Do iPhones make up for stagnant wages?

Photographer: Laura McDermott/Bloomberg

Jamie Dimon Reduces Income Inequality

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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(After this column was published, it was brought to our attention that news reports on the speech in question were incomplete. The speech discussed a range of measures to reduce income inequality including skills training, strengthening inner-city schools, structuring a just immigration policy, and growing economic markets. This information should have been referenced and we regret the omission.)  

Whenever I am going through a rough patch in my life, it’s nice when a friend offers kind words of encouragement, some motivational thoughts -- Hey! You can get through this! -- and everything eventually gets better. 

Perhaps that’s what JPMorgan Chase Chief Executive Officer Jamie Dimon was thinking when he in effect told the poor -- Buck up! Things are much better than you realize. Dimon, a billionaire, was speaking at an event in Detroit last week when he noted the positive effects technology was having on inequality, even with wages stagnant for so many workers for so long. “It’s not right to say we’re worse off,” he said. “If you go back 20 years ago, cars were worse, health was worse, you didn’t live as long, the air was worse. People didn’t have iPhones.” 

I like my iPhone, but I had no idea it had the power to make up for three decades of stagnant wages, especially for those workers on the lower half of the income scale. No wonder Steve Jobs was so beloved. 

Things-aren’t-so-bad arguments seem to fall into a few distinct archetypes, some much more worthy -- and entertaining -- than others. 

The first is a pushback against the Malthusians, or the idea that humans will outstrip the earth’s resources, mainly arable land. Morgan Housel, at the Motley Fool, offers a fine example of why we shouldn’t listen to these doom-and-gloom types. 

The second type notes that regardless of how good things may be, humans tend to find the negative. When comedian Louis CK told Conan O’Brien that “Everything’s amazing and nobody’s happy,” it went viral because it was a) hilarious and b) resonated as true.

The last type, including the one made by Dimon, is both cynical and deeply misleading. I call it hedonic adjustment for the poor. Like all bad arguments, it has just enough facts to make it look plausible. It isn’t, and can easily be debunked; indeed, it falls apart upon close examination. We touched on this back in January in “Are the Poor Better Off Than King Louis XIV?” Like so many zombie ideas, it keeps coming back, again and again.

Hedonic adjustments trace their recent history to the work of Michael Boskin, who served as chairman of the President’s Council of Economic Advisers under President George H.W. Bush. The Boskin Commission -- or as it was formally known, the Advisory Commission to Study the Consumer Price Index -- reached the dubious conclusion that inflation was overstated. To address this finding, the commission made a series of recommendations that were implemented by the Bureau of Labor Statistics.

Adjusting for quality -- hedonics -- was one of the many ways that inflation measurements were reduced. It’s complicated, but hedonics essentially says that quality improvements are the equivalent of price decreases. Looked at another way, if something stays the same price but its quality goes up, you are essentially paying less than you previously were, and thus inflation is slower. I have discussed the folly of hedonics previously (here and here). Adjusting for quality was one of the factors that reduced reported inflation by more than 1.1 percent in almost every year since 1997. The Mises Institute does a good job of explaining why hedonics is mostly nonsense.

And so we come back to Dimon. His comments are warmed-over think-tank pablum. The conservative Heritage Foundation, for example, a few years ago made the preposterous argument that no one with a refrigerator or stove is truly poor.

Noting that even though income inequality is a problem, Dimon said that slashing CEO pay wouldn’t help: “It is true that income inequality has kind of gotten worse . . . you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it.”

So if you confiscated the pay of the rich that wouldn’t reduce income inequality? Think about that. Of course it would -- though obviously that isn’t the way anyone should want to go about closing the gap. Far better is raising the pay of everyone further down the earnings ladder. (To his credit, Dimon does seem to acknowledge this.)

If you really want to understand wealth and income disparity, consider looking at the gap between rich and poor on things such as life expectancy, educational opportunities and career options. Even simple things like access to fresh food or quality medical care are wildly disparate and widening. Contrary to what some think tanks claim, these things are not becoming more available -- even for the middle class.

An easy way to identify a bad argument or investment thesis is to follow Charlie Munger’s exhortation: “Invert! Always invert!” Doing so with Dimon’s logic allows me to offer the following tongue-in-cheek suggestion: A new confiscatory 90 percent income tax on the top 1 percent would be fine because, after all, they would still be left with their iPhones, expensive luxury cars and the Hamptons weekend houses.

This argument is just as terrible as the one Dimon is making. It is exactly the reason Cambridge economist Joan Robinson wrote: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Or by anyone else. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Barry L Ritholtz at

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