use their discretionary power purely for the benefit of builders. It is not a far-fetched statement to make to suggest that they are a captured regulator.

To resolve this matter you will need to provide the VBA with specific directions and eliminate their discretionary powers. Fortunately, there is now a pathway available for you to use.

In response to the VAGO’s report, the Government has enacted (through you) the Building Legislation Amendment (Consumer Protection) Act 2016 No. 15 of 2016 on 19 April 2016. Section 172AA (Renewal of registration) of the new Act empowers you (through the anticipated Building Regulations 2017) to require the VBA to grant renewal of registration of a builder subject to applicant complying with “any other renewal criteria or conditions” beyond those that relate merely to payment of the fee.

I request you to (a) mandate the meaning of “fit and proper” and (2) specify the renewal conditions. In particular, the following requirements should be inserted into the regulations:

a) that the VBA require registered builders to specify, in the relevant contract, the completion date for each stage of construction that they undertake (this requirement should be supported through changes to the Domestic Building Contracts Act 1995, although it may not be necessary to do so);

b) that the VBA ask all registered builders to provide an annual declaration (a tick a box would suffice) to the effect that:

  • all their domestic building work is being undertaken in accordance with contractually agreed timelines for each stage. Where any stage has slipped, the guilder should provide details and reasons for slippage; and
  • all work that needed to be completed during a previous year/s has been completed within 1.5 times the contractually agreed timeline.

c) that the VBA require builders to not sign up any new work if there has been any slippage in the completion at any stage of any existing work, till such existing work is completed and the project reverts to its planned timelines;

d) that the VBA automatically deregister any builder who has not completed any domestic building work within 1.5 times the contractually agreed duration (in this regard, the duration should be allowed to be amended in writing by both parties: this would allow for legitimate variations); and

e) once a builder is deregistered, the builder’s company should be delicensed as well, else in some cases I understand things get prolonged and consumers get no relief. Basically, as soon as the builder is deregistered, the consumer should have the right to go to the insurer and get the remaining works completed (this is a rather important requirement and needs relevant legislative change. It may lead to increase in insurance premiums, but consumers would much rather pay more for such insurance as part of the building process, than suffer bad builders).

Upon receipt of a builder’s declaration, the VBA should:

  • publish the declaration and any associated explanations on its website. This information is of great public interest, being of concern both to current and future customers of the builder. The information asymmetry prevalent today – whereby consumers know next to nothing about someone to whom they entrust their entire lifetime savings – can only be addressed through transparency. Reputational effects are the best cure for this disease of bad builders;
  • re-register the builder unconditionally where work is proceeding within contractual timelines; and
  • issue conditional re-registration if any delay has occurred beyond the contractual completion date/s for any stage; then, cause an inquiry and publish its findings; where necessary, the VBA should terminate the registration of a builder even though he has not yet reached 1.5 times the contractual period for completion where it becomes obvious that the work simply cannot be completed in time. The key is to weed out the bad elements from the system as soon as possible.

ii. Issue a Statement of Expectations that requires the VBA to create an early warning system

A good regulator must implement a risk-based approach to address market failures. In this case the gaping information asymmetries in the system are being exacerbated by significant government failure (namely, defamation laws to sabotage reputational effects). The VBA needs to develop the capability to distinguish good from bad builders.

The regulatory requirements above will provide the VBA with the data and tools to develop a robust early warning system.

I request you to issue a Statement of Expectations to the VBA to require the development of an early-warning system based on information obtained from: (a) regulatory requirements; (b) the CAV; (c) the VCAT; (d) through VBA’s random inspections; (e) through VBA’s interviews with consumers; and (f) through the internet (where customers sometimes do express some of their experiences even with small builders). The VBA should also engage with building surveyors to proactively identify whether a builder continues to be fit and proper.

This will increase the VBA’s workload and costs. I believe customers will be willing to pay a higher building permit fee in order to get a higher quality service from the VBA.

Alternatively, the VBA can charge extra from those consumers who want a higher level of scrutiny of their builder. I would have happily paid 1 per cent of my build cost to VBA (i.e. $6,000) to supervise my builder more actively. Doing so would be so much cheaper than going through the hell created by my builder.

iii. Amend the Domestic Building Contracts Act 1995

The Domestic Building Contracts Act 1995 has a number of lacunae and should be amended to:

  • require builders to specify the time taken by each stage of building, from the day the building permit is approved (this should be the unambiguous legal date of commencement of construction); and
  • require weekly damages for delay at an annualised rate of 10 per cent over and above the standard indexation rate for government fees (set by the Treasurer of Victoria each year).

There is also an urgent need to reform the insurance system for homes so it becomes easy to access insurance once a builder is deregistered.

iv. Amend the defamation law

While this matter is not within your portfolio (hence I’m copying the Premier), the defamation law in Victoria needs to let Victorians freely express their views on the performance of all businesses –  regardless of their size

D.Concluding request

I would like to see the system fixed. I am keen to work through any practical obstacles and identify cost-effective solutions that balance the cost of increased regulatory oversight with social benefits.  To progress this, I’d be happy to discuss details with your designated representative (and the designated representative/s of other relevant Ministers).

I am copying this letter to others concerned and will also publish it on my personal blog for the benefit of the many affected customers of my builder and for the benefit of other Victorians who are currently suffering from the effects of this ill-designed system.

Regards

 

Sanjeev Sabhlok

Copy (I’m excluding attachments in the interest of privacy) to: The Premier; the Attorney General; the Minister for Consumer Affairs; the Secretary of DELWP; the VBA.

 

==ADDENDUM===

Someone found this article: http://www.theage.com.au/victoria/when-your-dream-home-becomes-a-nightmare-20150805-gis1h3.html

Clearly this is not a new issue.
==ADDENDUM==
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The most readable Thomas Sowell – on the shambles that is leftism

Some of Sowell’s wonderful articles on Leftism:

12/06/16: The Left’s Gambles

11/02/16: The Left’s Vision

10/21/16: The Left and the Masses: Part III
10/20/16: The Left and the Masses: Part II
10/19/16: The Left and the Masses

12/22/15: The Busybody Left

07/23/15: The Fact-Free Left: Part II
07/22/15: The Fact-Free Left

03/11/14: The Left Versus Minorities

04/25/14: The High Cost of Liberalism: Part III
04/24/14: The High Cost of Liberalism: Part II
04/23/14: The High Cost of Liberalism

08/06/13: Busybody Politics

07/05/13: The Mindset of the Left: Part IV
07/04/13: The Mindset of the Left: Part III
07/03/13: The Mindset of the Left: Part II
07/02/13: The Mindset of the Left

12/02/08: Freedom and the Left

09/09/08: The Vision of the Left

05/16/07: Presumptions of the Left
05/15/07: The Anger Of The Left

08/24/06: The Left and crime, Part II
08/23/06: The Left and crime

01/07/05: The Left monopoly

08/06/04: The left’s vocabulary
08/05/04: The left’s vision

12/05/03: The high cost of busybodies, Part IV
12/04/03: The high costs of busybodies, Part III
12/03/03: The high costs of busybodies, Part II
12/02/03: The high costs of busybodies

12/04/00: Poverty and the Left

5/29/98: The insulation of the Left

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The most brilliant Thomas Sowell – on the nonsensical public policy concept of “affordability”

I regret I’m discovering Sowell’s extensive work only now. It is an amazing pleasure to read his articles and books.

In this one, I’m noting a few of his insights on the ultra-spurious concept of affordability:

====EXTRACT===

“Many of the cant words of politics are simply evasions of reality. A prime example is the notion of making housing, college, health insurance, or other things “affordable.”

“Virtually anything can be made more affordable in isolation, simply by transferring resources to it from elsewhere in the economy, and having most of the costs absorbed by the U. S. Treasury.

“The federal government could make a Rolls Royce affordable for every American, but we would not be a richer country as a result. We would in fact be a much poorer country”

– Thomas Sowell

===ARTICLE===

“Affordability” strikes again

prices are conveying an underlying reality about costs and scarcity — a reality that is not going to be changed by throwing the taxpayers’ money around to make things “affordable.”

housing prices have been forced up by artificially created scarcities, many under pious political labels. In one of the hotbeds of environmentalism and other forms of liberalism — California’s Marin County, across from San Francisco — the average price of a house rose five-fold in just one decade.

===ARTICLE==

The ‘Affordable Housing’ Fraud

==ARTICLE===

Who can afford it?

==ARTICLE==

Affordable housing

 

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The fundamental mistakes of analysis about income inequality – a brilliant exposition by Thomas Sowell

I’m extracting a brilliant section from the Thomas Sowell Reader for the illumination of mankind. If you understand this, you’ll become immune to some of the major errors/delusions that beset many of the “intellectuals” of this world.

===

“INCOME DISTRIBUTION” –by Thomas Sowell

Variations in income can be viewed empirically, on the one hand, or in terms of moral judgments, on the other. Most of the contemporary intelligentsia do both. But, in order to assess the validity of the conclusions they reach, it is advisable to assess the empirical issues and the moral issues separately, rather than attempt to go back and forth between the two, with any expectation of rational coherence.

Empirical Evidence

Given the vast amounts of statistical data on income available from the Census Bureau, the Internal Revenue Service and innumerable research institutes and projects, one might imagine that the bare facts about variations in income would be fairly well known by informed people, even though they might have differing opinions as to the desirability of those particular variations. In reality, however, the most fundamental facts are in dispute, and variations in what are claimed to be facts seem to be at least as great as variations in incomes. Both the magnitude of income variations and the trends in these variations over time are seen in radically different terms by those with different visions as regards the current reality, even aside from what different people may regard as desirable for the future. Perhaps the most fertile source of misunderstandings about incomes has been the widespread practice of confusing statistical categories with flesh-and-blood human beings. Many statements have been made in the media and in academia, claiming that the rich are gaining not only larger incomes but a growing share of all incomes, widening the income gap between people at the top and those at the bottom. Almost invariably these statements are based on confusing what has been happening over time in statistical categories with what has been happening over time with actual flesh-and-blood people.

A New York Times editorial, for example, declared that “the gap between rich and poor has widened in America.”1 Similar conclusions appeared in a 2007 Newsweek article which referred to this era as “a time when the gap is growing between the rich and the poor?and the superrich and the merely rich,?2 a theme common in such other well-known media outlets as the Washington Post and innumerable television programs. “The rich have seen far greater income gains than have the poor,” according to Washington Post columnist Eugene Robinson.3 A writer in the Los Angeles Times likewise declared, “the gap between rich and poor is growing.”4 According to Professor Andrew Hacker in his book Money: “While all segments of the population enjoyed an increase in income, the top fifth did twenty-four times better than the bottom fifth. And measured by their shares of the aggregate, not just the bottom fifth but the three above it all ended up losing ground.”5 E.J. Dionne of the Washington Post described “the wealthy” as “people who have made almost all the income gains in recent years” and added that they are “undertaxed.”6

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories—and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one income category to another over time. In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20 percent bracket have risen over the years, widening the gap between the top and bottom quintiles.7 But U.S. Treasury Department data, following specific individuals over time from their tax returns to the Internal Revenue Service, show that in terms of people, the incomes of those particular taxpayers who were in the bottom 20 percent in income in 1996 rose 91 percent by 2005, while the incomes of those particular taxpayers who were in the top 20 percent in 1996 rose by only 10 percent by 2005—and the incomes of those in the top 5 percent and top one percent actually declined.8

While it might seem as if both these radically different sets of statistics cannot be true at the same time, what makes them mutually compatible is that flesh-and-blood human beings move from one statistical category to another over time. When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile—and when those in the top one percent had their incomes cut by about one-fourth, that may well have dropped many, if not most, of them out of the top one percent. Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.

Many of the same kinds of data used to claim a widening income gap between “the rich” and “the poor”—names usually given to people with different incomes, rather than different wealth, as the terms rich and poor might seem to imply—have led many in the media to likewise claim a growing income gap between the “super-rich” and the “merely rich.” Under the headline “Richest Are Leaving Even the Rich Far Behind,” a front-page New York Times article dubbed the “top 0.1 percent of income earners—the top one-thousandth” as the “hyper-rich” and declared that they “have even left behind people making hundreds of thousands of dollars a year.”9 Once again, the confusion is between what is happening to statistical categories over time and what is happening to flesh-and-blood individuals over time, as they move from one statistical category to another.

Despite the rise in the income of the top 0.1 percent of taxpayers as a statistical category, both absolutely and relative to the incomes in other categories, as flesh-and-blood human beings those individuals who were in that category initially had their incomes actually fall by a whopping 50 percent between 1996 and 2005.10 It is hardly surprising when people whose incomes are cut in half drop out of the top 0.1 percent. What happens to the income of the category over time is not the same as what happens to the people who were in that category at any given point in time. But many among the intelligentsia are ready to seize upon any numbers that seem to fit their vision.11

It is much the same story with data on the top four hundred income earners in the country. As with other data, data on those who were among the top 400 income earners from 1992 to 2000 were not data on the same 400 people throughout the span of time covered. During that span, there were thousands of people in the top 400—which is to say, turnover was high. Fewer than one-fourth of all the people in that category during that span of years were in that category more than one year, and fewer than 13 percent were in that category more than two years.12

Behind many of those numbers and the accompanying alarmist rhetoric is a very mundane fact: Most people begin their working careers at the bottom, earning entry-level salaries. Over time, as they acquire more skills and experience, their rising productivity leads to rising pay, putting them in successively higher income brackets. These are not rare, Horatio Alger stories. These are common patterns among millions of people in the United States and in some other countries. More than three-quarters of those working Americans whose incomes were in the bottom 20 percent in 1975 were also in the top 40 percent of income earners at some point by 1991. Only 5 percent of those who were initially in the bottom quintile were still there in 1991, while 29 percent of those who were initially at the bottom quintile had risen to the top quintile.13 Yet verbal virtuosity has transformed a transient cohort in a given statistical category into an enduring class called “the poor.”

Just as most Americans in statistical categories identified as “the poor” are not an enduring class there, studies in Britain, Canada, New Zealand and Greece show similar patterns of transience among those in low-income brackets at a given time.14 Just over half of all Americans earning at or near the minimum wage are from 16 to 24 years of age15—and of course these individuals cannot remain from 16 to 24 years of age indefinitely, though that age category can of course continue indefinitely, providing many intellectuals with data to fit their preconceptions.

Only by focussing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a “problem” for which a “solution” is necessary. They have created a powerful vision of “classes” with “disparities” and “inequities” in income, caused by “barriers” created by “society.” But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the “barriers” assumed by many, if not most, of the intelligentsia.

Far from using their intellectual skills to clarify the distinction between statistical categories and flesh-and-blood human beings, the intelligentsia have instead used their verbal virtuosity to equate the changing numerical relationship between statistical categories over time with a changing relationship between flesh-and-blood human beings (?the rich? and ?the poor?) over time, even though data that follow individual income-earners over time tell a diametrically opposite story from that of data which follow the statistical categories which people are moving into and out of over time.

The confusion between statistical categories and flesh-and-blood human beings is compounded when there is confusion between income and wealth. People called “rich” or “super-rich” have been given these titles by the media on the basis of income, not wealth, even though being rich means having more wealth. According to the Treasury Department: “Among those with the very highest incomes in 1996—the top 1/100 of 1 percent—only 25 percent remained in this group in 2005.”16 If these were genuinely superrich people, it is hard to explain why three-quarters of them are no longer in that category a decade later.

A related, but somewhat different, confusion between statistical categories and human beings has led to many claims in the media and in academia that Americans’ incomes have stagnated or grown only very slowly over the years. For example, over the entire period from 1967 to 2005, median real household income—that is, money income adjusted for inflation—rose by 31 percent.17 For selected periods within that long span, real household incomes rose even less, and those selected periods have often been cited by the intelligentsia to claim that income and living standards have “stagnated.”18 Meanwhile, real per capita income rose by 122 percent over that same span, from 1967 to 2005.19 When a more than doubling of real income per person is called “stagnation,” that is one of the many feats of verbal virtuosity.

The reason for the large discrepancy between growth rate trends in household income and growth rate trends in individual income is very straightforward: The number of persons per household has been declining over the years. As early as 1966, the U.S. Bureau of the Census reported that the number of households was increasing faster than the number of people and concluded: “The main reason for the more rapid rate of household formation is the increased tendency, particularly among unrelated individuals, to maintain their own homes or apartments rather than live with relatives or move into existing households as roomers, lodgers, and so forth.?20 Increasing individual incomes made this possible. As late as 1970, 21 percent of American households contained 5 or more people. But, by 2007, only 10 percent did.21

Despite such obvious and mundane facts, household or family income statistics continue to be widely cited in the media and in academia—and per capita income statistics widely ignored, despite the fact that households are variable in size, while per capita income always refers to the income of one person. However, the statistics that the intelligentsia keep citing are much more consistent with their vision of America than the statistics they keep ignoring.

Just as household statistics understate the rise in the American standard of living over time, they overstate the degree of income inequality, since lower income households tend to have fewer people than upper income households. While there are 39 million people in households whose incomes are in the bottom 20 percent, there are 64 million people in households whose incomes are in the top 20 percent.22 There is nothing mysterious about this either, given the number of low-income mothers living with fatherless children, and low-income lodgers in single room occupancy hotels or rooming houses, for example.

Even if every person in the entire country received exactly the same income, there would still be a significant “disparity” between the average incomes received by households containing 64 million people compared to the average incomes received by households containing 39 million people. That disparity would be even greater if only the incomes of working adults were counted, even if those working adults all had identical incomes. There are more adult heads of household working full-time and year-around in even the top five percent of households than in the bottom twenty percent of households.23

Many income statistics are misleading in another sense, when they leave out the income received in kind—such as food stamps and subsidized housing—which often exceeds the value of the cash income received by people in the lower-income brackets. In 2001, for example, transfers in cash or in kind accounted for more than three-quarters of the total economic resources at the disposal of people in the bottom 20 percent.24 In other words, the standard of living of people in the bottom quintile is about three times what the income statistics would indicate. As we shall see, their personal possessions are far more consistent with this fact than with the vision of the intelligentsia.

Moral Considerations

The difference between statistical categories and actual people affects moral, as well as empirical, issues. However concerned we might be about the economic fate of flesh-and-blood human beings, that is very different from being alarmed or outraged about the fate of statistical categories. Michael Harrington’s best-selling book The Other America, for example, dramatized income statistics, lamenting “the anguish” of the poor in America, tens of millions “maimed in body and spirit” constituting “the shame of the other America,” people “caught in a vicious circle” and suffering a “warping of the will and spirit that is a consequence of being poor.”25 But investing statistical data with moral angst does nothing to establish a connection between a transient cohort in statistical categories and an enduring class conjured up through verbal virtuosity.

There was a time when such rhetoric might have made some sense in the United States, and there are other countries where it may still make sense today. But most of those Americans now living below the official poverty line have possessions once considered part of a middle class standard of living, just a generation or so ago. As of 2001, three-quarters of Americans with incomes below the official poverty level had air-conditioning (which only one-third of Americans had in 1971), 97 percent had color television (which fewer than half of Americans had in 1971), 73 percent owned a microwave oven (which fewer than one percent of Americans had in 1971) and 98 percent of “the poor” had either a videocassette recorder or a DVD player (which no one had in 1971). In addition, 72 percent of “the poor” owned a motor vehicle.26 None of this has done much to change the rhetoric of the intelligentsia, however much it may reflect changes in the standard of living of Americans in the lower income brackets.

Typical of the mindset of many intellectuals was a book by Andrew Hacker which referred to the trillions of dollars that become “the personal income of Americans” each year, and said: “Just how this money is apportioned will be the subject of this book.?27 But this money is not apportioned at all. It becomes income through an entirely different process.

The very phrase “income distribution” is tendentious. It starts the economic story in the middle, with a body of income or wealth existing somehow, leaving only the question as to how that income or wealth is to be distributed or “apportioned” as Professor Hacker puts it. In the real world, the situation is quite different. In a market economy, most people receive income as a result of what they produce, supplying other people with some goods or services that those people want, even if that service is only labor. Each recipient of these goods and services pays according to the value which that particular recipient puts on what is received, choosing among alternative suppliers to find the best combination of price and quality—both as judged by the individual who is paying.

This mundane, utilitarian process is quite different from the vision of “income distribution” projected by those among the intelligentsia who invest that vision with moral angst. If there really were some pre-existing body of income or wealth, produced somehow—manna from heaven, as it were—then there would of course be a moral question as to how large a share each member of society should receive. But wealth is produced. It does not just exist somehow. Where millions of individuals are paid according to how much what they produce is valued subjectively by millions of other individuals, it is not at all clear on what basis third parties could say that some goods or services are over-valued or under-valued, that cooking should be valued more or carpentry should be valued less, for example, much less that not working at all is not rewarded enough compared to working.

Nor is there anything mysterious in the fact that at least a thousand times as many people would pay to hear Pavarotti sing as would pay to hear the average person sing.

Where people are paid for what they produce, one person’s output can easily be worth a thousand times as much as another person’s output to those who are the recipients of that output—if only because thousands more people are interested in receiving some products or services than are interested in receiving other products and services—or even the same product or service from someone else. For example, when Tiger Woods left the golf tournament circuit for several months because of an injury, television audiences for the final round of major tournaments declined by varying amounts, ranging up to 61 percent.28 That can translate into millions of dollars’ worth of advertising revenue, based on the number of television viewers.

The fact that one person’s productivity may be a thousand times as valuable as another’s does not mean that one person’s merit is a thousand times as great as another’s. Productivity and merit are very different things, though the two things are often confused with one another. An individual’s productivity is affected by innumerable factors besides the efforts of that individual—being born with a great voice being an obvious example. Being raised in a particular home with a particular set of values and behavior patterns, living in a particular geographic or social environment, merely being born with a normal brain, rather than a brain damaged during the birth process, can make enormous differences in what a given person is capable of producing.

Moreover, third parties are in no position to second-guess the felt value of someone’s productivity to someone else, and it is hard even to conceive how someone’s merit could be judged accurately by another human being who “never walked in his shoes.” An individual raised in terrible home conditions or terrible social conditions may be laudable for having become an average, decent citizen with average work skills as a shoe repairer, while someone raised from birth with every advantage that money and social position can confer may be no more laudable for becoming an eminent brain surgeon. But that is wholly different from saying that repairing shoes is just as valuable to others as being able to repair maladies of the brain. To say that merit may be the same is not to say that productivity is the same. Nor can we logically or morally ignore the discrepancy in the relative urgency of those who want their shoes repaired versus those in need of brain surgery. In other words, it is not a question of simply weighing the interest of one income recipient versus the interest of another income recipient, while ignoring the vastly larger number of other people whose well-being depends on what these individuals produce.

If one prefers an economy in which income is divorced from productivity, then the case for that kind of economy needs to be made explicitly. But that is wholly different from making such a large and fundamental change on the basis of verbal virtuosity in depicting the issue as being simply that of one set of “income distribution” statistics today versus an alternative set of “income distribution” statistics tomorrow.

As for the moral question, whether any given set of human beings can be held responsible for disparities in other people’s productivity—and consequent earnings—depends on how much control any given set of human beings has maintained, or can possibly maintain, over the innumerable factors which have led to existing differences in productivity. Since no human being has control over the past, and many deeply ingrained cultural differences are a legacy of the past, limitations on what can be done in the present are limitations on what can be regarded as moral failings by society. Still less can statistical differences between groups be automatically attributed to “barriers” created by society. Barriers exist in the real world, just as cancer exists. But acknowledging that does not mean that all deaths—or even most deaths—can be automatically attributed to cancer or that most economic differences can be automatically attributed to “barriers,” however fashionable this latter non sequitur may be in some quarters.

Within the constraints of circumstances, there are things which can be done to make opportunities more widely available, or to help those whose handicaps are too severe to expect them to utilize whatever opportunities are already available. In fact, much has already been done and is still being done in a country like the United States, which leads the world in philanthropy, not only in terms of money but also in terms of individuals donating their time to philanthropic endeavors. But only by assuming that everything that has not been done could have been done, disregarding costs and risks, can individuals or societies be blamed because the real world does not match some vision of an ideal society. Nor can the discrepancy between the real and the vision of the ideal be automatically blamed on the existing reality, as if visionaries cannot possibly be mistaken.

 

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