Feeling Lucky? – Econlib

• My appointment at Washington University was in the sociology department. During the autumn of my fourth year, I ran into a social work faculty friend of mine in the hallway of my building… she mentioned in passing that the social work school had a job opening that perhaps I might be interested in… on a whim I decided to apply… I was offered and accepted the job in March of that year. Two weeks later, the university announced that they were closing the department of sociology and that all junior faculty would be terminated… Had I not run into my friend in the hallway, had she not mentioned as an after-thought the job opening, I certainly would have found myself out of a job and searching for a comparable position somewhere…

• —Mark Robert Rank, The Random Factor, p. 133

Mark Rank has put considerable effort into studying household incomes, delving into a large panel survey that tracks households over time as well as conducting interviews to hear people tell their own stories. These experiences convinced him that we should pay more attention to the role that luck plays in people’s lives.

As luck would have it, two authors with much better name recognition, Cass Sunstein and Nate Silver, also came out with new books recently related to the topic of luck and its effects. Their presence probably reduces the chances that The Random Factor (TRF) will reach a large audience.

In fact, it is rare for a book to sell more than a few hundred copies. Neither authors nor publishers have much control over what makes it to the best-seller list. There is a lot of luck involved.

Rank points out that history has been altered by attempts to assassinate leaders, whether the attempts fail or succeed. The classic example of the latter is the assassination of the Austrian archduke in 1914, which lit the fuse that started the First World War. As luck would have it, we had another example of the assassination phenomenon subsequent to the appearance of TRF. A young man attempted to assassinate Donald Trump at a campaign rally. Because Mr. Trump happened to be turning his head at just the right instant, he only suffered a wound to his ear.

In my opinion, it is very hard to come up with a completely satisfactory definition of luck. Rank writes,

• … a chance event is random with respect to the individual affected. In other words, the individual encountering the event could just as easily have been someone else. p. 18

This already is problematic. It describes the person who was struck by a bullet at the campaign rally and was killed. But it does not describe Mr. Trump himself, in that one cannot say that the assassination attempt could just as easily have targeted someone else.

In probability theory, there is the Law of Large Numbers, which says that if events are repeated a sufficient number of times, the average outcome becomes more predictable. Although Rank does not cite this Law, he makes the point clearly. He illustrates it using major professional sports:

• The more times that a team can score, the less important the role of luck. In the NBA, an individual team may score a basket 40 or 50 times during a game, whereas in professional soccer or hockey there may be only one or two times that a team scores. p. 71

Rank pays particular attention to the incidence of poverty.

• My life course research has shown that over the span of adulthood, 75 percent of Americans will experience at least one year in poverty or near poverty. The reason this percentage is so high is that over the course of 40 or 50 years, many unanticipated and unlucky events can happen to people. p. 137-138

The point is worth emphasizing that annual income varies a great deal relative to lifetime income. This is easily and often overlooked. For example, we regularly read that the home ownership rate in America hovers around 60 percent. However, people move back and forth between renting and owning. It was Rank and his co-authors who in an earlier book showed that close to 90 percent of Americans will have bought a home by the time they reach age 55.

In terms of annual income, when I was in graduate school, I lived in poverty, but in terms of lifetime income, I was never poor. I believe that everyone interested in public policy, including Rank, should focus more on lifetime income and less on annual income.

Turning to public policy, Rank points out that liberals are more likely than conservatives are to see luck as a factor determining people’s income and social status. I agree, and in fact, I have made the point that people would disagree less on politics if everyone had the same view of the relative role of effort and luck in different outcomes.

In his chapter on public policy, Rank focuses on annual income instead of lifetime income.

• Perhaps the most straightforward way of providing an effective safety net is through what is known as a guaranteed minimum income (GMI)….

• … for an individual or family that is earning below a certain level of income, the government would provide the necessary amount to lift them up to a minimum threshold. p. 193

Although he cites Milton Friedman, Rank misstates Friedman’s negative income tax idea. As Rank describes it, there would be zero incentive to work if all you could do was approach the minimum guaranteed income. Instead, Friedman proposes that below a minimum income level, a household would enjoy a negative income tax rate, not a full subsidy to reach a threshold.

Rank asserts that America’s safety net is inadequate, but in my opinion, this case needs to be spelled out. We already have unemployment insurance, which addresses some of the risks that people face. We have Medicare, which addresses another source of potential financial stress.

Above all, Rank does not take seriously the implications of looking at lifetime income. If people’s income varies over their lifetime that means they have the opportunity to self-insure by saving when times are good in order to maintain their living standards when times are bad. It strikes me that an implication of his research findings is that for most people, self-insurance would be adequate to enable them to get by when they have a bad year.

We should direct our compassion to people with very low lifetime income potential. For the many people who experience variation in annual incomes, we should encourage self-insurance. Government assistance might be converted to mandatory savings programs rather than programs for which eligibility is based on annual income.

Rank’s policy preferences point in the direction of a more generous welfare state. But I think that his research findings concerning the variability of income year-to-year point in a different direction.