Thursday, August 28, 2014

What if the Horatio Alger's story hero is named Rajiv?

In this Age of Piketty, there have been more and more writing about the issue of income and wealth inequality. Three articles particularly resonated with me.

Equality of opportunity, not wealth
The first was a piece from Richard Reeves of the Brookings Institute called Saving Horatio Alger: Equality, Opportunity and the American Dream.

The article cited the lack of the equality of opportunity as a problem with America today. Simply put, your success depended a large extent on the wealth of the family you were born into (emphasis added):
Lack of upward mobility is souring the national mood. As horizons shrink, anger rises. The political right has done a better job, so far, of converting frustration into political gain, by successfully—if implausibly—laying the blame for many of America’s woes at the door of "Big Government". Much of the political energy on the left has been directed against the highest earners—the top 1 percent of the income distribution. But while Occupy Wall Street generated plenty of headlines, it has produced precious few votes, and only a trivial change in the tax system: since 2013, married couples making more than $450,000 a year have had to pay just an extra nickel of tax on each dollar above that level.

The problem is not that the United States is failing to live up to European egalitarian principles, which use income as a measure of equality. It is that America is failing to live up to American egalitarian principles, measured by the promise of equal opportunity for all, the idea that every child born into poverty can rise to the top.

Take one standard indicator of mobility: the likelihood that children will, as adults, ascend to a higher rung on the income ladder than their parents. In a completely mobile, fluid society, a child raised on the bottom rung of the income ladder (usually defined as the bottom fifth of the distribution) would theoretically have as good a chance as any of making it to the top, and no greater risk of remaining trapped at the bottom. But the U.S. suffers from a high degree of intergenerational "stickiness" at the bottom of the income distribution. Children born on the bottom rung have a four in 10 chance of remaining stuck there in adulthood (between 36 percent and 43 percent, depending on the dataset), and a very slim chance (between 4 percent and 10 percent) of making it to the top.

Alan Kreuger called this inter-generational wealth stickiness effect the Great Gatsby Curve,

Reeves concluded not with an exhortation towards re-distribution, but for a plea to equalize opportunity again so that the American Dream could be realized:
On the political left, there are plenty of people who think it is time to consign Horatio Alger to the dustbin of history. For them, the Alger myth is little more than a cultural conjuring trick, providing an illusion of opportunity to distract the masses from gross inequalities of income and wealth. It can also act as a convenient untruth for the elite, who can rest assured of their intrinsic superiority: “Born on third base … thinking they hit a triple,” in football coach Barry Switzer’s vivid phrase.

But abandoning Alger—giving up on the American Dream—is not an option. While Bellamy and Piketty provide rich seams of ideas to mine, there is no prospect of a Euro-egalitarian turn in American politics. The American body politic would simply reject a graft of European-style social democracy. It’s pointless for progressives to get frustrated about this. Attachment to the ideal of equal opportunity is not a blind spot in the vision of voters. Americans do have strong egalitarian instincts, but they go hand-in-hand with a fierce commitment to individualism. The ideal of merit-fueled mobility is a fixed feature of American politics and ideology. It comes, almost literally, with the territory. Even if it were possible to retire the Alger myth, it would be a mistake. The national commitment to the principles of natural equality, opportunity, and upward mobility is an American strength. Only a politics that goes with this American grain stands any chance of creating a more equal nation.

The pitchforks are coming
The second was an article in Politico by Nick Hanauer, a billionaire, to his brethren called The pitchforks are coming...for us plutocrats. He begins his article with the story of his success:
You probably don’t know me, but like you I am one of those .01%ers, a proud and unapologetic capitalist. I have founded, co-founded and funded more than 30 companies across a range of industries—from itsy-bitsy ones like the night club I started in my 20s to giant ones like, for which I was the first nonfamily investor. Then I founded aQuantive, an Internet advertising company that was sold to Microsoft in 2007 for $6.4 billion. In cash. My friends and I own a bank. I tell you all this to demonstrate that in many ways I’m no different from you. Like you, I have a broad perspective on business and capitalism. And also like you, I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can’t even imagine. Multiple homes, my own plane, etc., etc. You know what I’m talking about. In 1992, I was selling pillows made by my family’s business, Pacific Coast Feather Co., to retail stores across the country, and the Internet was a clunky novelty to which one hooked up with a loud squawk at 300 baud. But I saw pretty quickly, even back then, that many of my customers, the big department store chains, were already doomed. I knew that as soon as the Internet became fast and trustworthy enough—and that time wasn’t far off—people were going to shop online like crazy. Goodbye, Caldor. And Filene’s. And Borders. And on and on.

Realizing that, seeing over the horizon a little faster than the next guy, was the strategic part of my success. The lucky part was that I had two friends, both immensely talented, who also saw a lot of potential in the web. One was a guy you’ve probably never heard of named Jeff Tauber, and the other was a fellow named Jeff Bezos. I was so excited by the potential of the web that I told both Jeffs that I wanted to invest in whatever they launched, big time. It just happened that the second Jeff—Bezos—called me back first to take up my investment offer. So I helped underwrite his tiny start-up bookseller. The other Jeff started a web department store called Cybershop, but at a time when trust in Internet sales was still low, it was too early for his high-end online idea; people just weren’t yet ready to buy expensive goods without personally checking them out (unlike a basic commodity like books, which don’t vary in quality—Bezos’ great insight). Cybershop didn’t make it, just another dot-com bust. Amazon did somewhat better. Now I own a very large yacht.
The difference is that this so-called "self-made man" does not see himself as anything special. In many ways, he just got lucky, which makes him fear for the future of America (emphasis added):
But let’s speak frankly to each other. I’m not the smartest guy you’ve ever met, or the hardest-working. I was a mediocre student. I’m not technical at all—I can’t write a word of code. What sets me apart, I think, is a tolerance for risk and an intuition about what will happen in the future. Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now?

I see pitchforks.
Hanauer sees a class war on the horizon and he wants to defuse it before it begins:
The oldest and most important conflict in human societies is the battle over the concentration of wealth and power. The folks like us at the top have always told those at the bottom that our respective positions are righteous and good for all. Historically, we called that divine right. Today we have trickle-down economics.

What nonsense this is. Am I really such a superior person? Do I belong at the center of the moral as well as economic universe? Do you?

My family, the Hanauers, started in Germany selling feathers and pillows. They got chased out of Germany by Hitler and ended up in Seattle owning another pillow company. Three generations later, I benefited from that. Then I got as lucky as a person could possibly get in the Internet age by having a buddy in Seattle named Bezos. I look at the average Joe on the street, and I say, “There but for the grace of Jeff go I.” Even the best of us, in the worst of circumstances, are barefoot, standing by a dirt road, selling fruit. We should never forget that, or forget that the United States of America and its middle class made us, rather than the other way around.
Hanauer`s solution is to pay Americans more, starting with a minimum wage increase. He believes that a better paid Middle America would have more money to spend and therefore corporate income, leading to a virtuous cycle of growth.

An emerging class system in America
If the idea of the American Dream is equality of opportunity and the idea that anybody can make it, as opposed to the class system left behind in Old Europe, what is disturbing is an essay by Noah Smith showing evidence of an emerging class system in America:
If there’s one political idea most people agree on these days, it’s the rule of law. We argue endlessly about income inequality, wealth inequality, or inequality of opportunity, but we take it as given that equality under the law is a prerequisite for a just society. And the consequences of private law are dire. The original system of French privilege was one of the main causes of that country’s bloody, chaotic revolution.

Now here’s the problem: The U.S. is looking more and more like it has a real privilege system. We are enforcing laws differently based on race, but also based on class. This is un-American, and it has got to stop.

First, there is race privilege. The tragic shooting of an unarmed black teenager by a police officer in Ferguson, Missouri, has put this issue front and center, but the facts bear repeating. Our police officers enforce the law differently for different races. They arrest a much higher percentage of black people for using drugs, even though blacks and whites use illegal drugs at about the same rates and whites use the most harmful drugs -- cocaine and heroin -- at higher rates. That is an injustice.
We have all heard about the offence of "driving while black":
Our courts are no less of a problem. Blacks are 30 percent more likely to be thrown in prison than whites who were convicted of the same crime. Furthermore, our Constitution guarantees citizens the right to a trial by a jury of their peers, but many black defendants are prosecuted by all-white juries, which are significantly more likely to return a guilty verdict against blacks. Finally, racial profiling is so rampant that black Americans who have committed no crimes at all have to live in constant fear of getting stopped by the cops. White Americans don't have to live with this fear.
The whites aren`t immune to the class system either, according to Smith. There is one set of laws for the rich and another set for the "great unwashed masses":
White Americans can be complacent about racial disparities in law enforcement, thinking that at least they themselves are safe. Except that in modern America, the law now seems to be different for people of different income levels as well.

In 2010, Martin Erzinger, a private-wealth manager for Morgan Stanley Smith Barney, was the driver in a hit-and-run of a bicyclist in Eagle, Colorado. The victim suffered spinal injuries and brain bleeding. But the prosecutor dropped felony charges against Erzinger, giving the following justification:
Felony convictions have some pretty serious job implications for someone in Mr. Erzinger's profession, and that entered into it," [prosecutor] Hurlbert said. "When you're talking about restitution, you don't want to take away his ability to pay.
In addition to the story of Martin Erzinger, Noah Smith had a number of other examples of how the rich got off easily with a slap on the wrist from the justice system when faced with serious offences.

Notwithstanding the ideas of a class system runs counter to the founding myth of America, what is more disturbing is that it can lead to economic stagnation. The FT had a very good article about the two different paths taken by Argentina and the US about a hundred years ago:
A short century ago the US and Argentina were rivals. Both were riding the first wave of globalisation at the turn of the 20th century. Both were young, dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the 10 richest economies in the world…

There was no individual event at which Argentina’s path was set on a permanent divergence from that of the United States of America. But there was a series of mistakes and missteps that fit a general pattern. The countries were dealt quite similar hands but played them very differently.
The article is well reading in its entirety. The main point is: Class systems choke off growth.

Equality in a global world
Reeves, Hanauer and Smith all make good points about inequality in America. Equality of opportunity is becoming a barrier to the American Dream that anyone can succeed. Should that Dream and social consensus shatter, the cultural dynamics of growth in the United States would be changed forever. However, this kind of thinking about inequality models American equality as a closed system. The United States is part of the world - and the nature of global inequality has been changing.

In a landmark study, Branko Milanovic of the World Bank showed how global inequality has been changing. The chart below shows who won and lost in the inequality race globally. The x-axis on the bottom splits the world population from the poorest on the left in subsistence economies to the richest on the right, while the y-axis shows the real income growth in PPP terms between 1988 and 2008.

Milanovic went on to show that the country that you were born matters a lot more now than the social class that you were born into. In 1988 to 2008 30-year interval, the winners in the inequality race were the middle class in emerging economies, because of the effects of globalization, and the very rich, who engineered the globalization revolution. The losers were the very poor in subsistence economies, who weren't able to benefit from and the middle class in developed economies, who did not receive the benefits of the productivity gains in the last few decades. The latter represents the disaffected group that Reeves and Hanauer wrote about.

So, is the American Dream still alive? Well sort of. It got globalized and the winners of the American Dream are not likely named Joe, but Rajiv.

As to the question of whether this represents a bug, or a feature, of economic policy, that question is way beyond my pay grade.

1 comment:

Keith Piccirillo said...

Add Stiglitz's recent commentary (and white paper) citing tax law as a way that could help level the playing field out.
No pun intended, but you sure are well read.